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Understand the different kinds of insurance available for real estate investors to best assess which types of coverage are best for your unique circumstances.

Insurance 101 for Real Estate Investors

Insurance plays a critical role in any real estate investment strategy. Understanding the different kinds of insurance available for real estate investors will allow you to best assess which types of coverage are best for your unique circumstances. When you have a strong comprehension of insurance, this knowledge will enable you to protect yourself and your investments. 

The information included here is for information purposes only. Every individual’s needs and circumstances are different. You should discuss your unique situation with a licensed insurance broker. 

How insurance for real estate investors differs from homeowner insurance 

If you currently own a home, you may already be familiar with homeowner insurance. This insurance covers liabilities like fire, flood, personal belongings, and theft. While insurance for real estate investors is similar, there are several critical differences. 

If you plan to insure a rental property, you don’t need to insure your resident’s personal property. Still, you may need to protect your investment in other ways. Insurance for real estate property owners helps to protect the investment that you have made and ensures that you are protected based on common and potential outcomes.  

Investment or rental property insurance 

Rental property insurance, sometimes called investment property insurance or landlord insurance, helps protect you financially from damages or injuries related to your rental property. This type of insurance is available for both single and multi-family rental properties. Keep in mind that you may need to consider a commercial insurance policy if you own a larger number of real estate properties. 

What does rental property insurance cover? 

While each individual insurance coverage will differ depending on the specifics of your insurance plan and carrier, you can expect most insurance to protect you against covered damage or destruction to the home you rent out. Most rental property insurance plans will also provide coverage for other structures on your property (garages, fences, etc.) and any personal property you may use to maintain the rental property.  

Each rental property insurance policy will include a list of “covered perils.” This is a list of the types of damages that your policy protects you against. For example, most policies will include hail, tornadoes, or hurricanes in the list of “covered perils.” Additional coverage for loss of rental income, unavoidable construction costs, or protection against burglary and vandalism may be available.

With the help of a knowledgeable insurance broker, you will have the opportunity to customize your rental property insurance policy. Further, certain types of coverage may be required by your lender if you don’t own the investment property outright.  

A common addition to rental property insurance covers medical and legal expenses if someone is injured on your rental property and a court finds you at fault. Adding a landlord liability policy also protects you in case your resident is injured, and you’re found at fault. 

For most rental property insurance policies, you may also be able to include coverage for what is called “landlord contents.” This coverage is most frequently used if you plan to furnish your rental property. In this case, landlord content can include items like furniture and rugs. A policy that provides coverage for landlord contents will protect your items if damaged or destroyed by a “covered peril.” If you’re concerned about the damage a tenant may cause, you must ensure that this is listed as a “covered peril.” 

Your standard rental property insurance may not cover damages resulting from theft or vandalism. To ensure that you are appropriately insured, discuss any concerns about theft or vandalism with your insurance broker. They can provide detailed insight into what will be covered by your policy or what additional protections you can add to your policy. 

Imagine purchasing a rental property only to learn that the property needs additional work to ensure it meets building codes. In insurance, this is called “unavoidable construction,” and a rental property insurance policy can provide coverage to pay these expenses.

One of the most critical types of landlord insurance coverage protects you against potentially lost incomes. A standard policy may not include this type of coverage. Still, you should consider discussing the benefits and costs with your insurance broker. 

Imagine that your property sustains damage from a covered peril and is uninhabitable. In this case, loss of income coverage can help replace the income you would have made from your rental income. Further, imagine that repairs to your rental property take six months to complete. A loss of income inclusion on your rental property insurance would replace the income you would have made for those six months. 

3 things that are not covered by rental property insurance 

While there are many to customize your rental property insurance, there are three items that are not covered by landlord insurance. First, rental property insurance does not cover maintenance or appliances. Your insurance company will not cover the costs associated with replacing the carpet or dishwasher in your rental property. As the owner, you must plan for annual maintenance and repairs. 

Rental property insurance does not cover your tenant or any of their property. As a result, it’s best to require your residents to purchase renters insurance. Renter’s insurance is generally very affordable. You may also consider adding this requirement to the lease. 

