
If you’re an investor who diligently screens your tenants, you know that even when the perfect renter is handpicked, there’s a possibility that something can go wrong. For instance, missed rent payments and other situations can cause rental income to come to a halt. This is when rental guarantee insurance, also known as rent default insurance, comes into play to remedy the financial setbacks that happen when a tenant fails to meet their rent payment obligations.
The reasons behind non-payment can vary, ranging from job loss to a personal crisis, but the impact on a landlord’s cash flow is always negative. You may be thinking, “I have traditional landlord insurance, so I’m already covered.” However, basic policies such as these don’t cover missed rental payments, except under certain circumstances, and this leaves a gap that rent guarantee insurance can fill. You can head over to my article on landlord insurance to learn more about how it differs.
By covering the lost rent and, in many cases, assisting with an eviction process and safeguarding against potential legal expenses, rent guarantee insurance can protect an investor financially, as well as give them peace of mind.
Although this type of insurance originated in Great Britain, it has really gained traction in the United States. So, it’s worth getting up to speed on how it all works so you can decide if this policy type is right for your particular situation or not. With all that said, let’s jump right into the fine details…
What is Rent Guarantee Insurance?
Rent guarantee insurance is just that, a “guarantee” that a landlord will receive their “rent.” It’s an insurance policy that more and more investors are putting in place for added protection. Why? Because when this type of rental property insurance is in place, and a claim is filed due to a tenant failing to make their rent payment, the policy will provide a number of payments to a landlord to cover their loss of rental income.
Most policies will also cover legal expenses pertaining to eviction, repair disputes, and other specific situations requiring legal proceedings. Keep in mind, though, that each carrier will differ as to what they include in their policy.
Loss of Rental Income Insurance vs Rent Guarantee Insurance
Many landlords confuse this type of coverage with what’s called “loss of rental income insurance,” so I’d like to touch on the topic to clear things up. As mentioned, rental guarantee insurance is coverage that pertains to a tenant being unable or unwilling to pay their rent.
Loss of rental income insurance is coverage that deals more with certain circumstances that make a rental property uninhabitable, such as major plumbing issues, storm damage, and so on. If the tenant is forced out due to an insured peril such as these and others, rent payments stop, and the insurance kicks in.
Coverage Provided by Rent Guarantee Insurance Policies
Now that you have an idea of what rent guarantee insurance is, let’s take a look at what it actually covers and excludes, as well as other important details.
We’ll start with the basics, such as what type of properties are covered. In the U.S., you’ll find that insurance carriers mostly cover residential properties such as single-family and multi-family dwellings. In addition to this, typically, there is one policy per rental unit. Depending on the insurer, you may be able to have up to four tenants on one policy if they all reside in the same unit. In many cases, additional tenants may be added for a higher premium.
Before we dive in further, I wanted to share this related article I put together on protecting Your Real Estate Investment for Long-Term Profitability. I think you’ll find it helpful since you’re on the path to protecting your rental income.
Policy Coverage Specifics
Let’s get into more detail on what’s covered, as well as information on pricing and more.
1. How Much Does Rent Guarantee Insurance Cost?
You’ll expect to pay about 5-7% of the annual rental income. Keep in mind that various factors will alter these numbers. For instance, you’ll pay a higher price if you opt for things like a more comprehensive policy, a longer lease length, or if your property is in a location that calls for higher premiums.
On top of this, they’ll factor in the creditworthiness of your tenant, raising the rates, or even denying the policy for high-risk renters. The bottom line is that each insurance company has its own set of rates, and each landlord will have factors that differ, which can determine the overall cost of their policy.
2. When Does the Policy Coverage Start?
Coverage for guaranteeing your rent will normally start 30 days after a renter stops making payments. Some policies do offer more expensive coverage that doesn’t have a waiting period.
3. How Much Rental Income Loss is Covered?
This can vary greatly depending on what insurance company your policy is through. For example, some policies may only cover two months, while other insurance companies provide comprehensive coverage for up to 12 months. One specific company, Single Key, offers 12 months or up to $60,000. With that in mind, you’ll want to shop around for the best coverage that makes sense for your situation.
4. What Does a Rent Guarantee Insurance Policy Include?
At its most basic, it includes base rent loss coverage in the event a tenant stops making payments while still residing in the rental. Many policies will also include legal expense payouts up to a certain amount, such as the legal cost of the eviction process. Along with this, the policy could include having the insurance company manage the eviction process for the landlord. If legal expenses and management are not included, it may be possible to purchase it as an add-on – it could be well worth it.
When it comes to a rent loss payout, there are a few requirements to take note of. This includes a typical list of allowable reasons for missed rent (each insurance company will have its own set of factors):
- Most reasons that have caused a tenant’s cash flow to stop
- Losing a job due to no fault of their own, such as being laid off
- Military deployment
- Company job relocation
- Emergencies related to health and medical
Although some policies may have the option to cover this, rent guarantee insurance generally doesn’t provide loss of rent coverage if the tenant vacates the premises without a legitimate reason, one that meets the policy requirement. For example, if the renter decides to move and breaks the lease.
5. Do Landlords Have to Pay an Insurance Deductible?
Most insurance policies of any type have deductibles in place, so it’s very likely that the insurance carrier you go with will require one. For those who are unfamiliar with deductibles, it’s the amount a policyholder is responsible for before an insurance company starts to cover expenses.
Benefits of Rent Guarantee Insurance
The biggest benefit, as far as I can see, is that having missed rent covered is essential since a halt in cash flow decreases an investor’s ROI and can drain their pockets. This is especially important if that rental income is designated to cover mortgage payments.
