February 29, 2024

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Investing in real estate comes with risk, and having the right insurance coverage is critical to protecting your rental property investment. Just as each property is unique, your insurance policy should also be custom to your dwelling type, location, duration of the rental agreement, and more. 

Understanding the nuances of coverages for short-term, medium-term, and long-term rentals is especially important, as the wrong type of policy can render your claim denied by an insurer. This is because the risk of a long-term tenant is perceived differently from that of a property rented out on a short-term basis, such as an Airbnb or vacation rental. So, how do you know if you have the right coverage in place? In this article, we will take a closer look at each type of insurance policy and its key differences.

Disclaimer: This article discusses insurance coverage in general regarding what is common in the insurance industry. Every carrier’s policy is different, and it is the responsibility of the insured to review their policy for coverage, terms, and conditions. 

Short-Term Rental Insurance

Short-term rental insurance is designed to provide coverage for properties that are rented out on a short-term basis, typically for a period of fewer than 30 days. This type of insurance is often used by property owners who rent out their homes on vacation rental platforms like Airbnb and VRBO.

Short-term rental insurance typically includes property damage, theft, and liability coverage. This means that if a guest damages your property or steals something from your home, your insurance policy will cover the cost of repairs or replacement. Additionally, short-term rental insurance often includes liability coverage, which can protect you from lawsuits in the event that a guest is injured on your property.

Some short-term rental insurance policies may also include coverage for lost rental income if your property becomes uninhabitable due to damage caused by a covered event. This can be particularly important if your rental property is a major source of income for you. 

Many short-term rental hosts rent out a second home previously covered by a homeowner’s insurance policy. It’s important to note that homeowners insurance covers properties from specific perils such as fire, lightning, and hail, but homeowners insurance policies specifically exclude “business activity.” And because most STR hosts do not live in their rental properties, coverage limitations likely apply. If your insurance company catches wind that your home is not actually occupied by you (or whoever is the policyholder), and the property is damaged by a renter instead, they will almost always reject your claim.

There is one exception in which your homeowner’s insurance may cover your short-term rental, and that is if you are also living on the property. If you have a multifamily property and are living on the premises, your homeowner’s insurance carrier may offer a “unit or residence rented to others” endorsement. This endorsement will cause your premium to increase but will likely be cheaper than purchasing a new line of insurance altogether.

Most insurance providers offer pretty affordable plans, considering the coverage included in short-term rental insurance policies. In addition, you can get a free quote from each insurer to determine how much you’ll need to pay each year.

The average cost for a short-term rental insurance policy ranges between $2,000 and $3,000 every year in the U.S. However, this range can increase up to $9,000 per year if your rental home is in popular tourist destinations like Florida or California. 

It’s important to note that short-term rental insurance policies are not one-size-fits-all. Depending on the insurance company, policy options may vary widely, and the specific coverage you need may vary depending on the location of your property and the length of time it will be rented out. 

Medium-Term Rental Insurance

In insurance, there is technically no medium-term range. Policies either fall into short-term or long-term rentals. Carriers typically look at anything under six months as short-term. However, some carriers extend this to include anything under 12 months. This type of insurance is often used by property owners who rent out their homes or apartments on a temporary basis, such as business travelers, travel nurses, or people who are in the process of relocating. 

The type of insurance policy will depend on the carrier you are working with. Coverages for mid-term rentals are similar to short-term rentals, including property damage, theft, and liability. 

A good, comprehensive policy will include three key protections:

1. Property damage – This covers any damage to the property caused by fire, water damage, vandalism, theft, irresponsible tenants, or other things that could damage the physical structure of the property. Not all policies are created equal – some basic policies only cover the perils that are named like fire, lightning, smoke, and hail. Other policies are broader and cover everything unless it is specifically listed as an exclusion on the policy. Virtually every policy these days includes a COVID-related exclusion.   

2. Loss of rental income/rental income protection – Should something occur that causes your property to be uninhabitable, such as a fire or burst pipe, this coverage provides temporary rental income reimbursement that acts as a replacement for the rent a landlord would be receiving as usual if a tenant was occupying their property. Insurance companies will verify your financials to support the rental income amount, so a landlord won’t be collecting $1,000 per month on a property that was previously rented out for $500. 

3. Liability – Covers any medical or legal fees and settlements, such as lawsuits, bodily injury claims, and settlement costs, that could ensue if a tenant or a visitor were to get injured on the premises.

Additional coverage you may want to pursue to further protect your investment:

  • Flood insurance covers flood damage which almost every policy excludes. This is often a separate policy, but can usually be purchased through your same agent.
  • Earthquake Insurance covers earthquake damage which almost every policy excludes. This can be purchased similarly to flood insurance as a separate policy. 
  • Guaranteed income insurance covers partial or full rent payments if the tenant is unable to pay, something many landlords experienced during the height of the pandemic. This one is always a separate policy.
  • Personal property coverage covers your furnishings if you are renting out a furnished rental unit. This is usually available in every landlord policy, so you just need to increase the limit high enough to cover your furniture. If you don’t have a furnished rental, you can still carry a small amount of personal property for appliances and other things you might be keeping at home.

Keep in mind that the amount and type of additional coverage vary from insurance provider to insurance provider.

Long-Term Rental Insurance

Typically called “landlord insurance” or “rental property insurance”, these dwelling policies are intended for people who rent their homes to others on a long-term basis. New landlords often confuse landlord insurance and homeowners insurance, but there are key differences between these two policy types.

A standard homeowners insurance policy protects against building/personal property damage and liability, but it only applies when the property owner lives within the residence. If you’re renting the dwelling out, homeowners insurance won’t cover any ensuing damage.

A landlord may get by with buying a homeowner’s policy if the insurance company doesn’t know they’re renting it out to others, but when the company starts investigating the first claim, they will find out it’s being rented out to someone else, and they could deny the claim and cancel the policy.

Your standard landlord insurance policy will have similar coverages mentioned earlier: dwelling, liability, rental income protection, certain tenant damage, and structures other than the main dwelling, like sheds, detached garages, etc.

You can also consider additional coverages, like an umbrella policy, which provides extra coverage in addition to what’s covered by landlord insurance. 

When it comes to selecting the right type of insurance for your needs, you need to know what is covered and what these policies do not cover. The only way to know that for sure is to read the terms and conditions of the policy you are selecting. This can vary from one policy and one insurer to the next; however, some of the most important exclusions to landlord insurance include the following:

  • The tenant’s property. Most policies do not cover the tenant’s property, and many landlords require or encourage renters to obtain their own policy for these items.
  • The tenant or landlord’s car. The same applies here, as the tenant should seek out their own coverage.
  • Landlord insurance does not cover repairs to major systems.
  • It does not cover damage caused by the property owner, such as if a property owner causes damage to the rental itself.
  • It does not cover anything that stops working due to normal wear and tear or a lack of maintenance.

Long-term landlord insurance typically costs around 25% more than traditional homeowners insurance. An average policy price is around $1,070 nationwide, dependent on a number of factors, including geo-location, property condition, replacement cost, etc. 

Conclusion

To learn more about short, mid, and long-term rental property insurance, visit Steadily.com to get a commitment-free quote. Steadily has a team of landlord insurance experts who can provide licensed guidance on insurance for rental property owners.

This article is presented by Steadily

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Steadily is America’s best-rated rental property insurance provider. Get coverage online in minutes for all property types and all policy durations, including short-term rentals. Visit Steadily.com to get a free quote today.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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