Finally, rental property insurance does not cover owner-occupied or shared property. Rental property insurance only applies to properties that the owner does not occupy. 

How much does rental property insurance cost? 

While the cost of rental property insurance will vary depending on your specific coverage and location, you can expect that this type of insurance will cost about 15% more than homeowner insurance. The average cost for standard rental property insurance is $1,500/year. You can expect the premium cost to increase as you increase your coverage. 

Several additional factors can impact the cost of rental property insurance:

Smart home devices that provide warning of issues 

High-risk features like fireplaces or pools 

Ask your insurance broker what upgrades or repairs you can make to reduce your insurance costs. With guidance from a knowledgeable insurance broker, you can identify a policy that fits your needs and budget.  

Considerations and questions for your insurance broker 

As with any significant decision, we recommend you get several rental property insurance quotes. It's also helpful to find a broker who will partner with you to find the best coverage for your needs. You will also want to discuss the deductibles associated with each potential policy to ensure you understand the amount and when they will be applied. Generally, the higher your insurance deductible, the lower your annual premium, and vice versa. 

A local insurance broker can also guide you to additional location-specific coverages. In some cases, upgrading your coverage for specific incidents like flooding may be essential.  

Finally, we recommend you discuss the difference between actual cash value and replacement cost with your insurance broker. Actual cash value (ACV) means the insurance company will cover what you paid for the property (minus the value of the land). Replacement cost covers the total cost of any loss, even if you have to rebuild the property. If home values or construction costs are rapidly increasing in your area, replacement costs may be advantageous. 

Support that transcends traditional property management

A real estate pro forma is a financial projection of rental income and expenses, highlighting what a rental property could, should, or would gross in revenue.

What is Pro Forma in Real Estate?

A real estate pro forma uses current or potential rental income and operating expenses to help potential investors understand the risks and benefits of purchasing a property. While there are different kinds of pro formas in various industries, they all present financial projections for a specific period of time in a standardized way. 

It’s important to note that a real estate pro forma is a financial projection of rental income and expenses, not an actual report. A pro forma highlights what a rental property could, should, or would gross in revenue. As such, a pro forma is a tool used to evaluate the risks or benefits of a potential rental property. However, you need to consider critical factors in calculating your pro forma. Most importantly, you must learn to spot a pro forma that inaccurately reflects a potential real estate investment. 

What real estate investors need to know about pro forma reports for real estate 

If you’re interested in purchasing a real estate investment, pro formas are essential to evaluate potential properties. A real estate pro forma report can indicate a property’s projected net income and possible cash flow projections. 

An accurate pro forma report can help investors estimate and project the rate of return for a rental property. The pro forma outlines income, expenses, potential revenue, and the operating income of a property. This information is critical if you are new to investing in real estate, renting a home, or unfamiliar with the geographic area.  

What included in a pro forma statement for rental property

While there are many different ways to present the information in a real estate pro forma, nearly all of these documents will include three main types of information. A pro forma will include a projection of a rental property's net operating income (NOI). The net operating income may also be called before-tax cash flow. The NOI is calculated by subtracting operating expenses from the effective gross income. 

NOI = Effective Gross Income - Operating Expenses 

While each pro forma will include slightly different information, you should see expenses, gross income, and the net operating income on each pro forma document. 

How to calculate gross income for a pro forma

You can calculate the effective gross income using a simple formula. Take the total projected income, add any other income for the property, and subtract a vacancy allowance. 

Gross income = (Total Projected Income + Other Income) - Vacancy Allowance 

The projected gross income for a rental property should reflect the total rental income the property would generate if you leased it 100% of the time. The projected gross income should reflect the current rent if the property is rented. If the property is not leased, the gross income may be an estimate based on the current rental market. 

Other income should include things such as late fees or pet fees. However, this additional income should not include security deposits.

The vacancy allowance for a rental property is an estimate that allows prospective rental property owners to account for any time when the property may not be rented. The vacancy allowance should include the time the property may be vacant between residents. It should also include any time you need between the purchase and when a new resident will move into the property. 

