During uncertain times like this, when the economy is still trying to stabilize on shaky ground due to the aftermath of the recent pandemic, investing in brick-and-mortar properties is relatively safe. However, the market and its conditions are still fluctuating, and while the property appreciates over the long term, the property investor must think outside the box and make secure decisions. To do so, the property's value needs to be insured.
So, if you plan to buy a property to use it as a home, rent it, flip it, or as a long-term investment, here is everything you need to know about insuring and protecting it.
The Necessity of Investment Property Insurance
Do you need to ensure your investment property? Simply, yes. Insuring your investment property is an inevitable step in protecting it. Look at the big picture: when you invest in real estate, you expect it to be a lucrative venture that allows you to get a stable income and long-term appreciation. However, some risks threaten your financial stability and the value of the property you've bought. You need to get an insurance policy to minimize and mitigate those risks.
When your property is insured against common threats like fire, theft, and natural disasters, you can rest assured that your financial situation will be stable if such perils occur. In addition, such insurance policies provide liability protection and coverage for loss of rental income. As a result, your investment will be safeguarded, and your financial goals will be secure.
Is It a Legal Obligation to Have Homeowners Insurance?
Although homeowners insurance is not usually required by law, mortgage lenders typically make such a policy part of the contract. Simply put, you might breach your mortgage agreement if you don't have homeowners insurance.
The truth is that homeowners insurance protects the mortgage lender's investment. Plus, in the worst-case scenario where your property is destroyed, you want to avoid being left paying a mortgage for a home that doesn't exist.
In cases where you will be renting out your property to get the loan on this basis, the mortgage lenders will require you to get landlord insurance. We will explain this type of insurance a bit later in the text.
The Cost of Home Insurance
The national average cost of home insurance in the United States of America in 2024 is $2,285 per year for a policy with a $300,000 dwelling limit, or about $190 per month.
However, according to Landon Pacific Property Management, the cost of home insurance depends on many factors, including the location of the property and the value of your and the surrounding properties. Plus, you can get additional insurance coverage, which will increase the price of the policy.
To get homeowners insurance, you must check out various providers to get the best deal customized for your needs. Researching this area will help you save a lot of money.
Types of Insurance Policies for Your Investment Property Needs
Now, let's look at the different insurance policies you might need for your property investment.
Rental Property Insurance
Rental property insurance, or landlord insurance, is like homeowners insurance for a rental property. It protects the property against damage to the dwelling and the other structures on the lot. However, landlord rental property insurance might cost 15 to 20% more than homeowners insurance because of the additional risk of having tenants living in the property and protection against loss of income.
This type of insurance will also cover a tenant's medical expenses should they become injured or sick due to the rental property's condition. As a result, the policy costs more. A standard homeowners policy designed for owner-occupied homes does not cover these liability claims.
Why is rental property insurance a wise decision for any real estate investor?
First, it provides wholesome protection against a variety of risks and ensures that the investment is secure and profitable. Most importantly, it will cover property damage, including fire or smoke damage, storm damage (wind, hail, and lightning), vandalism and malicious mischief, burst pipes, and water damage.
Secondly, rental property insurance provides liability protection. It covers legal and medical expenses if a tenant or visitor is injured on your property and holds you responsible. This protection will help you ensure you don't suffer devastating financial losses.
Thirdly, in cases of rental income loss, you can get reimbursed for the rental income you would have received. In situations like when a fire renders your property unlivable for several months, the coverage will ensure that you get the rental income regularly to meet mortgage payments and other expenses.
In addition, you can add different kinds of optional coverages to your policy for additional protection, such as flood insurance, earthquake insurance, and building code coverage.
Insurance for Short-term Rental Properties
Due to the success of platforms like Airbnb, short-term rental properties are becoming very popular and profitable. However, these short-term rentals must be insured with a different insurance policy because the risk is increased, and there is a higher turnover compared to long-term rentals.
Also, personal property, including furniture, electronics, and kitchenware, is often included in a short-term rental. For that reason, short-term rental insurance policies usually provide more extensive coverage for these personal belongings to ensure that you are protected in cases of them being damaged or stolen by guests.
Finally, short-term rental insurance provides liability protection tailored to the unique risks of having many transient guests. The coverage is for guest injuries, property damage caused by guests, and even some legal defenses if the guest sues you.
The Benefits for Both Parties
If you are a real estate investor and landlord, getting rental insurance will protect you regarding your financial situation. However, renters insurance is also a wise idea that should be offered to the tenants as it can protect them and indirectly your investment.
Another important aspect of insurance policies is that they offer tax benefits that can help you save money. For example, if you invest in a variable annuity, you can defer taxes on any gains until you withdraw the money.
Final Thoughts
Buying an investment property is a great way to generate a regular income and build its value over time. However, it is vital to get homeowners, landlords, or short-term rental insurance to protect the property as an asset. Rest assured that you will be covered for any damage that comes your way. You need to research your options thoroughly and consult with different vendors to choose the best policy that will fit your needs.
At AustinVesters Property Management, we specialize in helping property owners understand the importance of rental insurance. With our expertise in local market trends, property management, and tenant relations, you can rest assured that your investment thrives on the market and is completely protected.
Contact us today to learn how we can help you with rental insurance advice and how we can optimize your rental property to take full advantage of Austin's booming tech-driven rental market.
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