Ok, so you don’t need rent guarantee insurance, but you may want to look into it. Especially if you’re a landlord with a low tolerance for risk or if the loss of rental income from a tenant poses a serious threat to your cash flow.
We’ll cover how it works, the pros and cons, how much it costs, and ultimately help you decide if rent guarantee insurance is right for you (or not).
1. What is Rent Guarantee Insurance and How Does it Work?
Rent guarantee insurance protects landlords from a loss of income if their tenant fails to pay rent. It’s not included in a standard landlord insurance policy, but is often available as an endorsement or “add-on.”
While you, as the landlord, have to pay for this endorsement (which typically runs at about 5-7% of the fair market value of the rental), it may be possible to include it in your lease agreement—much like you would stipulate a renter have tenant insurance.
Depending on the insurance company, rent guarantee insurance may cover as few as 6 weeks to 6 months of non-payment of rent. If you make a claim, it’s a relatively hassle-free process for you as your insurer pursues the tenant for rent, legal fees, eviction, and reporting to the credit bureau.
You have to apply for rent guarantee insurance, but the insurance company must approve. For tenants with a poor credit rating, irregular work, or a history of defaulting on rent, the application could be denied.
For each property, and each new tenant, you need to apply each time. That’s a lot of work to add on to your hectic schedule with landlord expense management, renewing leases, and managing turnovers.
Rent Insurance: Rent Guarantee vs. Loss of Income vs. Rent Schemes
You may hear the term “rent insurance” tossed around. We want to be clear what this article discusses.
- Rent guarantee insurance is for when a tenant is in arrears on paying rent or stops paying altogether, what this article is about.
- Loss of income insurance is for when a renter needs to move out after an insured peril (e.g. flood or fire) becomes a reality. While the tenant lives outside of the rental property, loss of income insurance keeps the rent payments coming in. It’s a separate add-on to your policy.
- Guaranteed rent schemes are for when a landlord signs over management of the property to a real estate agent in exchange for regular monthly payments, even if the property is empty.
2. What Does Rent Guarantee Insurance Cover?
If a tenant stops paying, this insurance covers the rent payments and any associated legal fees. The insurance company is responsible for pursuing the tenant to collect the money, beginning the eviction process and reporting to credit agencies.
Rent guarantee insurance covers non-payment of rent due to any of the following:
- Job loss – due to economic recession or firing
- Break up in a relationship and divorce
- Health issues or medical emergencies
- Military deployment or job relocation
- Anything that might affect a tenant’s cash flow
It does not cover:
- Landlord’s failure to comply with the terms of the lease
- Keeping the property habitable for the tenant
- All the associated costs of the eviction process
3. Pros and Cons of Rent Guarantee Insurance
You may be wondering if rent guarantee insurance fits your needs and risk tolerance. The handy chart below can help you decide if the pros outweigh the cons for you.
|Guaranteed rent||Expensive at 5-7% of annual rent|
|Peace of mind||Possible denial of many applications|
|Vacancies less likely to affect profits||Must apply on lease-by-lease basis|
|Premiums often need to be paid in advance, in full|
|May take a month before you receive any insurance payments|
4. How do you Qualify?
For a landlord to qualify for coverage, your signed lease agreement must include*:
- A rental of a residential property (single-family to multi-unit)
- A primary residence for the renter
- A term of no less than 6 months
- A minimum remaining term of 6 months when you purchase the policy
- A term that has has already begun at the time of purchase or start within 30 days from the policy activation
- A minimum rent cost between $800 and $5,000
*terms may vary by insurance provider
5. How Much is Rent Guarantee Insurance?
Rent guarantee insurance costs between 5-7% of the fair market value of an annual rental payment. Here’s a table to give you a rough idea of what it will cost you given the price of your rental.
|Rent Percentage||Monthly rent $1,000||Monthly rent $2,000|
|5%||$600 annually||$1,200 annually|
|6%||$720 annually||$1,440 annually|
|7%||$840 annually||$1,680 annually|
Essentially, at 5%, it costs $600 annually for every $1,000 in rent charged.
We looked up 1-bedroom apartments in Greenwich Village, New York and the cheapest we could find was $3,395. At that price, you as the landlord would be paying $2,037. Is it worth it?
It’s easy to manage these costs and know if a property is profitable with our analytics tool for landlords. You can understand your expenses and get property metrics in real time, all for free.
6. Is Rent Guarantee Insurance Worth it?
Rent guarantee insurance comes with many stipulations and arguably, it’s only worth it if your tenant would likely not qualify for it due to unsteady work or poor credit history.
You could argue that a security deposit may tide you over, or that your own credit checks are diligent enough. And if you’re using our tenant screening tool, everything should be in order.
But you never know what could happen. And if you need the cash flow for your mortgage payments or other expenses, that could seriously hurt you.
Do the math. For each unique situation, weigh your tolerance for risk against the price you’ll pay and make the ultimate call. Peace of mind can be priceless, but if you can acquire a new property faster and diversify your assets, maybe that’s enough protection.
Landlords don’t need rent guarantee insurance, but it’s a great product to protect you if you’re renting to individuals with poor credit history or unsteady work, but even then the insurance company must approve them. It’s not cheap, either. So weigh the pros and cons we list in this article.
Rent guarantee insurance only kicks in after a month of your claim. Depending on your policy, it may only cover 6 weeks of rent. Also, It won’t protect you from tenants with poor credit ratings or irregular work because the insurer will likely deny the coverage.
For landlords with a low tolerance for risk and a profitable portfolio of properties, it may be worth the added cost to buy you peace of mind. While you may be able to pass the cost along to the tenant, it's often only possible if they qualify for coverage. If they qualify, they’re likely not going to skip on the rent.