How to calculate operating expenses for pro forma 

Calculating the operating expenses for a real estate pro forma requires understanding the costs associated with managing and maintaining a rental property. These expenses fall into four categories: repairs and maintenance, property management costs, mortgage payments, and additional miscellaneous expenses. 

Repairs and maintenance: If you are unfamiliar with maintaining a rental property, it’s helpful first to consider standard rental property maintenance costs. You should also consider a potential property's annual maintenance costs. If a potential property is older or less updated, you can expect there to be more maintenance and repairs. Similarly, it’s helpful to consider the age and condition of the major home systems like central air, water heaters, or the roof. Your estimate for maintenance also needs to include a reserve amount used for future maintenance or repairs.

Property management costs: Your real estate pro forma must include the property's management costs. If you plan to self-manage the property, you must account for all management expenses, including your own time. Most property management services will charge a percentage of the monthly rental value, typically between 6-12%. However, there are often additional costs and fees associated with traditional property management. So while an initial package may only cost 6% of your monthly rent, extra expenses can add up quickly.

Mortgage payment: If you will not own the property outright, you will need to include the principal, interest, and property taxes on the pro forma. 

Expenses: Your real estate pro forma should include any additional expenses associated with the rental property. These expenses include utilities, insurance, legal fees, marketing, HOA fees, or any other costs you can estimate.  

Why accurate pro forma calculations are important

An accurate pro forma will provide an essential financial snapshot of a rental property. A more precise pro forma will allow you to evaluate a potential real estate investment effectively. 

Further, almost all real estate investment metrics/calculations (cap rate, cash-on-cash, and ROI) rely on accurately calculating NOI and cash flow: 

Capitalization Rate = Net Operating Income / Purchase Price

Cash-on-Cash Return= Total Cash Invested/ Annual Pre-Tax Cash Flow

ROI = (Gain on investment – Cost of investment) / Cost of Investment

Conversely, if a pro forma is incorrect or misrepresents a property, you may risk making poor financial decisions. An inaccurate pro forma can result in overpaying for a rental property or misjudging the potential success of a property. Poor financial projections might cause you to set the rent too high because you did not include all expenses in the initial pro forma. You may also miss out on a real estate investment opportunity because of miscalculations.  

How to avoid misleading pro forma reports 

Unfortunately, you may also encounter pro formas that present information in a way that either misrepresents a property, aims to emphasize optimistic financial projections, or downplays expenses. 

An overly simple pro forma might only include the purchase price, gross annual rent, cash flow per month, and appreciation. In this case, the pro forma does not accurately capture the expenses associated with owning a rental property.

Similarly, overly complicated pro formas make it difficult to compare potential real estate investments accurately. Keep in mind that sellers are incentivized to provide an optimistic pro forma. It’s vital to avoid wishful thinking when you evaluate a real estate investment or pro forma. 

In real estate investing, comparing properties using the same criteria and data points is best. Because of this, you should use the same pro forma calculations for each potential investment. We also recommend that you do not rely on a pro forma that the seller’s agent provides. 

Carefully review any gross income data that a seller provides. Potential rental income or rent rate projections can widely differ from the current rental market. Always do your best to conduct your own calculations and ensure you have an accurate sense of what rental rates are in the area. For a precise pro forma, you’ll need to understand how much rent to charge and consider all rental pricing factors related to a potential rental property. It can be challenging to project rent, as pricing factors can fluctuate over short periods.

Belong makes pro forma calculations simple 

Due to high costs and hidden fees, traditional property management companies can negatively impact your pro forma. However, Belong offers homeowners a modern alternative to property management that makes financial projections easy and straightforward. 

Rental pricing: Belong's unique proprietary algorithm tells you exactly how much rent to charge, thanks to real-time data and insights about your individual property.

Guaranteed Rent: Did you know Belong homeowners get guaranteed rent, no matter when their residents pay? Estimating rental income couldn’t be easier thanks to steady and guaranteed payments with Belong.