It gives the landlord peace of mind knowing that if a renter were to have an unexpected event that prevents them from paying, it wouldn’t affect their bottom line. Because you most likely have a goal to safeguard your income and increase ROI, you’ll want to bookmark my related post for future reading – Maximizing Rental Income: Understanding Rent Comparables and Gross Rent Multiplier.
Another benefit worth highlighting is that since rent guarantee insurance aids in the eviction fees and process, that lifts a huge burden off the property owner’s shoulders. If you’ve ever had to evict a tenant, you know exactly what I’m talking about. Using Single Key as an example again, they pay out up to $2,000 in eviction fees in addition to lost rent, when applicable.
Example of a Rent Guarantee Insurance Policy In Place
So you can visualize this in real-life terms, the following example illustrates just how beneficial this insurance policy type can be:
Let’s say you have a single-family rental property that’s going for $2,500 a month. About seven months into the lease, your tenant is laid off and stops making monthly rental payments. This goes on for four months, and so does a costly eviction process.
There are two scenarios that could take place with the above situation:
With Rent Guarantee Insurance in Place: You file a claim, and the insurance pays out $7,500 in missed rent over those three months. They also cover $2,000 of the eviction costs and assist you with the process. All the while, your mortgage continues to get paid on time, and you don’t miss a beat.
No Rent Guarantee Insurance in Place: You pay $7,500 plus $2,000 in legal fees out of your own pocket to cover your mortgage, and your ROI is lowered in the process. It goes without saying that having to unexpectedly come up with $9,500 can be a bit stressful.
I’d like to mention that as a real estate investor, there’s something else that you can benefit from as far as ROI and safeguarding your wealth are concerned, and that’s investing in a landlord-friendly state. You’ll find that a landlord’s rights are protected way more in a state such as this. Additionally, when you need protection from a tenant who won’t pay or leave, living in a landlord-friendly state can save you thousands of dollars. Make sure to dive into my article so you’re informed – Five Most Landlord-Friendly States for Real Estate Investors.
What to Consider Before Moving Forward
There are a few things you’ll want to consider regarding rent guarantee insurance. For starters, it’s important to understand that you’re actually not guaranteed coverage. This is because the tenant has to pass certain requirements to be coverage-worthy.
For instance, as I touched on earlier, they’ll need to pass a certain minimum credit check, as well as not have any bankruptcies in the past three years, although the timeframe can vary with each insurance company. This is important because the tenant should be deemed reliable and able to pay their rent each month, which also means they have to have their income verified. Along with this, there must be a legal tenant agreement in place at the time of adding the rent guarantee insurance plan.
You’ll also want to consider if you’ll need this insurance type. I say this because many investors just make sure they have a good property management company on board that does an exceptional job screening tenants. This setup can weed out potential tenants who are prone to defaulting on their rent. If you’re not familiar with management companies, head over to my article that can fill you in – Guide to Residential Property Management. You’ll also want to take a look at my other related article that can help you place a reliable renter – Safeguarding Your Investment: Understanding Tenant Background Checks.
Remember, there are no guarantees even if they are perfectly screened because, well, life happens, and sometimes this causes good people to not be able to pay their rent.
Tips for Selecting the Right Insurance Policy for Your Rental Property
When it comes to choosing the right rental guarantee policy, start by ensuring you’re going with a good company by checking out different insurers and comparing the coverage options they offer, as well as their costs. In addition to this, read customer reviews and ratings to get a feel for the insurance company’s reputation for reliability and customer service. Make sure the policy covers both loss of rental income and legal expenses, if that’s the coverage you’re seeking. Having both doesn’t raise the price too much and it can provide comprehensive protection.
Rent Guarantee Insurance Protects Your Cash Flow and ROI
Rental guarantee insurance can be set in place as a financial safety net for investors looking to protect their rental income, ROI, and peace of mind. So, I hope this article has provided you with the details needed to understand what this insurance type, and its coverage specifics can do for you as a landlord, so you can make an informed decision as to whether or not it’s right for your situation.
I’d like to mention once more that while expert tenant screening and effective property management are crucial, unexpected life events may still impact a tenant’s ability to pay their rent, and rent guarantee insurance may just be what’s needed to raise your risk management strategy up a notch. I actually have a whole post on risk mitigation strategies for real estate investors; it contains a wealth of knowledge that can help you lower your financial risks.
Work with a Full-Service Real Estate Investment Company
If you’re an investor looking to add additional properties to your portfolio, know that Morris Invest provides new construction turnkey properties, or what we refer to as “beyond turnkey,” because of the extent of the full-service experience we provide. Our properties are in lucrative housing markets, and always in landlord-friendly states. In fact, we never build in a location unless it passes our 10-point checklist, which can sometimes take years. However, it’s worth the wait to set up camp in an area we know has a high demand for rentals, a booming economy, and a steadily growing population.
On top of this, we place an experienced property management company and a tenant in the rentals for our clients, so the cash flow will start almost immediately. If your interest has been sparked, feel free to schedule a complimentary call with the Morris Invest team – we would be happy to get you set up with an income-generating property.
Power Resources for Real Estate Investors
Before you head out, take a moment to dive into the resources below that can help set you on the path to financial independence:
- Freedom Number Cheat Sheet
- 90-Day Financial Empowerment Bootcamp
- The Financial Freedom Academy
- Morris Invest & SDIRA Program Overview
I also recommend grabbing a cup of coffee and watching my video that provides helpful information on insurance coverage for real estate investors. Also, make sure to contact Morris Invest if you have any questions regarding rental property insurance or rental real estate in general.