Being a landlord can be lucrative and rewarding, but it’s not without risk. One of the biggest perils of owning and managing a rental property is the tenant failing to pay rent on time. Without steady rent payments, you won’t have the funds to cover your rental mortgage, utilities, property taxes, and other ongoing expenses. In short, you could find yourself in financial trouble fast.
Rent guarantee insurance can help you avoid this catastrophic risk. It safeguards your rental income, ensuring it continues uninterrupted even when your tenant stops paying rent. In this article, we’ll explain rent guarantee insurance, how it works, and what type of coverage it offers landlords.
What is rent guarantee insurance?
Rent guarantee insurance compensates landlords for lost income when tenants fail to pay their rent. The rent guarantee insurance provider covers the monthly rent for a specific period until the tenant resumes making payments or a replacement tenant takes their place.
No matter how meticulous you are in screening tenants for financial stability, situations can arise where they start paying late or default altogether. Tenants can stop paying rent for many reasons:
- They lose their job during an economic downturn.
- They go through a lengthy and costly divorce
- They have to pay for unexpected medical bills
- Their bank account gets frozen
In such situations, rent payments will take a back seat to a tenant’s other financial commitments. And if that happens, your profit can dwindle fast, putting you in a difficult spot. Rent guarantee insurance was created exactly for this reason—to protect you from massive financial losses due to non-payment of rent from your tenants.
What does rent guarantee insurance cover?
The primary role of rent guarantee insurance is to reimburse you for lost income if your tenant defaults or falls behind on their rent. Your rent guarantee provider will cover missed rent for a limited time, typically 6 to 12 months. The coverage ends once your tenant resumes paying rent or you evict them and sign a lease with a new tenant. The amount of lost rental income you’re entitled to varies based on your policy and rent guarantee provider.
Most rent guarantee policies will also compensate you for legal expenses you incur in evicting a non-paying tenant. These include court, bailiff, and paralegal fees up to a specific dollar amount.
Some rent guarantee products offer additional coverage for other perils, typically property damage caused by the tenant. This extra coverage can prove valuable, as the tenant’s security deposit may be insufficient to cover the cost of repairs.
How does rent guarantee insurance work?
To access rent guarantee insurance, you must first purchase a policy from a company that offers this type of product. Here are the most common places where you can sign up for one:
- Lease guarantor companies. These firms specialize in lease guarantee services for landlords and property owners.
- Insurance companies. Traditional insurance companies and brokers may include rent guarantee policies as part of their suite of products.
- Property technology companies. These technology firms operate in the real estate industry, offering a range of products and services, including property management software and tenant screening.
The cost of a rent guarantee ranges from 5% to 7% of your monthly rent fee. Some companies offer discounts if you pay the entire annual premium upfront. Factors that impact the cost of your rent guarantee policy may include the lease length, deductible amount, property type, coverage limits, and your tenant’s credit score.
Once you’ve purchased your policy, the issuing company will verify your tenant’s information before you’re eligible for coverage. It won’t approve someone with a history of loan defaults or a lack of stable income. In cases where the tenant poses a higher credit risk, the company may require a guarantor to sign the lease as an additional layer of security.
As a result of these eligibility criteria, be prepared to submit your tenant’s credit report and proof of income, such as a T4 or pay stub. The rent guarantee firm wants to see that you’ve performed your due diligence in screening tenants.
Once you secure approval for the rent guarantee, you’ll be responsible for paying the monthly or annual premium. Typically, your coverage will take effect one month after your enrollment. However, some companies may offer immediate coverage for a higher fee.
After the waiting period, you can file claims for lost rent as needed. If the claim is valid following an investigation by your rent guarantee provider, you’ll receive compensation as outlined in the terms of your policy. Depending on these terms, you may have to pay a deductible before a payout is issued.
Deciding whether rent guarantee insurance is right for you
Is rent guarantee insurance worth getting, or is it just another overhyped product you should avoid? That answer is, “it depends.” When deciding whether to buy this type of coverage, consider the following factors:
Experience as a landlord
Are you brand new to the rental industry or a seasoned professional? That’s the first question you should ask yourself when deciding whether you need rent guarantee insurance. If you fall into the former camp, obtaining this coverage is a wise move. If you fall into the latter, it’s less necessary but still something nice to have.
Why? The reason is that, as a budding landlord, you lack experience in managing a rental property. As a result, you’re more likely to make mistakes in managing your rental. In this industry, mistakes can result in massive financial losses, which you may not be prepared to pay. These Ottawa-based landlords discovered this the hard way when they invited the wrong tenants to live on their property.
Eviction timeline in your jurisdiction
After considering your experience as a landlord, take into account the eviction laws in your jurisdiction. How long, on average, does it take to remove a delinquent tenant from a rental property? The answer will help you estimate the cost of evicting a tenant who fails to pay rent, damages your property, or breaches other aspects of the lease.
In general, the longer an eviction takes to execute, the more valuable a rent guarantee insurance policy. For example, let’s say it takes up to six months to complete the eviction process to remove a non-paying tenant. Can you afford to lose six months’ rent plus the fees associated with the eviction? Can you cover the cost of your rental mortgage and other expenses during this period? If the answer is no, getting rent guarantee coverage is worthwhile.
Risk tolerance
If the thought of your rental income grinding to a halt overnight makes you feel uneasy, getting rent guarantee insurance is wise. The cost will more than offset the anxiety that comes with the ever-present risk of lost rental income. You can avoid the hassle of dealing with past-due rent, including the fierce arguments and costly evictions that may ensue. The rent guarantee will act as your financial safety net, ensuring you continue to collect rent each month.
Reliance on rental income
The more you financially rely on your rental income, the more advantageous it is to purchase rent guarantee insurance. For example, if you have a mortgage on your rental, steady rent payments aren’t simply a luxury – they’re vital for staying in business. Should your tenant unexpectedly stop paying rent, you’ll quickly fall behind on your mortgage payments, leading to your lender foreclosing on your property.
You may also rely on your rental income to cover other business expenses, such as taxes, ongoing operating expenses, or renovation projects. Or it may be the primary source of income that fuels your retirement. Regardless, you could face financial hardship if your tenant fails to pay rent on time. Rent guarantee insurance will help you stay afloat.
Number of rental units owned
Rent guarantee insurance may or may not be worth obtaining, depending on the size of your rental property business.
If you own an extensive, diversified portfolio of properties, you face less financial risk. Why? Because one non-paying tenant won’t put a significant dent in your profit since you’re collecting rent from your other units. In this scenario, rent guarantee insurance makes less sense.
However, let’s assume that you own a single rental property. In this case, your rental income stream shuts down entirely if your tenant ceases to pay rent. Rent guarantee insurance would be valuable since you don’t have any other rental properties contributing to your bottom line.
Rental property value
The impact of lost rent is more painful if you manage an upscale rental property. Just one missed payment can lead to financial difficulty, given the high cost of the property’s mortgage, upkeep, and other expenses. Rent guarantee insurance will provide much-needed financial relief in this situation.
Our final thoughts
Tenants who fail to pay rent on time pose one of the greatest risks for landlords. Rent guarantee insurance helps manage this risk by acting as a safety net when rent payments stop. It provides financial compensation for lost rental income, eviction expenses, and, in some cases, property damage inflicted by tenants.
Rent guarantee insurance is a relatively new risk management product in North America. However, it’s growing in popularity—and so are the number of companies offering it. For example, SingleKey’s Rent Guarantee Program provides landlords with coverage for missed rent payments, legal expenses, and property damage. Learn more by comparing rent guarantee programs in the United States and rent guarantee programs in Canada.
