Renting to Your Family - Landlord Insurance

We will cover everything that you need to know about renting to your family members and the implications of having landlord insurance. At the end of the article, we will provide some insights that we have gathered from real estate professionals, legal professionals, and a few bloggers.

Yes. You'll need landlord insurance anytime you own a property, title it in in your name, live elsewhere, and collect rent.

Whether it's a second home, vacation home, or investment property, if you charge for someone to live in it, including family, then you should buy landlord insurance.

What if I Live in The Rental Property Periodically?

Even if you live there for nearly half the year, you can only have one primary residence for insurance and tax purposes. For example, you may visit the grandkids or help aging parents. You would still need a landlord insurance policy and not a homeowners insurance policy because the rental is not your primary residence.

What is Landlord Insurance?

Landlord insurance is an insurance policy that covers property owners when there is damage to a property that they rent. Insurance companies sell three types of landlord insurance policies (or dwelling fire policies). There is dwelling policy 1 (DP-1) for very limited coverage, dwelling policy 2 (DP-2) for moderate coverage, and dwelling policy 3 (DP-3) for comprehensive coverage.

DP-3 policies grant replacement cost instead of actual cash value for claims and repairs, meaning you avoid taking a hit for depreciation, and you'll get the money you need to buy something new and comparable. That's one reason they're the standard landlord policy. DP-3 policies are like the standard homeowner's policies (HO-3) with some key differences and have the following coverages:

• Building: Covers the structure itself for common perils such as fire, lightning, wind, and hail
• Liability Protection: Covers bodily injury to someone else, damage to their property, and legal fees from a lawsuit.
• Loss of Rental Income: Replaces loss rent for a set period if tenants are forced out
• Additional Coverages (Unlike homeowners insurance where these are included)
• Other Structures: Unattached structures such as garages or sheds
• Personal Property/Contents: You can pay more to protect your personal items. The tenants would need a separate renters policy for their personal belongings.
• Medical Payments: Covers the medical expenses of guests regardless of fault. You may be able to add coverage for your rentals through your primary homeowners' (HO-3) policy.
• Notable Exclusions: Earthquake, power failure, water damage, and mold (some companies cover the last two). Vandalism is excluded unless you add it.

Do I Need Landlord Insurance and Home Insurance?

Not for the same home. Insurance companies expect the owner to live in the house for a homeowners policy. So, you'd have a homeowners policy for your primary and landlord insurance for your rental family home.

Landlord insurance gives building and liability coverage. The most significant difference between your landlord policy and homeowners policy is that your homeowner's policy covers your personal property.

Does My Homeowners Insurance Cover the Family I Rent to?

No, your homeowners, vacation, and second home insurance policies will not cover the family you rent to. There are two exceptions.

First, some insurance companies may allow you to add an endorsement to your homeowner's policy for a second home or vacation home to cover a short-term rental (think the length you'd rent an Airbnb).  Anything greater than a month would be a long-term rental and require you to buy landlord insurance.

Second, if you have insurance on a vacation home or a second home, and you've put your family member on the title or deed. You may insure the house on a homeowners policy with the insurance carrier's underwriting approval.

A common problem arises when a parent moves to a second home to rent the old house to a child. Since the owner no longer lives in the home, you need landlord insurance for the property, or you risk the insurance company denying payment in case of a claim.

What if I'm Letting my Family Stay for Free or Reduced Rent?

Parent and grandparent landlords ask this question often. But even if your family pays reduced rent or no rent at all. You must purchase landlord insurance.

The policy doesn't factor in how much the tenants dish out for rent. Your family would still be your tenants, even if their monthly cost is nothing more than an "I love you."

As noted above, you may qualify for the cheaper-priced homeowner's insurance instead of landlord insurance if you put your family member on the deed. Contact your insurance agent and see if they'll allow it before you title the property with your family member's name.

Does landlord insurance cover personal property?

No, the standard dwelling policy (DP-3) does not cover personal property. But you may be able to add contents insurance coverage (or personal property insurance) to protect your personal property such as appliances, furniture, or landscape equipment like a lawnmower.

The key point is your policy won't cover your tenant's stuff even if they're family.

(If you have a homeowners policy then see Equipment Breakdown Coverage Form)

Should my Family Members get a Renters Insurance Policy?

Yes, it's a smart idea, and many landlords require it. A renters policy also called an (HO-4), gives the tenant personal property coverage.

And the renter's policy may prevent disputes between landlords and tenants over personal property claims. Although this is less likely with family, it still makes things clear. The renter's policy also gives your renting family liability insurance and protects them if their guest sustains an injury and names them in a lawsuit.

Some may think they can skip the renter's policy because they lease to family. Here's an example to illustrate what could happen:

Jim and Bridgette lived in their suburban home for 23 years until their son married and moved his bride in. The parents moved out to a smaller condo in the city next to Jim's job. They thought their old homeowner's policy would cover their son and his wife.

After a fire, the insurance provider considered the damage to the structure a covered loss but denied the claim on everything the newlyweds owned, including all their brand-new furniture, wardrobes, and expensive wedding gifts.

