Owning rental property can be a great investment, but if you don’t want that investment to become more of a burden than a blessing, make sure to properly protect it.
1. Understand Your Property Coverage. Understanding your rental insurance coverages is absolutely critical. Because there is a desire to manage expenses, agents will often write coverage for the dwelling (the house or apartment) on an Actual Cash Value basis. While this coverage can be less expensive, if the property suffers a partial loss (the vast majority of claims are partial losses) the landlord can be stuck with significant out of pocket expenses. In addition to coverage on the dwelling, there are other important coverages such as Other Structures, Contents, & Loss of Rents that if not property set, can result in additional out of pocket expense at the time of loss. Because there are so many options, sitting down with an agent to make sure you truly understand what would happen in the event of a claim is key.
2. Avoid Coinsurance Penalties. The concept of coinsurance is a tough concept for most landlords to understand. At the highest level, coinsurance is a built in provision in most property insurance policies that requires limits of coverage to be set at a minimum level. Most commonly coinsurance is required to be a percentage of the cost to replace if a property has replacement cost or a percentage of the actual cash value if the property is insured on an actual cash value basis. In an effort to manage expenses, landlords will direct their agents to insure a building at the cost they paid (fair market value). Many times this limit is less than the required limit in the policy and landlords put themselves at risk for significant penalties at the time of a claim. This provision alone is a reason why working with an agent to understands rental property coverages is critical.
3. Use a Strong Lease. Having a clear lease will save you a ridiculous amount of trouble with your rentals. This process starts with knowing Landlord-Tenant laws in the state of Illinois, as well as City and Federal requirements. Put the terms of the lease in WRITING. Require a completed application that includes references, employers, contact information, and the nearest relative. Create a written inventory of the property that comes with the rental, including appliances and other removable items. Make note of the condition of walls, floors, doors, and windows. Getting all of this information at the start of your rental arrangement sets clear expectations.
4. Require Renters Insurance. Your property insurance covers what you own, including the dwelling itself and liabilities that arise out of your ownership of the property. It does not cover the tenant’s property, nor does it cover liabilities that are that of the tenant. Make sure it is clearly communicated in your lease agreement that you do not have insurance for their belongings and that you require them to maintain minimum rental insurance limits (both property limits and liability limits). In addition to requiring it in the lease, ask for proof of coverage before you allow them access to the property and require that they provide proof of ongoing coverage on an annual basis. Not only does this coverage provided value to your tenant, if there is a liability claim that is made at the property, there is a higher likelihood that you will not be the subject of a lawsuit (certainly not a silver bullet).
5. Purchase an Umbrella Policy. When you’ve been in the rental business long enough, the likelihood of a lawsuit increases, despite your best efforts to be clear in the rental arrangements. Having a good umbrella policy will cover damages from these lawsuits that might otherwise exceed your liability limits and attack other assets.
Renting property is a valuable service to the community. Insure wisely to mitigate risk and keep the experience positive for all involved.
As always, we are happy to take a look at your associated policies to make sure you don’t have insurance gaps that might cause you problems in the future.