Rental Property Insurance 101 with Kyle Melko

On this episode, host Georges El Masri welcomes guest Kyle Melko to educate listeners about rental property insurance. Kyle, a seasoned professional in the industry, shares in-depth insight into ways this type of insurance works and why property owners cannot afford to overlook it. 

As Kyle elaborates, rental property insurance is a unique insurance category. It is tailored for landlords and safeguards them from potential financial losses associated with rental properties. These losses may occur due to a plethora of reasons. These could include property damage from natural disasters like storms, vandalism, or tenant-caused damages. It also accounts for income loss if the rental property becomes inhabitable, forcing tenants to vacate. 

One might wonder why landlords need separate insurance for their rental properties. However, as Kyle explains, typical homeowner's insurance doesn't cover losses if the property is rented out. This additional protection removes the financial risk from the property owner. It places it onto the insurance company, ensuring landlords are not left high and dry, should unfortunate events occur. 

When discussing rental property insurance coverage, our guest emphasizes that policies often encompass three fundamental areas: physical damage, loss of rental income, and liability. Physical damage covers scenarios where the rental property is damaged or destroyed by unforeseen events like storms, fires, or tenant mishaps. The loss of rental income coverage is designed to compensate landlords if their rental units become uninhabitable due to covered damages. Finally, liability coverage protects landlords from legal responsibility if a tenant or a visitor gets injured within the property.

Kyle points out that these types of rental property insurance can fall broadly into three categories: DP-1, DP-2, and DP-3 policies. While the discussion went into detailed nuances, he summarized that a DP-1 policy is the most basic and least expensive, covering only a few specific perils. In contrast, a DP-3 policy is the most comprehensive, covering all perils except those expressly excluded.

As the conversation proceeds, Kyle enumerates factors that insurance companies often consider when setting rental property insurance costs. Among these are the property's location, size, age, and condition and the total number of rental units. He stresses the importance of landlords understanding these factors while negotiating for the best insurance premiums. 

Regarding furnished rental properties, Kyle highlights that these require additional insurance components to cover the cost of furnishings. Landlords risk substantial financial loss without this extra coverage should any furnishings get damaged. 

Kyle highlights the difference between actual cash value and replacement cost on insurance policies, stating that while replacement cost considers the amount necessary to restore or replace the damaged item, the real cash value considers the item's depreciation, leading to lower payouts. 

In conclusion, Kyle emphasized the importance of seeking guidance from a knowledgeable insurance agent to ensure optimal protection. An astute agent can help landlords navigate insurance complexities, proactively identify risks, and assist in choosing the policy that best matches their needs. 

But first, if you want financing for your next investment and want to know what type of collateral may be involved, click the link below for a free strategy call with our mortgage team at LendCity to discuss your specific situation.

Why Rental Property Insurance is Important 

In his discussion with Kyle Melko, Georges El Masri emphasized the necessity of rental property insurance. Their discussion showed that rental property insurance can provide a safety net for unforeseen situations. It can protect property owners from financial losses resulting from property damage or potential lawsuits filed by tenants or visitors. 

Property damage is a joint risk property owners face due to a natural disaster like a storm or artificial accidents like fire. Having rental property insurance allows owners to cover repairing or rebuilding the property when such unfortunate incidents happen. 

Kyle Melko, during the podcast, distinctly mentioned how rental property insurance can protect landlords from certain liabilities. For example, suppose a tenant or a visitor gets injured on the property and decides to file a lawsuit. In that case, the liability coverage in the insurance can help cover legal costs and potential compensation claims. 

Georges El Masri highlighted an additional value of rental property insurance - coverage for loss of rental income. This means that if a rental property becomes uninhabitable due to a covered loss, the rental property insurance can compensate the owner for the lost income during the repairing or rebuilding period.

Understanding the Basic Coverage of Rental Property Insurance 

Kyle Melko defines the Basic Coverage of Rental Property Insurance as threefold: 

1. Dwelling Coverage: This safeguards your rental property's physical structure, that is, the building itself, from damages. In this case, your insurance provider will reimburse you for rebuilding or repairing the property, whether it is harm due to a fire or wind damage.
2. Liability Coverage: This insurance component is an often overlooked but crucial aspect of rental property insurance. Suppose a renter or visitor gets injured on your premises due to a faulty structure or negligence. In that case, liability coverage will protect you from potential financial headaches associated with the resulting medical or legal expenses.
3. Loss of Income coverage: The insurance policy covers you for income loss if, due to a covered peril, your rental property is rendered inhabitable and you cannot collect rent.

