Should You Insure Your Short-Term Rental?

Since short-term and vacation rentals like Airbnb are so popular in our area, today I’ve brought in Roger Heighton from Farmers Insurance to talk about how insuring these properties works.

The Bay Area has a number of popular tourist destinations that bring in travelers who only want to stay in the area for a few days at a time. Given that, many people have homes or condos that they rent out for short-term rentals as a means of pulling in a little extra cash when they’re not using their vacation property.

A lot of times, people don’t understand that insurance coverage for living in a home and renting one out are different. They also don’t understand that there’s a difference between renting a property out for a standard, long-term lease and a short-term rental.

Say you’re renting out a property through Airbnb: The tenant leaves the coffee pot on in the kitchen and starts a fire. If you don’t make sure you have the proper coverage beforehand, your insurance company might deny your claim because they simply didn’t know that it was being rented out.

In addition to problems with claims coverage, you’ll also have the problem of losing your income if the property is no longer rentable. Further still, you’ll have to deal with the damage to the property somehow.

One of Roger’s clients who rented out a property through Airbnb once told him that he didn’t need coverage on the property because Airbnb provides coverage. When we took a look at the contract from Airbnb, we saw that Airbnb provides what is called ‘third-party liability.’ If the renter on your premises is injured, Airbnb will provide coverage for that, but they won’t provide coverage for damage to the property.

That’s why, if you’re thinking of doing a short-term rental, it’s very important to talk to your insurance company.

In terms of cost, insurance for short-term rentals will almost always be more expensive than a standard rental. This is because of the transient nature of the tenants coming and going from the property. Think about it: If you have a tenant in a standard rental property, they’ve been vetted and will likely take good care of the place, or at least more than someone who would only be staying for a few days.

At the end of the day, however, it’s not the cost that’s important. Rather, it’s the type of coverage you’re paying for. If a short-term rental property owner suffers a loss, they’ll want and need coverage that will allow them to recoup that loss.

Here’s a personal story from my own experience:

A couple of my partners and I bought a house as an LLC in Scottsdale, Arizona, for use as an investment property. The insurance agent suggested that, since we were doing short-term rentals, we get the relevant coverage they offered. It would have been about $200 more expensive per year, but we were at least covered. One of my partners didn’t think there was much point in spending that extra money and assured us that there was no issue going with the cheaper policy. The other partner and I, however, shot him down.

Three years later, a big storm hit Scottsdale and knocked a giant palm tree over onto the roof of our carport. It didn’t do much damage to the house, but we were out of commission for a couple months. Because we had that short-term rental insurance, we were able to show records of our income from the years since we started renting it out, and they reimbursed us for the loss of income for those few months. That was thousands of dollars that we might have lost forever with the wrong insurance plan.

As you can see, having the right coverage, even if it costs a bit more in the end, can actually save your business by paying you back and so much more when a loss occurs.

If you have any questions about this or other real estate topics, don’t hesitate to reach out to me. In the meantime, we’ll see you in part two of our series!