A rent guarantee insurance is the product of risk management that helps in protecting landlords against losses if a lease defaults. The insurance tends to pay rent to landlords for a decided time period if the tenants covered fail to make payments.
Points To Remember ✔ A rent guarantee insurance safeguards landlords against any losses that they might have to incur if a tenant defaults or falls behind in paying the rent. ✔ The premium is paid by the landlord; however, it may also be paid by the tenant in extra rent or if it is specified in the lease. ✔ Insurers will be looking over the financial stability additionally with the creditworthiness of the tenant/tenants before they underwrite the policy.
What Is Rent Guarantee Insurance?
The worst nightmare of any landlord is a tenant that refuses to or is not able to pay the rent.
In multiple cases, companies or individuals that lease properties have many policies to choose from. This include options that not just insure properties but also their contents, along with all the legal expenses needed to evict a tenant.
Some of these policies are referred to as “rental cover.” However, that wouldn’t guarantee their compensation if the tenant falls into indebtedness.
Rent guarantee insurance is considerably a new concept that emerged from the United Kingdom and has now gotten popular in the United States as well. These insurances are particularly designed to safeguard the income source of a landlord when a tenant fails to make a payment.
Similar to PMI, rent guarantee insurance proffers to protect the landlord and not the tenant. If, for any reason, the tenant fails to pay the rent, the insurance carrier that acts as a guarantor covers the rent that the tenant has failed to pay for a given time period.
The default tenants will still have rent liabilities, additionally with any charged fees against them. The guarantor has the right to start any legal proceedings against the negligent tenant, including eviction and reporting to legal agencies.
Selective landlords may not choose to fork out any additional amount on the rent guarantee insurance, assured that the credit checks and screens that they ran on the tenants before they could lease them the property and handing the keys over prove their financial capability of bearing monthly rental payments.
Circumstances may, however, change.
For instance, a tenant may lose their job because of an economic recession. Or, they might get a divorce or move to a different country due to a job opportunity while breaking off all the obligations of the tenancy agreement.
For a landlord that completely depends on the rent as a source of income to pay mortgages, funds, or just to support his regular lifestyle, the failure of a tenant to rent may land the landlord with serious implications.
However, rent guarantee insurance is not the same as a guaranteed rent schemes. A guaranteed rent scheme allows the landlords to sign-over their property management or a real estate agent while exchanging a pre-agree payment.
In a case like that, one needs to pay the owner even if the property stays empty or the tenants fail to pay the rent.
Benefits Of Rent Guarantee Insurance
Rent guarantee insurance provides financial protection in a situation where a tenant fails to pay the rent. This is beneficial, particularly when the tenant moves out and empties the property; however, the landlord still stays liable for mortgage payments or other functional expenses.
A rent guarantee insurance helps landlords cover for cost of evicting for a tenant that has consistently failed rent payment.
Rent guarantee insurance also provides landlords with peace of mind. This is because it takes away the reimbursement worry for a lost rental income due to uninhabitable damage to the property, like a flood from a broken pipeline or any natural disaster like an earthquake or flood.
Considerations For A Rent Guarantee Insurance
A landlord may look for a few considerations while they take a rent insurance policy. This will make sure that landlords are getting maximum benefits from the insurance.
Here is a list of things that landlords must consider before they opt for rent guarantee insurance:
- A landlord must make sure the policy they choose at least covers the rent for the first few months.
- There are a couple of premium payment options; hence landlords must make sure to thoroughly look into them before choosing.
- Look intensively through the policies.
- Make sure that the insurance carrier is reputed enough to avoid any potential scam or fraud.
Cost Of A Rent Guarantee Insurance
The rent guarantee insurance primarily costs between 5% to 7% of the annual amount of rent. However, there are certain factors that might impact the rent guarantee costs.
The first factor is the extension of the lease term. Typically a longer lease will require the landlords to pay more premium, assuming the risk will be more.
The next factor is the total insurance coverage that the landlord is expecting. Based on how much insurance the landlord is expecting, the cost of the insurance policy may go up or down.
The third factor that might affect the cost is the deductibility of the property. A policy that has a higher deductible will have a considerably low premium. Because the landlord will be held responsible for paying for any bigger damage that is done to the property.
Finally, the location of the property will also play a considerable role in deciding the rent insurance premium cost.
Limitations Of A Rent Guarantee Insurance
Insurers will not be handing out any insurance without getting their due diligence done. This means the application approval of a rent guarantee will depend on the history of the tenant’s default payments.
Also, to qualify for this policy, tenants need stable source of income to help them comfortably pay for property they wish to lend.
Finally, a rent guarantee income is costly. It costs 5-7% of the annual rent payment, which may vary depending on certain factors.
The rent guarantee insurance may help landlords protect themselves against a rent failure; however, that comes with a cost. Hence, landlords must make sure that they have all the information before they choose to get it for themselves.