There are different ways for a landlord to use money. Extended vacancies can result in losses, as can property damage caused by a tenant. But lost rent is another way landlords can wind up cash-strapped, and one way to prevent that scenario is to buy rent guarantee insurance.
What is rent guarantee insurance?
There are plenty of reasons for a tenant to stop paying rent. Job losses, medical emergencies, and other circumstances can result in unpaid rent even when a tenant has otherwise been reliable.
The problem, of course, is that maintaining residential property costs money, and so when a landlord doesn't collect rental income, cash flow problems can ensue. That's where rent guarantee insurance comes in.
Rent guarantee insurance protects landlords from a tenant default on rent. In exchange for an insurance premium, a landlord gets a rent guarantee -- namely, that the insurance company will come in and provide the landlord with those lost monthly rent payments for a preset period of time, as outlined in the insurance contract.
What's the difference between rent guarantee insurance and landlord insurance?
Rent guarantee insurance covers missed rent, as the name implies. Landlord insurance, or rental property insurance, covers damage to a property and also includes liability coverage in case a tenant or visitor gets hurt on the premises. However, landlord insurance will not cover the cost of a missed rental payment.
How much does rent guarantee insurance cost?
Rent guarantee insurance can be expensive, costing 5% to 7% of the annual rent payments attached to a policy. Usually, a landlord will have to pay for that rent guarantee. In some cases, however, it may be possible for a landlord to pass the cost of rent guarantee insurance on to a tenant. This might come into play when a tenant with poor credit applies.
Does rent guarantee insurance let tenants off the hook in paying rent?
Just because a landlord has rent guarantee insurance does not mean that a tenant gets a free pass on rent. That insurance simply kicks in once rent isn't paid. If a tenant continues to remain delinquent, a landlord can begin the process of having that tenant evicted.
What are the pros and cons of rent guarantee insurance?
Rent guarantee insurance can help landlords avoid landing in a tough financial spot when tenants are unable to pay. It's possible for a tenant to appear like a financially sound applicant when a lease is first signed only to then lose a job, get divorced, fall ill, or encounter another situation that puts a strain on his or her finances. Having insurance allows landlords to be made whole in circumstances where there's unpaid rent.
But rent guarantee insurance has its drawbacks, too. For one thing, it costs money, and a landlord could end up paying for coverage only to never need it. Granted, as is the case with other types of insurance, that's technically a good situation to be in. Many people hold life insurance, for example, with the hopes of not needing to use it for a very long time. But in some cases, more thorough tenant screenings could take the place of rent guarantee insurance.
Also, an insurer won't give out a rent guarantee policy willy nilly. Rather, each insurer will do its own due diligence, and if a landlord is applying for a tenant with really bad credit or a job that's not steady, that insurance policy could be denied.
Keep in mind that landlords generally have to apply for rent guarantee insurance on a lease-by-lease basis, and that could be a cumbersome prospect. For example, if a landlord has a building with 50 different units and wants an insurance policy for 20 of them, that will generally require 20 distinct applications. That's a lot of work for a landlord to take on.
Also, rent insurance premiums often need to be paid in advance, not on a month-to-month basis. As such, a landlord could get stuck shelling out a lot of money upfront in exchange for guaranteed rent.
The bottom line on rent guarantee insurance
Ultimately, rent guarantee insurance can be useful, but it's an expense that some landlords may be able to avoid by screening tenants carefully. Still, those who need that peace of mind may want to move forward with it despite the cost.