While discussing the above points, Georges El Masri further emphasized the importance of getting adequate coverage, "Are you aware of your policy limits and whether they can cover you completely? It's crucial to get this clarified regularly with your provider". 

As Kyle and Georges discussed, policy limits are the maximum amount an insurance company is willing to pay for a covered loss. Therefore, your policy limits must align with the potential cost of rebuilding or repairing your property. Not having adequate policy limits can leave you with substantial out-of-pocket expenses in the event of severe damage to your rental property.

Different Types of Rental Property Insurance Policies 

Knowing the different types of rental property insurance policies is crucial to being a landlord. As voiced by Kyle Melko, options vary and making an informed decision ensures that you select the plan that best suits your needs. 

Dwelling Policy (DP) 

The Dwelling Policy, commonly referred to as DP, is an essential insurance primarily covering damage to the physical property. This type of insurance can be broken down into three subcategories: 

1. DP-1: This fundamental policy offers limited coverage, insuring against a narrow set of perils, namely, fire and lightning.
2. DP-2: Known as the broad form, it adds to the coverage of DP-1, including perils like windstorms, hail, vandalism, and accidental damages.
3. DP-3: This is often called the best form and offers the most comprehensive coverage. Along with all the perils covered in DP-2, it also shields against any sudden or accidental direct physical loss unless the specific loss is excluded from the policy.

Landlord Insurance 

As Kyle emphasized, Landlord insurance offers broader coverage and protects against property damage, liability claims, and loss of rent if the property becomes uninhabitable due to a covered loss. This type of insurance is generally more expensive than a typical DP. 

Renter's Insurance 

Although not a direct responsibility of the landlord, renter's insurance is worthy of note. It protects tenants' personal property inside the rental unit. Georges El Masri recommends that landlords always ensure their tenants have this insurance to avoid potential conflicts in the case of personal items damage. 

In short, understanding these types of policies allows you to protect your investment better. Based on your needs and the nature of your rental property, you can decide which policy offers the best protection for your property and financial situation.

Factors That Affect Rental Property Insurance Premiums 

There are undeniable truths to insurance premiums for rental properties. Host Georges El Masri speaks with insurance professional Kyle Melko to shed light on factors that can directly affect these costs. 

Location of Your Rental Property 

Location tops the list as one of the most influential factors. As Kyle Melko explains, properties in regions prone to natural disasters like hurricanes, floods, or wildfires will have a higher insurance premium than those in lower-risk areas. This correlation stems from the increased possibility of insurance claims in such locations. 

The Type and Age of the Property 

The type and age of the property can also impact the premium. Older properties, especially those with outdated electrical systems or plumbing, are typically at a higher risk of damage and, hence, have a steeper insurance cost. In comparison, newer properties with modern safety features may be eligible for discounts, according to Melko. 

Tenant Types and Rental Length 

Your tenants play a crucial role as much as your property itself. Melko shares that tenants with good credit histories and a record of on-time rent payments could lower insurance premiums. Longer rental agreements may also lead to lower premiums as they assure insurers of steady income with less risk of property damage. 

Policy Deductible 

Another critical mention by Melko is the policy deductible. It is the amount paid out of pocket by the policyholder before the insurance company covers the rest. A higher deductible means a lower premium, while a lower deductible means a higher premium. Remember, it's essential to consider what you are comfortable with and capable of paying as an immediate upfront cost in case of a claim. 

In conclusion, understanding and managing these factors can significantly affect the ultimate cost of your rental property insurance. You have some control, but some factors are inherently based on changing circumstances. Awareness is the first step to effective budgeting, so stay informed and plan wisely.

How to Properly Insure Furnished Rental Properties  

In ensuring your furnished rental property, it is essential to consider a few additional steps. Kyle Melko, with his vast experience in property insurance, has provided some helpful insights for property owners. 

Creating a Furniture Inventory 

Inventorying all your furniture is the first step in ensuring a furnished rental property. List every item and note their current condition to estimate their overall value. This inventory will be vital when requesting a quote for your insurance premium. It will also be a record if you need to file an insurance claim. 

