As of 2019, an estimated 36% of the United States’ 122.8 million households lived in rental property. That translates to a staggering 44.2 million renters.
Renting, after all, is generally cheaper than buying a house or financing one with a mortgage. For example, a report found that some renters paid $606 less than mortgage borrowers.
Despite that, many tenants still find themselves behind on rental payments. As a result, rental property owners suffer from income loss due to rent delinquencies.
Fortunately, rent default insurance can help mitigate such losses.
So, if you’re thinking of renting out a property, this rent default insurance guide is for you. Read on to discover what this policy is, what it covers, and why rental property owners should buy it.
What Does Rent Default Mean?
Rent default refers to instances wherein a tenant fails to make their due rental payment. Under the law, it’s a breach of contract on the renter’s part.
Unfortunately, rent default has been a growing problem in the US.
For example, in January 2021, an estimated 18% of renters were behind on their rent payments. That’s approximately 10 million people who were, on average, four months delinquent. What’s more, the typical late-paying tenants owed their landlords $5,600 on average.
What Then Is Rent Default Insurance?
Rent default insurance, or rent guarantee insurance, is a risk-management insurance product. It protects landlords against losses that arise from defaulting renters or lessees. It does so by paying the monthly rent that an insured tenant fails to pay for a set period.
Let’s use the rent prices on https://www.rent.com/michigan/ann-arbor-apartments as an example. As you’ll see, most of the rates there are over $1,000, with the larger properties even reaching $2,500 or more. So, using that range, let’s say you decide to rent your property for $1,200 a month.
That’s how much you stand to lose if your tenant fails to pay their rent.
However, if you have rent default insurance, you’ll get the rent payment your tenant fails to pay. So, using the example above, you won’t lose $1,200 since the rent guarantee insurance will cover it.
What Makes Rent Guarantee Insurance Worth It?
One is the possibility that renters can lose their jobs, rendering them unable to pay their due rent. That’s especially true nowadays, wherein the unemployment rate, as of October 2021, was at 4.6%. That’s 7.4 million people without jobs, whereas there was only 5.7 million unemployed in February 2020.
Your tenant may also experience a job injury or illness severe enough to make them file for days away from work. While workers’ compensation may cover their loss of income, it can take weeks for them to get the benefits. That may result in them getting behind their rental payment.
While you can file for an eviction, doing so may still result in the delay or loss of income on your part. For starters, landlords usually need to give tenants a week or two of leeway to pay their rent. Only after that can rental property owners file for tenant eviction.
Unfortunately, even if you have them evicted, your tenants may still be unable to pay what they owe you.
As such, if your tenant can’t pay the rent for any of those reasons, you also lose income. However, your rental income will still come if you have rent guarantee insurance. What’s more, it can secure your rental cash flow for six up to 12 months.
In addition, rent default insurance can help cover some forms of legal expenses. That may include lawyer fees for when you file an eviction lawsuit. It may also help you pay for court fees related to the eviction or repossession process.
Who Pays for Rent Default Insurance Then?
Rental property owners are usually those who pay for the premiums. However, they can require the tenants to cover the premium payments. In that case, the monthly premium payment gets added to the monthly rent.
Can Anyone Purchase Rent Guarantee Insurance?
No.
Insurers do their due diligence before they underwrite a rent guarantee insurance policy. That involves screening the tenant, including their employment and payment history.
One crucial eligibility factor is that the renter must have a steady job. Another is that they should be earning enough to pay their rent without problems. If they meet those criteria, the insurer will likely underwrite a policy.
By contrast, tenants without a stable source of income are unlikely to qualify. The same goes for those with a history of defaulting on previous rental payments.
How Long Before Rent Default Insurance Pays Out?
In most cases, rent default insurance payments kick in a month after a tenant fails to pay. However, you can file a claim as soon as your renter fails to pay, even after they receive your official notice.
So the second month of non-payment is usually when the policy starts paying out. From there, it will cover the rest of the months that go unpaid, up until the final month indicated in the contract.
For example, suppose you purchase a policy with a term of six months. Let’s also say your tenant fails to pay their rent for June.
In that case, the policy should cover the rental payments starting in July. You should then get coverage until December, so long as you’re not getting paid for your property.
Safeguard Your Income With Rent Guarantee Insurance
There you have it, the essential facts you need to know about rent default insurance. As you can see, it’s a safety net that protects your rental income in the event of tenant default. From there, it can help you keep the cash flowing for several months until you get a new tenant.
So, as early as now, consider investing in rent guarantee insurance.
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