A renters policy would have saved the day for the newlyweds, and according to Insurance Information Institute (III), the average cost of renters insurance is just $15 per month.

How Much Does Landlord Insurance Cost?

You can expect the cost of landlord insurance to run about 25 percent more than standard homeowners insurance.  It costs more because renters have a statistically higher probability of causing property damage that requires a claim than homeowners, and insurers charge more to deal with the increased risk.  At the time of the claim, landlords can expect to pay a deductible between $1,000 and $2,500, depending on where they set it. The average homeowner paid $1,192 in premium, and the average landlord paid $1,478, as of a few years back.

What If I Want to Run a Business Out of My Home?

If you are renting your home and you just want to run a home-based business then your standard homeowner's insurance might need to be adjusted see Equipment Breakdown Coverage Form

Insights and Opinions

We gathered insights and opinions on renting to family members. We asked them the following questions:

1. How Are My Taxes Affected by Renting to Family?
2. What are the pros of renting to family members?
3. What are the cons of renting family members?
4. Anything else you would like to add?

Here are their responses:

"The good thing about renting to family members is that you know who is living in your house and probably know more about the person's background than most rental screening reports can tell you.

The downside is that if things don't go as planned it can be very difficult to make the hard decision to remove that person from your property."

-Nick Disney | Real Estate Investor at Sell My Antonio House

"A person that refuses to pay rent or leave a property and decides to occupy a space unlawfully is a landlord's worst nightmare. A landlord should absolutely not rent their property without checking the credit and criminal history of the person even if the person is a family member.

A family member that offers a low chance that the person would become a squatter is one thing but if the landlord does not trust the family member is another matter entirely. The landlord must give careful consideration of the matter before allowing anybody, even family members, to live in their property for even a short period.

A landlord must be exceptionally vigilant when it comes to screening a potential person, including family members, to reside in a property for even a short period of time because evicting a person is a long, arduous
and expensive process even in the best of times.

Right now, many states are establishing eviction moratoriums because of the pandemic that prohibits a landlord from evicting a tenant for any reason. A landlord needs to think long, hard, and very carefully before allowing a person to quarantine in their space even for a period as short as 14 days because if the tenant decides not to leave for whatever reason then there will be serious consequences for the landlord to legally get the person removed."

-David Reischer | Tenant Attorney at LegalAdvice

" The positive of renting to a family member is that you typically know their character prior to handing over the keys. At the end of the day, make sure expectations are properly set and contracts are signed to prevent choppy times. "

-Matt Bonestroo | Founder of Phoenix Mobile Home

"If you’re renting your property to a family member your taxes will be negatively affected, but only if you have rented the property for less than the current market value. It will be considered as personal use, and you won’t be able to claim the deductible expenses. A rental property has several deductible expenses and all these deductibles can’t be claimed if you rent your property to family members for less than fair market value."

"When renting to family, you know what type of tenants you will have which can give you some sort of comfort, however, what if an issue arises and they can no longer pay rent? What if there is damage done to your property?

Regarding taxes for your rental property, it must already be proven to the IRS that your property is a rental as oftentimes rentals to family members can be considered as 'personal use,' which does not warrant those rental tax deductions.

To have a rental unit be considered as such, the unit must not be occupied by the owner for personal use greater than 14 days or 10% of the number of days out of the tax year, otherwise, it is either considered a vacation rental or personal residence."

-Marielle Mathe | The Keyes Company

One thing you should consider before renting to friends and family members is to ask them to co-sign the lease. If they blatantly refuse, you know they’re going to be a troublesome tenant. Make sure to set strict rules and leasing policies in the beginning so there’s less chances of problems later on.

The biggest pro of renting to your family members is that you have extensive knowledge about them.

-Matt Peden | Owner of Independent Property

"The big tax watch-out is to make sure you rent the property at a fair market rent. Otherwise, if you give your family a break on the rent, then you risk having the property reclassified as personal property and losing the
tax deductions normally associated with a rental property. This can result in a surprise tax bill with heavy penalties."

-Domenick | Accidental Rental | Landlord & Former CPA

"You might give it away for a smaller amount reducing your income.
A problem pertaining to the rent may damage your relationship.
You may not be able to benefit from tax deductibles if you give it for a lower amount"

-Johell Aponte | Move On House Buyers

The most important advice I would give is to have a formal lease agreement in place. Both parties must be on the same page to eliminate any gray area down the road and hopefully protect your relationship in the process as well. Before deciding to rent to family members, reach out to your CPA.

There may be tax implications that can turn your rental property into what is considered a second home, or personal use, eliminating your ability to deduct expenses. It’s important to know the rules and weigh your options before making a decision. There are many potential benefits to renting to family members.

-Angie Watts | Real Estate Agent | Writer at Clearsurance

Final Thoughts

It is clear that there are both benefits and negatives to renting to your family members. With family members you know what you are dealing with, however, business and family sometimes don't mix well. Be sure that you are fully prepared before renting to a family!