How to Deal With Rising Landlord Insurance Costs

Landlord insurance costs have risen significantly over the last decade. In just the last four years, the average cost of property insurance has increased by 25 to 45%. 

Rising insurance costs directly cut into investors’ returns and can impact investing strategies. To ensure their properties stay profitable, Landlords need to be aware of changing insurance costs and have a plan for dealing with them. 

Why Landlord Insurance Costs Are Rising 

Several factors have impacted insurance costs in recent years. As a general rule, Landlords pay more for insurance than homeowners do. Insurance companies see Tenants as a higher risk than owner-occupants. To compensate for this risk, Landlord insurance typically costs 20-25% more than homeowners insurance. 

That said, the cost of both Landlord insurance and homeowners has increased dramatically in the last decade. Several factors have led to this increase, including: 

• Natural disasters: The number and intensity of natural disasters has increased over the last few decades. There has been a notable increase in serious hurricanes, wildfires, and floods. This increases costs and risks for insurance companies, which leads to higher premiums for policyholders. 
• Labor and material shortages: Construction costs are up due to a shortage of skilled labor and materials. Supply chain disruptions have exacerbated this problem. It’s increasingly difficult to find skilled labor and materials for home repairs. The result is increased repair costs for insurers that push up premiums. 
• Inflation: The insurance industry has not been immune to the impacts of high inflation, which is one factor driving up premiums. 
• Increased claims for property damage: Insurers are seeing more claims for damage caused by vandalism and wear and tear. This increased expense for insurers is passed to policyholders through higher premiums. 
• Insurers exiting markets: Some insurance companies are leaving high-risk areas. This pushes up insurance costs in those markets. 

The Impacts Increased Insurance Costs Have on Investors

Rising insurance premiums mean increased operational costs for Landlords. This leads to decreased profits and less attractive returns. While some of the added expense can be passed on to Tenants through increased rent, this isn’t always the case. 

Insurance costs are fixed. Even if a property is vacant or if rental markets soften, Landlords are responsible for paying insurance premiums. This cuts into cash flow and makes properties less desirable for investors. 

Small Landlords and Landlords in high-risk areas are the most impacted by higher insurance rates.  Property owners in California and Florida have been hit the hardest. 

Extreme weather has caused insurance costs to double or triple in these coastal areas. Many Florida homeowners are paying four times the national average for insurance. In addition, it’s prompting some insurance companies to leave the areas altogether. Experts anticipate that Texas, Louisiana, and Colorado will see similar increases in the coming years. 

Tips for Dealing With Rising Insurance Costs 

Insurance costs aren’t going down and will likely continue their upward trend. Landlords need to be aware of this and proactive about addressing it. 

The good news is there are things you can do to minimize the impact insurance costs have on your investment portfolio. Here are some tips for dealing with this new reality: 

• Shop around for insurance and compare rates. When it’s time to renew your policy, compare rates from three to four companies. This is a little extra work for Landlords but can result in significant savings. 
• Upgrade your property. Any upgrades that make your house less of a risk to insurers can help keep your premium down. Some common upgrades to consider are:  
  • Hurricane-resistant windows
  • Fire safety systems
  • Alarm systems
  • Surveillance cameras 
  • Smart devices like water leak detectors 
• Increase your deductible. A higher deductible means a lower premium. If you’re comfortable paying more out-of-pocket when you file a claim, a high deductible is a good way to lower your premium. 
• Stay on top of property maintenance. If you keep your property in good condition it will mean fewer claims and reduced insurance costs. Have a plan for preventative maintenance and follow it. Use a good Residential Lease Agreement that outlines maintenance responsibilities and enforce all Lease provisions. 
• Educate your Tenants. At the start of a tenancy, show your Tenants where the water shutoffs are. You should also discuss fire safety – including using fire extinguishers and testing smoke detectors. It’s your job to ensure your Tenants have the information they need to keep your property in good condition. 
• Evaluate what type of policies you need and identify any coverage you can skip. For example, if your house has significant safeguards against flooding, you may not need to pay for flood insurance. 
• Consider property risks when adding to your portfolio. When buying new rental properties, evaluate the area’s risk for hurricanes, flooding, wildfires, and earthquakes. If you’re purchasing in a high-risk area, make sure that the property will cash flow even if insurance costs continue to rise. 

 

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Landlord insurance is a rising concern for Landlords, but it’s an issue that Landlords can manage with good systems and planning. Effective Tenant Screening and property management are two key ways Landlords can help to keep insurance and operating costs down.  

Visit ezLandlordForms.com to start a Tenant Screening, create a Lease, or customize a preventative maintenance checklist. We have tools for every phase of the Landlord lifecycle and can help you get the most out of your investments. Create a free account today.