Sunday, January 11, 2015

Is Landlord Insurance Worth It?

New rental property investors beware: your insurance may not be covering all of your asset.  I learned this lesson the hard way toward the end of last year.  After almost two years of no issues, one of my rental properties finally became unoccupied.  Now...I'm not that stupid.  I knew the scenario of a prolonged untenanted bout was possible.  However, seeing "Loss of Rents" on my policy gave me peace of mind.  I was under the impression that my policy covered any type of rent loss.  I was sorely mistaken.

What "Loss of Rents" means for most policy holders, landlords who get the basic insurance coverage, is a loss of rental income associated with time the dwelling is under repair for a covered loss.  It has nothing to do with your or your property management company's (if you're like me--an out of state landlord) inability of finding a tenant for your property.  Rookie mistake on my part.  I'm now up to three months of rental income loss on one property.  My cash flow from the other two is currently covering the mortgage, insurance, and maintenance monthly dues.  This is why having more than one rental property is somewhat critical.  The odds of your properties becoming vacant all at once are low, and get even lower as you add more (cash flowing) properties to your portfolio.

The story I have for you today gets funnier, not for me, but for you.  You can laugh at me knowing that in addition to this property costing me money each month, it also became the victim of theft.  When it rains it pours, especially outside of your house!  That is where the thief struck, taking the air conditioning unit one night.  Double drat!  Note to self: Your property management company is not a private security company.  They will not send someone to stand guard of your asset, 24-7.

I had a friend whose vacated rental property was burglarized recently.  The thieves did a great job of hauling out his stove and refrigerator, not leaving any scuff marks on the floor or dirt on the carpets.  They didn't break any windows to get in, picking the door lock somehow.  These were courteous burglars.

This is what I need!!

So far we have two great reasons to check on your existing rental property insurance coverage: 1) Rent losses due to the property being untenanted and 2) Theft.  But are there others?  Yes, let me show you what I have discovered.  There are multiple "causes" of loss and your basic (bank mandated) coverage only goes so far:

Form 8 = Basic Form CP1010
Form 1 = Broad Form CP1020
Form 2 = Special Form CP1030

My policy is Basic so if you look down the first column, Theft, is not covered.  I'm going to have to pick up the bill on a new air conditioning unit.  Thank goodness it's winter now and I have time to save for this purchase.

Is Landlord Insurance Worth It?

The answer to this question is a conditional, Yes!  If you can afford the additional insurance premium for adding Special coverage, that is, your cash flow situation can cover it, then I'd say go for it!  Thievery and broken leases are quite common.  A For Rent sign being on your property's lawn longer than a month is very possible.

I'm not an insurance expert, so consult with one to find out if you can add coverage a la carte.  When looking to buy a rental property, add landlord insurance to your pro forma calculations.

Aren't These Losses Tax Deductible?

Rental income is one-half of your Income Statement.  If you have a great year, get all of your potential rent, then you'll gross income will be excellent.

Your Operating Expenses is the other half of your Income Statement.  Things like monthly property management fees, insurance costs, travel to your sites, property taxes, repairs, replacement costs, For Rent signs, etc., are all tax deductible and will adjust your earnings for the taxable year in question.  Perks of our landlord friendly U.S. tax code!

Final Thoughts

You're going to need deductions if you make lots of money.  So, if you're like me and have a full-time job that pays over $100K a year, and make $30K+ in gross rental income, having to replace an air conditioner, a refrigerator, or a stove, here and there, won't kill you.  Deductions help lower your effective tax rate.  But if real estate investing is your livelihood, it may behoove you to get landlord insurance.  A month of not collecting may impact your business tremendously.

Thanks for reading!

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