A comprehensive list of regulations and legal considerations when creating a lease for your real estate investment - and a simpler alternative to going it alone

How to Create a Lease for your Real Estate Investment Property

Residential lease agreements protect you, your investment, and your new residents. To create a lease for your real estate investment property, you’ll need to consider what policies and clauses need to be included. Then you can begin to structure your agreement using one of our examples and consider consulting a professional to help finalize your agreement. Best of all, we’re sharing a new alternative to help you create a lease and find residents who love your home as much as you do. 

Legal considerations for residential leases 

Residential leases provide both you and your residents with legal protections. As such, there are several legal requirements you’ll need to consider before creating a lease for your real estate investment property. All residential rental agreements must adhere to landlord-tenant laws in your area.

You’ll find that most states have requirements around security deposits, occupancy limits, property maintenance, late fees, and grace periods for late payments. These requirements will vary depending on the state where your real estate investment property is located. These legal guidelines may also dictate specific landlord and tenant responsibilities, which you must abide by. 

Most states will require that you provide your residents with specific information regarding lead paint and bedbugs. In some cases, you must include this information in the lease agreement. You may include educational pamphlets in other states as an addendum to the lease. 

You should also familiarize yourself with Fair Housing Laws, which govern how you can market a property, screen for tenants, and regulate the use of your rental home. These laws ensure that everyone has fair access to housing and prevent discrimination. There are federal and state Fair Housing Laws, and failing to adhere correctly can expose you to legal action. 

Further, additional regulations govern everything from the condition of your investment property to renting your home to people with children or service animals. Closely review all applicable laws and regulations before you begin drafting your lease. 

Once you’ve identified which regulations will apply to your rental property, you can begin collecting the basic information needed for a lease agreement. Naturally, you will need the name of your residents, the lease term, the rental amount, and directions for how your residents can make rental payments. 

Your lease should also include information about your investment property, including a description of the property and its current condition. You will also need to outline details regarding access to the property and usage rules for the property. For example, your lease should clearly outline parking and storage inclusions. Likewise, you can include details about any common or outdoor spaces. If there are rules for shared areas, like pools or gyms, you should also have those rules as an addendum to your lease agreement.  

Additionally, your lease needs to include information about any security deposits or fees that may be required. It’s also critical to provide clear guidance around utilities. The agreement should clearly state which utilities are the resident’s responsibility and indicate who is responsible for transferring or initiating utility service. 

Finally, a standard lease agreement needs to include a lease termination clause. More specifically, your lease termination policy needs to outline what will happen if your resident breaks their lease before the end of the rental period. Remember that what you include in a lease termination clause is subject to regulations, and you'll want to carefully review legal precedent or engage the services of a professional. 

Additional guidelines to include in your rental agreement

While the inclusions discussed so far are a great starting point for creating a lease for your real estate investment property, you should consider several additional items. 

Maintenance policies and procedures: These policies will describe the resident’s responsibility to maintain the property and create a process for notifying you of any damages or requested maintenance. Finally, these guidelines will outline what kind of alterations your residents can make to the property (i.e., painting walls).

Entry: Entry clauses outline how and when you will access the rental property and must be consistent with your state’s landlord access laws. This clause also includes guidance for what happens in the case of an emergency. For example, if you have a water leak and your resident is not home, these clauses grant you the right to access the property to turn off the water or fix the leak.

Prorated rent: A prorated rent clause can provide your resident with information about how prorated rent is collected and calculated. This clause is beneficial if your resident pays prorated rent at the beginning of their term. 

Subletting: Your lease agreement should include a clause that either permits or restricts your residents from subletting the property. In some cases, related clauses can dictate whether or not the residents can lease the property as a short-term rental.

Illegal activities: It’s critical to include a clause prohibiting illegal activities. This clause will help limit your liability. 

Rules and HOA Guidelines: This clause requires residents to acknowledge receipt of rules or additional guidelines as dictated by the HOA (pool rules, community guidelines, good neighbor policies).

