Rent Loss Insurance – Is it good or bad?

Most of the mortgage companies require you to purchase this policy when you buy your investment property. As per the lending guidelines put forward by the Investor Company Freddie Mac, it is not optional but mandatory for borrowers to purchase rent loss insurance policy. In case of more than one investment property, the company requires insurance policies for each rental units independent of the net rental income.

The insurance premium provides coverage for damages to the property as well as if you lose rent on account of the damage. Usually the policy covers minimum of 6 months of gross rental income when your rental unit is unsuitable for habitation due to hazards such as fire or other damages.

The insurance premiums are calculated by sorting out the variables at the rental unit into various categories. The time frame for receiving the coverage and the coverage itself are limited. But when your property is damaged, you can receive rent loss payments till you reconstruct the damaged portion and find a better tenant for the rental unit.

The net operating loss or the amount of rent loss insurance depends on the gross monthly rental income after deducting the following items:

• Taxes
• Mortgage payments
• Insurance premiums
• Maintenance costs
• Expenses on utilities
• Vacancy factor for rental units in your area.

If rental income is your primary source for paying off the mortgage on your investment property, then it's a wise decision to go for the rent loss insurance coverage. After all, it compensates not only for property damage but also if you lose the rent.