Learn about rent loss and how property owners can secure their properties and their wallets against it with rent loss insurance, security deposits, and routine maintenance.
Rent loss is a serious issue for rental property owners. This is especially true for independent landlords who are more likely to feel the effect of loss of rent income — more so than institutional investors like a hedge fund would, for instance.
In this article, we'll explain what rent loss is and how property owners can secure their properties and their wallets against it.
When a rental property is severely damaged by a natural disaster, accident, or tenant negligence, it becomes uninhabitable and unable to be rented out. Due to this forced vacancy, rent payments can no longer be collected and so there is a loss of rent.
Rent loss compounds each month until repairs can be completed and/or a new tenant is found. This limbo period is a nightmare for landlords because if a property can't be rented, it's a net negative for the owner. The mortgage will still need to be paid, the utility bills will keep coming, and the added cost of repairs, contractor fees, and more will turn a once-profitable property into a money-sink.
Fortunately, there are steps any property owner can take (regardless of how many properties they own) that will ensure — as well as insure — against these rent loss situations.
Security deposits are commonplace in the rental property business — almost an afterthought to most landlords. However, what was designed to protect a landlord against tenant negligence has become a bargaining tool to attract renters.
Today, many rental property owners have decreased their security deposit amount, or waived it altogether as a way to compete against other landlords. The reasoning is that when properties, amenities, and rent costs are the same, there is little else to differentiate within a contested market.
As a result, if and when a tenant is the cause of a fire, flooding, or other major damage to a property, the landlord has no way to recoup repair costs or rent loss. The deposed tenant likely won't offer to pay for the damages willingly, and a lawsuit can be extremely expensive and unfruitful for the property owner.
The answer is simple: require a security deposit upfront that at a minimum will cover one month's vacancy. A security deposit won't offset major repairs or natural disasters, but should cover the cost of a short vacancy or minor repairs.
"Prevention is better than the cure," is a quote attributed to philosopher Desiderius Erasmus — and is a great lesson for landlords today.
Preventing damage to a property is significantly less expensive than repairing the damage after it's already been done. Plus, landlords can easily outsource routine maintenance, rather than having to spend time looking for a specialist contractor to fix a major problem.
In most areas, maintenance providers offer year-round service programs for property owners. These companies should have a good understanding of common problem areas and will help you schedule check-ups for different seasons. Here are examples of typical seasonal maintenance that will help landlords prevent major issues that cause rent loss.
During the spring, maintenance providers should:
When summer rolls in:
As we move into fall:
And when winter comes:
These key maintenance items will prevent any problems before they can cause significant damage to a property, and thus loss of rent.
The final hedge against rent loss is rent loss insurance. This type of policy or coverage insures a landlord against the loss of rental income that comes from forced vacancy situations when the cause of the vacancy is covered by the policy. In a nutshell, if tenants can't stay and pay, rent loss insurance will help cover the missing rent.
Why is this type of policy important? While a security deposit will cover minor rent loss situations and routine maintenance will eliminate preventable repairs, major structural damage and natural disasters aren't so easily solved.
Tornadoes, earthquakes, hurricanes, fires, and floods are common occurrences — so common that hundreds of insurance policies cover them. These policies help a property owner recoup and repair after a disaster, and are often bundled into an umbrella insurance policy designed to protect the property from most threats.
However, while these types of insurance products may cover costs to repair the damage, they don't often account for the loss of rental income that occurs when a unit is rendered uninhabitable. This loss of rental income can cripple a landlord whose livelihood depends upon their property portfolio.
To help ensure you’ll keep receiving rental income after significant property damage, loss of rent insurance is the best — sometimes only — recourse.
These two insurance products are often interchanged, and both are crucial for landlords. That said, it should be noted that Rent loss insurance and landlord insurance are not the same thing.
Some insurers will include “Fair Rental Value” or “Loss of Rents” within a landlord insurance policy, but this depends on the carrier and specifics of the policy. If you aren’t sure what type of coverage you have with your current policies, or what kind of perils are covered, speak to your insurance provider or agent.
Note: If you don’t understand your policies as well as you’d like, Azibo is here to help! We’re committed to helping protect landlords, and we’d be happy to work with you one-on-one to help you find the perfect coverage for your situation. One of our insurance professionals will analyze your existing policies with you and make recommendations — all for free.
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Rent loss insurance, on the other hand, has a very specific purpose — to secure rental income against property damage or natural disaster. It's a focused solution to a very real problem.
To be prepared for any situation, both landlord insurance and rent loss insurance are invaluable.
There is a difference between suffering rent loss due to catastrophic damage that leaves a property uninhabitable, and rent loss due to a tenant who simply refuses to pay rent.
Luckily for landlords, there are insurance options for both of these situations.
Rent loss insurance offers coverage for rental income lost due to major damage that renders their property "un-rentable" so long as (1) the coverage is included on the policy on which you are making the claim and (2) the cause of the damage or loss is covered by the policy on which you are making the claim.
On the other hand, rent default insurance offers coverage for rental income lost due to tenants who won't pay their rent, can't pay their rent, or are undergoing eviction.
Keep in mind that these are two similar tools offering similar solutions, but for very different scenarios.
Empty rental properties don't have to equal an empty bank account. Property owners have options regarding rent loss whether they need to dampen it, prevent it, or recover from it.
An appropriate security deposit, a regular maintenance schedule, and a solid insurance policy can protect landlords against significant rent loss.
Cody Rudolph is a real estate investor and digital marketing expert who writes about real estate investing, marketing, finances, software, and more at CodyRudolph.com.
Disclaimer: The information provided in this post does not, and is not intended to, constitute insurance advice; instead, all information, content, and materials are for general informational purposes only. This content may not constitute the most up-to-date insurance information. Readers must contact a licensed insurance agent or company to obtain quotes, advice, and guidance with respect to any insurance matter. No reader, user, or browser of this article should act or refrain from acting on the basis of information herein without first seeking the advice of a licensed insurance producer.
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