Many families own investment properties that they hold for rental to others. Unfortunately, we see frequent problems with how families insure those rental homes, and I think most stem from not slowing down the process to address major issues and instead jumping-in too quickly with an insurance-policy purchase.
We believe these three questions need to be addressed before determining how rental homes should be insured:
- Intent: Are you holding on to one home that’s been in the family for years, or do you plan on owning 10 rental properties? Do you anticipate rentals being a significant source of income? Do you renovate and sell (flip) fixer-uppers? Do you charge just enough rent to cover expenses so you can pass-down the home to the next generation?
- Ownership: Do you want the rental(s) to be included among your personal liabilities and responsibilities? If something unfortunate happens at/because of the rental-home investment, are you okay with the consequence possibly affecting your personal wealth?
- Use: Do you have long-term tenants, or do you rent to short-term occupants (VRBO, Airbnb, etc)?
Answers to these questions draw-out determinants on how best to design the portfolio. For example, should an attorney help transfer ownership into an LLC? Do commercial insurance contracts improve the scope of coverage needed? Do some underwriters have special programs (or conversely, will you lose your current insurance because your underwriter won’t accept the homes)? Will the coverage on the rental homes affect the insurance held on other assets?
The mechanics of how to insure rental homes isn’t difficult, but we see too often families with the wrong plan because they’ve never stopped to define the plan in the first place.
Photo: Rachael McGraw – Manhattan Beach