Owning a second home and renting it out is a common situation. This can be a vacation home or a piece of investment property. As a landlord for one of two properties, you may not have considered the risk management issues that you need to consider. As your real estate portfolio grows, these risks will be more significant to you.
Proper Insurance Coverage
It may be easy to tell your agent to add another address to your homeowner’s policy. Carefully review the language in the homeowner’s policy to see if a residence that is not being occupied by the policyholder is covered by the policy. You may need a specific landlord’s policy or a commercial insurance policy to cover a home that you own but do not occupy. This concern would not apply to a single building with up to 4 units, one of which is occupied by the policyholder.
Property Insurance Considerations
The most critical issue for property insurance is setting the correct limit for the building. We have discussed proper valuation in previous articles. See What is My Property Worth? Beyond the basic value of the structure, consider the income loss that would occur with a loss. Also consider any furnishings and supplies that you provide at the rental property.
If you plan to rebuild, consider if there are any code upgrades that would be needed. Upgraded roof requirements, seismic requirements and other building code changes since the building was built should factor into this decision. If like kind and quality will not meet code, you need to have the additional coverage to protect you.
Liability Insurance
Whether you use a landlord’s policy of a commercial general liability product you need to review the program to consider what are the limits of coverage you need? The minimum limits offered by some programs may be inadequate to protect your interests. Low primary limits may also make acquiring excess liability more expensive. Knowing your limits will help design the most economical program.
What level of medical payment coverage do you want to provide? Med pay is a no-fault coverage to pay for small claims. The intent is to limit litigation. Depending on your tenant profile, this can create a small loss frequency that will affect your pricing.
Lease Agreements
Written lease agreements are absolutely needed. Do not rely on handshake agreements. Many liability insurance policies will not stand behind unwritten agreements. Make the tenant responsible for obtaining and maintaining renters’ insurance for the duration of their occupancy. Ask for a certificate of insurance or a copy of the current policy year declarations page to see coverage terms. We strongly suggest you use your attorney to develop your lease. This will make sure the terms reflect your intentions and needs. Online or preprinted leases can be too generic to protect your interests.
Life Safety
As a landlord you are responsible for providing a safe living environment. Make sure you have installed and maintained smoke detectors and carbon monoxide detectors in your rental property. Specify who is responsible for ongoing maintenance in your lease. Be sure to have these devices tested EVERY time you access the property. Portable fire extinguishers should be provided.
Scald controls
As a landlord you must provide adequate hot water. If the tenants can access the hot water heating equipment, they may raise the temperature in an attempt to get more hot water. This does not create more water volume but raises the potential for scalds. This is another inspection point that should be documented. Most tub and shower valves are now pressured balanced to prevent scalds. If yours are not this type, consider upgrading.
Contracts for service
You may have contracts for cleaning, yard care, snow removal and other services. Have written agreements with requirements the provider carry limits of insurance equal to your own and ask that you be named as an additional insured on the provider’s liability insurance. The long-term cost of a lawsuit makes using uninsured contractors a losing proposition.
Entertainment Equipment
If your rental includes any entertainment equipment, pool, hot tub, spa, sauna, trampolines, or fire pits make sure they have all the required safety equipment. This includes fences, gates, proper electrical installations, water chemistry and clearance to combustibles needed for the equipment.
Security
Key control is critical to the safety of your tenants and your interests. Consider using locksets that can either be immediately reprogrammed for lock changes. If you use a key lock, use a lock brand that has restricted key duplication. Track who has keys and change locks when tenants change, or a key is missing.
Premises inspections
You should have documented inspection records for your property. This includes whenever tenants change and whenever you have access to the property for planned maintenance. Being able to document that appliances, utilities and protective devices were present and accounted for is crucial to your defending a claim.
Short term rentals
If your property is listed on short term rental web sites, VRBO or Airbnb, you may have less insurance company options. Since short-term tenants have very little long term interest in your property, they have a history of being less careful with their actions within your property. Increased property damage potential and increased liability issues have made some carriers move away from this exposure. The short-term rental sites offer the renter access to physical damage insurance in lieu of putting down a damage deposit. Consider if you want to make this insurance a requirement for your property. That eliminates credit risk for damage or repairs and lets your insurance company deal with their insurance company for a claim.
The Driehaus Difference
Our staff know the details of risk management for property owners. We know which companies can offer the most effective insurance programs given your properties. We take time to ask the next level questions that tailor an insurance program to fit you. This is not available in online environments and where you “only pay for what you need.” You have worked hard to own property and you need an agent to work hard to help you protect your interests. Call us at 513-977-6860 or use any of the contact tools on our website www.driehausins.com. We welcome the opportunity to be your insurance agent.