Rent Guarantee Insurance is a type of insurance that would pay the monthly rent if the tenant named on the insurance will fail to pay it. The risk-management product will pay for unpaid rent but only for a certain number of months.
The insurance company acts as a guarantor for the tenant who defaults on paying rent. The non-paying tenant will still be liable for the rent owed as well as any legal fees. They can be legally sued by the guarantor, get evicted, and reported to credit bureaus.
Rent Guarantee Insurance vs Rental Coverage
Landlord insurance often has a coverage known as “Rental Coverage,” which may sound similar to Rent Guarantee Insurance. The rental coverage covers only loss of rent when tenants need to move out because the property was rendered uninhabitable due to fire or calamity.
On the other hand, rent guarantee insurance pays for loss of rental income because a tenant failed to pay, even if the property was habitable.
Limitations
Rent guarantee insurance is lease-specific, not property-specific. That means that the landlord needs to get the insurance for each tenant who signs a lease with him. Only the non-payment of that tenant will be covered.
Before offering a rent guarantee insurance, insurers conduct thorough background checks of the tenant. They will likely reject tenants who have a history of default payments or unstable source of income. Should they approve a tenant despite those factors, the insurer may demand the tenant to have a guarantor.
The Payout
Most of the time, landlords can file a claim once the tenant shows the intention of not paying despite being sent an official notice. Do note that most rent guarantee insurance would only cover the 2nd to 6th month of non-payment.
How much and who pays?
Like any other insurance policy, the premium price, coverage, and terms may vary from one insurance company to another. Usually, the amount of premium is equivalent to 5–7% of the annual rent payments.
The landlord pays the premium since they are the ones who will get protection from financial loss caused by the tenant’s non-payment. However, he may require the tenant to pay extra rent for it, but the risk of discouraging tenants from renting will be present.
Types of Rental Properties that qualify
As mentioned earlier, rent guarantee insurance is not property-specific, which means that both residential and commercial property owners can have it. Some plans, however, have a limit on the range of rent that will be covered. For instance, popular plans in the US only cover commercial and residential units with monthly rental rates ranging from $800 to $5,000.
What to consider
Since the landlord would need to fork out extra money for the insurance, he must evaluate the risks and benefits. For landlords who strongly rely on rental income to pay for their rental property’s mortgage and other costs to operate the property, they will need the insurance to protect them from non-payments.
Some may also argue that the security deposit is already enough to pay for unpaid rent. However, it is often equivalent to just one to three months of rent depending on local regulations, plus the tenant may also leave the property with damages that will cost a lot to repair. If the security deposit is sufficient for those possibilities, then a landlord may decide not to get the additional insurance. The important thing is that the landlord must make a calculated decision, which considers all possibilities.
Minimizing Non-Payments
Whether or not a landlord decides to get rent guaranteed insurance, as a rental agent, you must help them minimize the chances of getting tenants who have the potential to default on payment. After publishing a listing on Padleads and getting tons of applicants, make sure you conduct a thorough screening process that includes checking their credit score, financial and rental history, job security, and income.