Move-Out Guidelines: You’ll want to ensure your lease clearly defines your resident's obligations at the end of their rental period. These move-out guidelines might include any cleaning procedures, how damages are assessed, and the process for providing notice and returning the keys. 

Renewal: Finally, you may want to include information on how the renewal process works and any procedures your residents may need to follow. 

Additions and customizations for your residential lease agreement 

Depending on the specifics of your real estate property, there are several additional sets of guidelines you may need to consider including in your lease agreement. 

Smoking policies: You do have the right to prohibit or restrict smoking on your property. If you choose to permit smoking in some capacity, your lease agreement should clearly outline those expectations. 

Cannabis: Similarly, you have the right to prohibit the use of cannabis, even if it is legal locally. A drug-free lease clause will also prohibit tenants from growing cannabis on the property. 

Pets: If you choose to permit pets in your rental property, you must include guidelines and information regarding any pet deposits or monthly pet rent you may require. 

Co-signer requirements: A co-signer is designated to make the rental payments if the resident does not pay. A co-signer agreement can provide additional protection if a resident does not have a solid or significant credit history. 

Renters insurance requirements: You may also require your residents to retain a renters insurance policy that protects a tenant’s belongings. 

Lease examples for your real estate investment property 

Once you’ve considered which of these policies and clauses are appropriate for your rental property, you can begin to assemble a lease agreement. We recommend using these examples to understand how you can structure and organize your rental agreement. However, because regulations vary based on location and frequently change, you should use these examples only as a guide. These examples do not constitute legal advice. 

Protect your real estate investment and work with a professional 

Your lease agreement is essential to protecting your real estate investment property. Because its importance cannot be understated, we highly recommend that you consult with a professional to ensure that your lease agreement protects your best interests and does not violate federal, state, or local laws. 

An attorney specializing in real estate agreements can provide you with essential guidance. Remember that an attorney may not be familiar with your real estate investment property and its unique challenges, so you’ll need to come prepared and know what needs to be included in your lease. 

Learn the guidelines that dictate how you should calculate square footage for your rental home.

How to Calculate Square Footage (And Why it Matters for your Rental Listing)

When preparing a rental listing, you need to know the square footage of your property, but did you know that there’s more to square footage than a simple number? The size of your rental property is crucial in attracting potential residents, but specific guidelines dictate how you should calculate square footage. Further, square footage is essential to pricing your rental property correctly and attracting the right residents. 

How to calculate residential square footage 

Calculating the square footage for your rental property is relatively easy. You’ll need paper, a pen or pencil, a tape measure or a laser distance meter, and your phone or calculator to start. Having a second set of hands can also be helpful if you plan to use a tape measure. 

Start by creating a sketch of your rental property, or use an existing floor plan or layout if you have one. One by one, go through each room, closet, and hallway and measure the length and width of each space. Once you have the length and width of each area, multiply the length by the width and note the square footage of each room. Once you’ve moved through the whole house, add the square footage of each space to calculate the total square footage of your rental property. You can round up to the nearest whole number. 

What should be included or excluded when calculating square footage

Although calculating square footage for your rental listing is pretty simple, you may ask which spaces or rooms to include and which ones to omit from the home’s total square footage. 

Generally, you should include all finished and heated interior areas in a home, including hallways and closets. As a result, you’ll need to omit several spaces from the total square footage calculation. 

Exclude these spaces from your square footage calculations: 

Including the square footage of basements and attics

Calculating and including the square footage of basements and attics can present a few challenges for property owners. It’s best practice to indicate the square footage of any basements in your rental listings. You should also note what portion of the basement is finished or unfinished. 

In some cases, you may include the square footage of a finished basement in the total square footage of the home. However, some local or state regulations may require that basement square footage be listed separately, even if the basement is finished. 

Similarly, you can include the square footage of your attic if the space is finished and the attic has a ceiling height of at least 7 feet for 50% or more of the area. Additionally, you can include covered or enclosed porches if your home’s HVAC system heats them. 

Ultimately, you should aim to accurately and fairly represent the square footage of the rental property to ensure that you attract the ideal residents.  

