Rental Guarantee Insurance: A Guide for Landlords

Traditionally, owning a rental property is considered a safe investment. However, even the safest investments are not foolproof. For example, during the pandemic, many landlords struggled financially after their tenants were unable to keep up with their rent.

As a landlord, it’s impossible to predict when a tenant will stop paying, but fortunately, there is a way to make sure you’re protected if rent money ever stops coming in. You can take out a rental guarantee insurance policy. 

We’ve created a guide to rental guarantee insurance to help you decide if you need this protection. Read it over to get a better sense of what this type of insurance policy is, how it works, and how it can be used to protect you from taking a loss on your investment.

Key takeaways

By the end of this article, you will know that:

1. Rent guarantee insurance protects landlords in the event that a tenant stops paying rent.
2. You will likely have to conform to certain behaviors as a landlord in order to qualify — for instance, running credit checks on prospective tenants.
3. You can expect to pay 4% to 7% of your gross income from a property for the insurance policy, and in some cases, landlords may decide they’re better off taking the risk themselves than paying this premium.

What is rental guarantee insurance?

In real estate, rent guarantee insurance is a type of insurance policy that is used to protect landlords in the event that a tenant defaults on their monthly rent obligation because of a job loss or other financial hardship.

Also known as “rent default insurance,” this type of policy is meant to replace your base rental income in the event that the tenant stops paying rent.  Not only will one of these policies protect you from loss of rent, but it will also allow you to keep up with any financial obligations that you have on the rental unit, such as a mortgage or home equity loan payment.

It’s important to note that a rental guarantee program is different from standard landlord insurance. While landlord insurance will protect you against financial losses related to property damage or liability claims, a rental guarantee insurance policy is simply meant to replace unpaid rent. 

How does rent guarantee insurance work?

Unlike other real estate insurance policies, a rental guarantee insurance policy is not attached to the rental property itself. Instead, one of these policies should be taken out on each individual lease, meaning that if you have multiple rental properties, you will need to have multiple rent guarantee insurance policies.

In addition, qualifying for rental guarantee insurance for landlords has more to do with your tenant screening practices than with you as the landlord. For instance, you will likely need to sign an agreement saying that you ran a credit check on the tenant before you will be approved for a policy.

Last but not least, there are often limits to the amount of rent that can be covered under one of these policies. Typically, in the United States, only rental amounts between $800 – $5,000 per month will be eligible to be covered under this type of landlord rent guarantee.

How much does rent guarantee insurance cost?

Ultimately, the cost of a rent guarantee insurance policy will vary, depending on how much rental income is being covered and the individual insurance company. As a result, commercial rent guarantee insurance policies are often costlier than similar residential versions, and insuring the leases for multiple rental properties will cost more than getting a policy for the lease on one rental unit. 

That said,  as a rule of thumb, the average rental guarantee insurance cost will amount to between 4% and 7% of your annual rent for the property, regardless of whether you’re after commercial landlord rent guarantee insurance or you intend to insure the lease on a residential property.

Do I need rent guarantee insurance?

Many landlords often ask, “Is rental guarantee insurance worth it?” However, the question of whether or not you need to invest in a rent guarantee insurance policy is a personal one. It all comes down to how well you’ll be able to handle a few months of lost rent and how much you want to invest in your own peace of mind.

Put simply, if a tenant decides to stop paying rent, it can take months to evict them and to find a new tenant. In the meantime, you will be solely responsible for the financial upkeep of your rental unit. If you are unable to shoulder that financial burden, obtaining an insurance policy that allows you to collect guaranteed rent might not be a bad idea. 

However, if you’re confident that you will be able to financially carry your rental property even if your tenant defaults, keeping up one of these insurance policies might be more trouble than it is worth. For one, you’d be responsible for paying an additional monthly premium. For another, you or your property management company will have to deal with the hassle of working with the insurance company in the event that you ever need a payout. 

FAQs

Is there rent guarantee insurance for tenants?

Indeed, tenants can take out rent guarantee insurance. This type of insurance is designed to assist tenants by covering their rent in times when they are unable to do so themselves. Therefore, if you, as a tenant, have a rent guarantee insurance policy and find yourself unable to pay your rent, your insurance provider will take on the responsibility of paying your rent for the duration of your financial difficulty. 

How much does rent guarantee insurance pay out?

The payout you receive from lease guarantee insurance is determined by the terms of your agreement with the insurance company. Generally, it covers the rent that the defaulting tenant would have paid for a specified number of months, up to a certain maximum amount, as outlined in your policy. 

Is rent guarantee insurance worth it?

Rent guarantee insurance is usually worth it in situations where tenants have a less established credit history, if they’re new to employment, or if they’re students, as these factors can sometimes increase the risk of rent default. This insurance becomes more crucial in economic climates where tenant job stability is uncertain, or in markets with high rental default rates.