- ALTERNATIVE INVESTMENTS
- REAL ESTATE INVESTING
What Is Rent Guarantee Insurance?
Rent guarantee insurance reimburses landlords for income lost when a tenant defaults on rent payments. The insurance pays the monthly rent for a set period if the tenant stops making payments.
This type of risk management product is relatively new to the United States. The practice was imported from Great Britain.
KEY TAKEAWAYS
- Rent guarantee insurance protects landlords against loss of income if a tenant falls behind or defaults on rent payments.
- Landlords typically pay for the premiums, though it is also possible to require the tenant to pay for it instead in extra rent or if the lease specifies it in writing.
- Insurers will look to the financial stability and creditworthiness of the tenant(s) to underwrite the policy.
Understanding Rent Guarantee Insurance
Individuals and companies who lease property can obtain several types of insurance policies to protect against losses. The buildings and their contents can be insured against loss or damage, and some policies will cover the legal costs of evicting a tenant. These policies generally do not include reimbursement of costs associated with non-payment of the rent by tenants.
Rent guarantee insurance addresses that particular need. The policies are designed to protect a landlord's income if a tenant defaults.
Much like private mortgage insurance (PMI), rent guarantee insurance offers protection to the landlord rather than the tenant. If the tenant stops paying rent, the insurance carrier, acting as guarantor, covers the rent for a length of time specified in the contract.
Tenant Remains Liable
Whether or not a landlord has rent guarantee insurance, a tenant who stops paying rent remains liable for the rent owed and any legal fees. The guarantor can initiate legal proceedings against a delinquent tenant, including eviction and reporting to credit agencies.
The extent of the tenant's liability is determined by state and local laws.
The 12 months
Rent guarantee insurance generally provides coverage for up to 12 months after a tenant defaults, covering lost income until the tenant resumes payments or is replaced by a new tenant.
Who Needs Rent Guarantee Insurance?
Some landlords might decide not to fork out money on rent guarantee insurance, depending on the quality of their tenant screening processes to ensure payment.
Circumstances can change, however. Tenants may lose their jobs, get divorced, or be offered a job in another state.
When a landlord relies on rental income to pay the mortgage or fund other expenses, a tenant's failure to pay can have serious implications.
Rent guarantee insurance should not be confused with guaranteed rent agreements. Guaranteed rent contracts allow landlords to sign over the management of their property to a company or real estate agent in exchange for a pre-agreed payment. In such cases, the owner would be paid even if the property is empty or the tenant defaults.
The cost of coverage can be absorbed in the monthly rent paid by the tenant, ensuring that the landlord doesn't have to foot the bill.
Limitations of Rent Guarantee Insurance
Insurers do not hand out rent guarantee insurance without doing their due diligence. That means that if a tenant has a history of defaulting on payments, an application to protect their rental payments will likely be rejected.
Moreover, for a landlord to qualify for such a policy, the tenant will need to have a steady job, earning enough to comfortably pay the rent on the property they lease. Failing that, the insurer will demand that a guarantor be in place to cover any shortfalls.
When the Coverage Kicks In
Rent guarantee insurance generally begins after one month of non-payment by the tenant. It is possible to buy a policy without any time lag, though the premiums are higher.
In any case, the tenant's scurity deposit is often sufficient to cover the first month's loss.
What Kind of Insurance Does a Landlord Need?
A good insurance policy for a landlord should include these elements:
- Property damage coverage for a wide range of adverse events from earthquakes to fire or damage by tenants.
- Lost rental income insurance to cover any period when the property becomes uninhabitable for some reason.
- Liability protection in case a tenant or visitor is injured on the property.
Rent guarantee insurance, although relatively new, is something to consider if you depend on an uninterrupted stream of rental income.
What's the Difference Between Homeowners Insurance and Landlord Insurance?
A homeowners insurance policy is the right choice for a resident homeowner, even if the home is rented out short-term once or twice a year. If it's a home, or a second home, that is rented for an extended period of time, you may need landlord insurance.
What's the Difference Between Homeowners Insurance and Renters Insurance?
Renters insurance is a whole lot cheaper. The policy covers just the contents, not the structure.
The Bottom Line
If you're a landlord, you might consider getting rent guarantee insurance in addition to the standard landlord insurance you maintain to protect your property. Even the most reliable tenants can experience personal or financial events that leave them unable to meet their rent payments. If you rely on that monthly rent income to keep your business humming, rent guarantee insurance is a good investment.