By Derek Kartchner | Gila Insurance
One of the most frequent questions I get asked at the AZREIA monthly meetings is, “Does it matter if I have the wrong policy?” People don’t ask it that way, but that IS the question they are asking. In some cases, they ask, “Will a rental property work for a flip?” Or “Why doesn’t a homeowners policy work for a rental property?” As a real estate investor, you juggle many responsibilities, and keeping your properties insured correctly is one of them. However, did you know that occupancy status plays a crucial role in choosing the right insurance? Let’s discuss some of the ways that matters.
First, I think it is a consensus that people don’t like insurance companies. Rates go up when you don’t have a claim. Claims rarely go as we want them to, and sometimes claims get denied. But quite frankly, we do it to ourselves. An insurance policy is nothing more than a contract. When we, as the contract’s purchaser, keep to the policy’s conditions, the carrier is bound and has no choice but to pay the claim. When we justify actions that violate the conditions, we invite the insurance company to deny the claim. It’s as simple as that. How does occupancy play into that? Well, you have to look at things through the eyes of an underwriter in the context of typical properties.
Primary Home vs Rental Property
A primary home you are in every day. You see the leaking sprinkler, the peeling paint, and that pile of leaves that need to be cleaned up. Many of these items might take a minute, but they will end up on your to-do list. A rental property, on the other hand, has a tenant that is so cheap they won’t even get a blasted shower curtain and dare to complain about mold when mildew starts growing in the corner of the bathroom (true personal story). I mean, tenants break stuff and pay late. By law, your ability to check stuff out and inspect requires notifications, has limitations, etc. So, there is a different risk. When you have money to fix a home, which comes first – your castle or theirs? Therefore, if you had to place a dollar amount on what the insurance should cost between the two, which would be higher? If you guessed rental property, you are correct! When carriers learn that the home has been used as a rental property rather than a primary home, they get skittish.
Vacant Property (Rehab or otherwise) vs Rental Property or Primary Home
Let’s face it, an empty property is a vulnerable one. Imagine a burst pipe going unnoticed for weeks in a vacant home. Or imagine from the insurance companies’ perspective how they feel about the idea that you are going to move the wall. Or the fact that you are about to put a dumpster out front signaling to the world that there is an easily accessible stash of copper available. In the mind of an insurance company, a vacant home will flood or be the party place for the local teens at the end of the week. The concern is so great that after 30 days (in some cases 60 days) insurance companies limit vandalism, and the damage done by bursting pipes. 30 Days, that’s it… and then the policy will automatically exclude this coverage.
Short-Term Rentals, PadSplit, and Group Homes
One other note: insurance companies want to know about your tenants. Therefore, not all rental property insurance covers every tenant type. A long-term rental situation allows you to do your due diligence on your tenant (credit, eviction history, etc.). Short-term rentals are a different beast, and you have no idea about the tenant other than Claire in Santa Monica gave them 4 stars (something, but who knows). PadSplit is awesome, but also has a unique situation as far as multiple tenants from different backgrounds in one place. Group homes, whether sober or assisted living or any other type, are viewed as a business and EXPRESSLY excluded in a standard insurance policy. Be sure to disclose these situations to your agent or insurance company. If you try a different business model you will need to make sure your policy matches the risk.
The Takeaway
Matching the right insurance policy to your property’s occupancy status is crucial for real estate investors. Don’t get caught off guard by assuming a homeowner’s policy covers everything. Remember:
- Use landlord insurance for tenant-occupied properties.
- Obtain vacant property insurance for unoccupied dwellings or homes under renovation.
- Make sure if you are renting the property to a different type of tenant that you let your agent know.
By understanding occupancy and choosing the appropriate coverage, you can ensure your investment properties are well-protected, no matter who calls them home (or doesn’t).