Choosing the Right Coverage 

Once you have taken the inventory, the next step, according to Kyle Melko, is to choose the proper coverage. This insurance should not only cover the building structure but also the furniture in it. This is referred to as contents insurance or property contents coverage. This type of coverage will protect you from losses related to theft, damage or destruction of your property's furniture and appliances. 

Insurance Provider Selection 

Selecting the right insurance provider is equally critical. One should look for an insurance company with a strong reputation for handling claims fairly and quickly, offering customizable policies to suit your needs. 

Regularly Review and Update Your Policy 

Finally, as advised by Melko, you should regularly review your policy and update it as needed. The value of your property's contents may change over time due to natural depreciation or adding more furniture. Regularly reviewing and updating your policy ensures you aren't underinsured or overpaying. 

In conclusion, insuring a furnished rental property requires more consideration than a non-furnished one. But with the correct steps, as insurance expert Kyle Melko pointed out, you can ensure your investment is well-protected.

The Difference Between Actual Cash Value and Replacement Cost in Rental Property Insurance 

Let's delve deeper into rental property insurance to understand the difference between Actual Cash Value (ACV) and Replacement Cost Value (RCV). Insurance companies may use these two approaches to determine a property's value. 

Actual Cash Value is defined as the property's cost minus depreciation. In other words, it's the original cost of the property subtracted by the amount the property has depreciated over time. If the worst happens and your property suffers a loss, an insurance policy paying out on an ACV basis could leave you with less money than you might expect. 

On the other hand, Replacement Cost Value is the cost to replace the damaged property with an item of similar kind and quality without considering depreciation. The insurer would reimburse you the cost to rebuild or repair the property to its state before the damage without considering how old the property was. 

This might immediately sound more appealing, as you're covered for the total cost of a replacement, but remember, RCV policies typically come with higher premiums. 

So, how do you choose between Actual Cash Value and Replacement Cost Value? A chat with our guest today, Kyle Melko, sheds light on this. "One must assess their risk tolerance and financial capability," says Kyle. 

You could opt for lower premiums if you can afford the cash to supplement an ACV payout. However, if not, an RCV could be a better option despite the higher premiums. The key is understanding your financial situation and your ability to absorb risk. 

Another essential factor is that the decision can influence the type of tenants you attract. High-end rental properties typically require an RCV policy to reassure prospective tenants that any potential damage will be adequately addressed. 

"Every landlord's needs are unique, and the right policy depends on your individual circumstances," reminds host Georges El Masri.

Staying informed about these aspects can help you make intelligent decisions and protect your rental property investment.

The Benefits of Working with a Knowledgeable Insurance Agent 

Engaging with a knowledgeable insurance agent can equip you with the tools you need to secure your rental property investment. Georges El Masri sat down with Kyle Melko to discuss the advantages of collaborating with an experienced insurance agent. Here are the highlights: 

Guidance Tailored to Your Specific Needs 

An insurance agent will provide tailored guidance to meet your unique needs. They consider your property's specifics, whether you're a first-time homeowner or a seasoned rental property investor. They assist you in understanding your risks and the insurance solutions that can mitigate them. 

Assistance with Claims 

If you ever need to file an insurance claim, an insurance agent will help you. They explain what's covered and not covered, help compile necessary documents, and ensure that your claim is submitted correctly. 

Provides Updates on Revisions or Changes in Insurance Policies 

Insurance policies are evolving according to changes in regulations and market trends. A well-informed insurance agent keeps you updated with these changes and ensures that your policy is compliant and adequate. 

Negotiating the Best Rates 

Kyle Melko emphasized that expert insurance agents have built relationships with various insurers. They can negotiate on your behalf to secure affordable rates and comprehensive coverage. They explore different policy options before making recommendations that suit your budget and your property's unique coverage needs. 

To wrap up, involving a knowledgeable insurance agent in your rental property investment strategy is beneficial. The profound understanding and expertise they bring to the table help you make more informed decisions, ultimately leading to better protection and greater peace of mind.

If you are ready to start investing today and want more information about how your mortgage may be secured – or are looking to apply for a mortgage today – click the link below for a free strategy call with our mortgage team at LendCity today.

Listen To The Podcast