Renting out property can provide an added source of income, whether you're listing a home or room on Airbnb or signing a lease with a long-term tenant. But property owners face personal liability risks for injuries that happen on the property and for damage to other people's property.
These risks usually aren't covered by ordinary homeowners insurance. Depending on your situation, you may need a landlord's policy or a business insurance policy.
Understanding the risks
If you own property, you're probably familiar with some of the main risks covered by homeowners insurance. They include weather-related issues like roof damage from hail or wind, as well as fire damage.
But there are other risks you may not have considered. As a general rule, property owners are responsible for keeping their property safe for people who stay or visit there, and they can be held liable for injuries that occur on their property.
This means, for example, that you could be sued by a guest who trips and breaks a leg on a poorly lit or broken step. You could also be liable for property damage, such as if a pipe leaks in your condo and damages the unit downstairs. Even a relatively minor claim can leave you responsible for tens of thousands of dollars in damages.
Most homeowners policies cover these risks if you live in your home full-time. But if you are renting out your home, you may need a different type of policy.
Insurance basics for long-term rentals
If you are renting out all or part of your home to a tenant who lives on the property full-time, contact your insurance company to find out whether you need landlord insurance vs. homeowners insurance. Here are things to know:
- If you are not living in the home, your homeowners policy may not cover you if there is an injury on the property.
- If you are living in the home, a homeowners policy usually covers your house and most of your possessions. In contrast, a landlord policy only covers the house and items used to service it. With a landlord policy, you may not have coverage for your possessions if you are living in the home but renting out a room.
- Your tenants can get coverage for their possessions by taking out a renters policy.
Your insurance agent can advise you on the type of insurance you need, based on your situation.
Insurance and short-term or Airbnb rentals
Insurance is much trickier if you are renting your home out short-term, either on your own or through a service like Airbnb or VRBO. Many insurance companies regard an Airbnb rental as a business. But homeowners and landlord's insurance policies typically won't cover any injuries or damage related to business activities. This means you can't count on your homeowners policy to be there for you if an Airbnb guest is injured, or even if the house is damaged, while it is being rented out.
To address this problem, Airbnb automatically includes free Host Protection Insurance for people who rent their property through the site. The program includes up to $1 million in liability insurance in the event of a lawsuit or claim against you for bodily injury or property damage. This may include injuries that occur on your property or certain damages to neighboring property or to common areas in a condo or apartment community. VRBO has a similar liability insurance program that also provides $1 million in coverage. Airbnb has a second program, Host Guarantee, that covers damage to the rental property caused by a guest or someone visiting a guest.
However, the home rental sites' insurance only goes so far. Intentional damage to the property isn't included in the host protection plan, for example, nor are issues like pollution, mold, and bedbugs. The policies do not protect against weather or fire damage the way ordinary homeowners policies do. In addition to leaving you open to risk, the free insurance may not be enough to satisfy your mortgage lender's requirement that you carry homeowners insurance.
To get more complete protection, you may need to buy business insurance.
Other ways to minimize your risk
If you are renting your home, there are a few steps—apart from insurance—that you can take to minimize potential issues:
- Form a limited liability company or corporation to own and manage your rental property. If there is ever a judgment involving the property, your losses will be limited to what you have invested in the property and you will not be risking everything you own.
- Use a professionally prepared lease agreement that is tailored to your state's laws.
- Before you get started, find out if it's legal to operate an Airbnb in your community. Many localities have passed ordinances prohibiting short-term rentals. Your homeowners association may also have restrictions.
- If you are a tenant rather than a homeowner, get your landlord's approval before attempting to sublet or Airbnb your home.
- Talk to an accountant about how to report your rental income and the expenses you can deduct. This can minimize your tax liability and help you avoid unpleasant surprises at the end of the year.
Before you list your home or spare room for rent, make the time to talk to an accountant and an insurance agent. And, if you're renting your property on your own, rather than through a home sharing site, be sure to work with an attorney or an online service provider to create a professionally prepared rental agreement.
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