As a landlord your primary risk to steady income is a sudden loss of rental income from tenants. This can be very stressful as most landlords rely on that rental income to cover the mortgage and other monthly expenses. It can happen for various reasons including the tenant moving out without warning or damage to the property that makes it unlivable space. In either case you need to find replacement income until the issue can be resolved.
What is loss of rents coverage?
Rent loss insurance is a coverage on most landlord insurance policies which provides income while a unit is uninhabitable due to a covered peril. A covered peril on most insurance policies includes fire, water damage and wind. Check your landlord insurance policy or ask your insurance agent what is and is not covered on your policy.
To determine the proper amount of coverage needed simply take your rental income for 12 months. This will provide enough coverage for the home to become fit for living again after a covered loss and allow for time to find another renter if the current tenant decided not to wait for the repair process. Most rental property insurance companies will provide a standard 6 to 12 months of coverage based on the policy limits but this may not provide enough money.
Is rent loss insurance required by mortgage companies?
The last few years have seen a dramatic change in mortgage loan underwriting which I believe is for the better. While these changes have made it more difficult to acquire a loan it has also made the mortgage industry a bit more trustworthy. Freddie Mac who underwrites the majority of loan applications in the U.S. requires rent loss insurance if an operating loss is expected when buying a first investment property. They also require rent loss coverage to be placed on all units if you own more than one rental property no matter if a loss is expected.
Operating Loss = (Gross monthly rent income x vacancy factor) - (Mortgage + tax+ insurance + maintenance + utilities)
This is what lenders will use to determine if a loss is expected when you purchase your first rental property.
What happens if a tenant just stops paying rent?
There are some insurance carriers that have the option for rent guarantee insurance which will cover lost rental payment by tenants for a specific period of time. This is not usually a standard coverage on most landlord insurance policies so check with your company to determine the best option.
It is in your best interest to have a solid rental agreement in place with each tenant so that you can mitigate some of the major issues that may arise. Another good practice is to perform background and credit checks on potential renters to determine the likelihood of them not being a great tenant.
How is it different than rent default insurance?
Loss of rents insurance is designed to provide income lost during repairs resulting from a covered loss such as property damage. Rent default insurance is not related to a covered loss that makes the property inhabitable like rent loss insurance. In situations where the tenant is not able to pay rent for a period of time for reasons such as loss of work, this is when rent default insurance will help.