How to verify your property’s square footage 

If you’ve calculated the square footage of your property, it’s a good idea to verify your calculations. There are a few ways you can do this. For almost every property, you can search public records. The county assessor typically creates and maintains documents that will include the home’s square footage. Start by searching the address on the county property appraiser's website. 

If you have the builder plans for your property, the square footage is likely already included in those documents. Most home plans will also include the square footage of each space within a property. If you purchased the home, you might also refer to the property’s listing from the time of purchase. Remember that this may not be an official square footage calculation, but you can still use this number to verify your own calculations. Finally, if you have any property appraisal documents, you will likely find the square footage included in the appraisal. 

Over time, industry leaders have worked to standardize the process and guidelines for calculating square footage. Square footage is a crucial measurement and indicator of your property value, and having accurate, reliable, and consistent data for each property is essential. As such, there is an effort to establish shared expectations around calculating square footage. Different states may require you to calculate square footage in a specific way for renting or selling a property. Further, several agencies have established standards for calculating residential square footage. 

The American Measure Standard sets voluntary guidelines for measuring residential square footage. These guidelines have been compiled and edited by a group of real estate professionals, including real estate agents, appraisers, assessors, home builders, and architects. 

Similarly, the American National Standards Institute (ANSI) also provides guidance on what constitutes living space and how you should calculate square footage. Fannie Mae uses ANSI standards for all appraisals to ensure consistency across the country. These guidelines only apply to single-family homes and not to apartments or condos.  

How to include square footage in your rental listings 

Once you’ve calculated the square footage for your rental property, you can consider how to communicate this information in your rental listing. Knowing the square footage of your property and effectively communicating that information to potential residents is essential to finding a good, long-term fit for your home.  

Most importantly, avoid misleading potential residents as this will lead to disappointment or can result in attracting the wrong potential tenants. It’s best not to include your garage or unfinished square footage in the total number when you list the property. 

We recommend that you also clearly describe any particularities or things that might end up surprising someone when they see the property in person. Including this information upfront will help you avoid showing the property to potential residents who may be turned off by something omitted in the listing. Good residents will appreciate clear, honest communication and an accurate representation of the property. 

How to use square footage to price your rental property 

The square footage of your property is a critical factor in determining the rental price. While demand, amenities, location, and other factors specific to the property will influence rental pricing, square footage can be a useful starting point in determining the rental price of your property. 

To use square footage as a starting point for pricing your rental property, compare the rent prices of local rentals with similar square footage and the number of bedrooms and bathrooms. You can also determine the rental price using a per-square-footage basis formula. What’s your price per square foot, and is that consistent with similar properties in the area? In densely populated or popular locations, you can expect a higher rental price per square foot than in suburban or rural locations (but other amenities may also influence rental pricing). 

Pricing your rental property is a challenge, and while square footage can aid you in determining the right price, it’s only one factor. 

Pricing your rental property is easy with Belong 

If you’re looking for support in pricing your rental property, look no further. Belong combines current market data with real-time insights into the demand for similar properties in the local rental market. We use first-class technology to determine the right price for your home, including what high-quality, long-term residents are prepared to pay right now. 

As a result, you experience fewer vacancies, good people who care for your home, and profitable rental income. On average, belong has 66% fewer vacancies on our platform, and we help residents find the right home within 19 days. 

Belong is simplifying the rental experience across the US and helping more homeowners reach their financial goals with the most hassle-free property management service; BelongPro.

Square footage is essential to pricing your rental property. Learn the guidelines that dictate how you should calculate square footage for your rental home.

Jordan Newsom

Jordan Newsom is a highly-caffeinated writer who loves delighting readers, using content to teach, and broadening perspectives. When she's not behind a computer screen, she's hunting down the best coffee shops, breweries, and restaurant patios in Denver, Colorado.

Ashleigh Graf

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Lauren Slagter

Ashleigh Graf

Afton Brazzoni

Harrison Kelly

Jane Allison Gunn

Lauren Slagter