Homeowner’s Insurance vs. Landlord Insurance For an Investment Property

Real estate is consistently one of the most lucrative and stable investments you can make. If you're a homeowner, a home will likely become one of your most valuable assets; if you own commercial property, it might provide you with long-term financial gains.

But as an investor, you want to ensure your investments are properly protected -- and in the case of real estate, that means insurance. But insurance for an investment property isn't quite the same thing as homeowner's insurance, and it's important to understand the nuances of your insurance coverage to avoid any financially dangerous misunderstandings. Depending on what you plan to do with the property, you may need to purchase specialized coverage such as landlord insurance or vacant home insurance. So what's the difference between these various kinds of coverage? Let's dig into the answers.

What Insurance Do You Need?

When it comes to insuring your property, how you intend to use it makes all the difference. In general, it comes down to this: if you plan to rent out the property, you'll need to purchase landlord insurance, which is designed to provide specific protections to property owners who lease their premises. If your goal is to renovate the property and flip / sell it later -- leaving the property empty of inhabitants at the time -- then you will want vacant home insurance.

Landlord Insurance vs. Homeowners Insurance

So how exactly does landlord insurance differ from a standard home insurance policy? Here are some of the coverage items that set it apart:

●     Loss of rental income: If your property is rendered uninhabitable due to one of the covered perils, then landlord insurance can compensate you for the lost revenue.

●     Liability protection: If a tenant or visitor should sustain an injury on the property and file a lawsuit, landlord insurance will protect you from the worst of the legal and financial consequences.

●     Legal expenses: Lawsuits can be expensive even if you come out the winner. If, for whatever reason, you need to take legal action against a troublesome tenant, landlord insurance may help cover the legal fees.

●     Property damage: Property damage caused by common perils doesn't just affect rental income -- it can incur plenty of cost on its own. Landlord insurance will help mitigate those expenses.

When you compare home insurance coverage to landlord insurance, there's plenty of overlap -- but that doesn't mean a standard home insurance policy will cover an investment property.

Temporary Renting and Accidental Landlords

You may or may not have heard the term "accidental landlord" before. It's fairly simple: sometimes homeowners go on vacation or are otherwise away from their home for a long time, and temporarily rent out their homes to a third party. Unfortunately, this situation might result in the homeowner not being covered if something should happen. As previously shown, homeowners insurance isn't suited to the unique risks requirements of a rental situation.

Accessory Dwelling Units (ADUs) and Home Insurance

A close cousin to renting out one's entire home as an additional revenue stream is an accessory dwelling unit, or ADU. These secondary living spaces -- often including guest houses or converted garages -- have become popular as a way to rent out to tenants and make some extra money. But just as with any other premises you rent out, it's important that you talk with your insurance provider and make sure you're properly covered. Having an ADU on your property can also affect your home insurance rates, which makes it a good idea to consider purchasing landlord insurance for additional coverage.

In fact, finding affordable home insurance can be a vital part of protecting your revenue stream. Insurance can take a big bite out of your finances, so it's always a good idea to compare rates and coverage options to get the most bang for your buck. The Zebra's Kristine Lee has compiled a useful list of the information you'll need and steps you can take to get a home insurance quote, and there are plenty of online tools out there to help you get a quote fast and free.

Other steps you could take to lower your premiums might include bundling your policies together for a discount, increasing the security around your home, or raising your deductible so that your monthly premiums are lower (at the risk of paying more out of pocket should something go amiss).

Tenant Insurance and Landlord Insurance

It's a common belief that if you have landlord insurance, then your tenants don't need renter's insurance. This is actually a common misconception. While landlord insurance covers liability issues and the structure of a property, one thing it doesn't cover is the tenant's personal property. If tenants want their things to be insured against theft, fire, or other covered perils, they will need renter's insurance -- and it's not a bad idea to encourage them to purchase some.