Podcast 386: What Is Renter's Insurance?

In this week’s episode, Podcast Host & Property Manager, Andrew Schultz, chats about renter’s insurance and how it can help not only benefit, but also a tenant during their rental stay.

What do you do when a tenant leaves an inoperative vehicle at your property? For example, one where the tires are all flat and you have to call a tow company to move it. Who flips the towing bill, tenant or landlord?

Last, but not least, learn more about the liabilities that come with accepting rent payments upfront from a tenant.

Andrew Schultz: (00:00)
Hey everyone. Welcome back to another episode of the Rent Prep for Landlord’s podcast. This is episode number 386 and I’m your host, Andrew Schultz. On today’s episode, we’re gonna be talking about the benefits of renter’s insurance, a tenant that leaves an inoperative vehicle at move out. And should you let a renter pay a year in advance? We’ll get to all that right after this.

Voice Over: (00:25)
Welcome to the Rent Prep for Landlord’s podcast. Now your host, Andrew Schultz.

Andrew Schultz: (00:30)
Have you heard about the free Pent prep for Landlord’s Facebook group? We just top 13,000 members. And of course that means we’re now on the hunt for 14,000. So if you have a question or situation that you’ve never encountered, or you just need to bounce an idea off of a big group of housing providers, this is the place. If you haven’t checked it out yet, do it today. Over at facebook.com/groups/rentprep. Don’t forget to mention the podcast when answering the questions. So we know how you found us

Voice Over: (00:57)
Water cooler wisdom, expert advice from real estate pros.

Andrew Schultz: (01:05)
We’re gonna start things off this week with a water cooler wisdom segment, all of our questions this week, come to us via the Rent Prep for Landlord’s Facebook group. I know we already plugged it, but don’t forget to take a look at that. If you haven’t already, this question is all about renter’s insurance. Let’s go ahead and jump right in here. Please help me understand how requiring tenants to have renter’s insurance would benefit me in the event of some sort of an emergency, say a burst pipe, making the apartment uninhabitable temporarily as a hypothetical. Can I force the tenant to file a claim to stay in the hotel? Do I have to pay and then have them reimburse me? What if they refuse to file or reimburse me? So this is actually a really interesting question. We haven’t talked about an insurance question in quite a bit.

Andrew Schultz: (01:46)
I do wanna preface this one by saying I’m not an insurance agent or broker, and that insurance policies are gonna vary widely from carrier to carrier. So what’s covered under an Allstate policy? For instance, may not be covered under a Geico policy though. The best resource for specific questions is going to be the specific insurance company that the tenant is getting coverage from all that said, there’s basically going to be two types of insurance at play here on most properties. You’re gonna have a landlord insurance policy, which covers the home and the structure, and maybe some tools or personal belongings, depending on how the policy is set up, but it’s not going to cover the tenants or any of the tenants’ stuff, et cetera. So the tenant needs to take out a renter’s insurance policy to cover themselves their belongings and things of that nature.

Andrew Schultz: (02:29)
So what is that renter’s insurance policy actually going to cover using the scenario that you laid out in your question? A renter’s insurance policy may cover temporary accommodations. If you need to move a tenant out of the unit to do repairs. In addition, it’s becoming more and more common for some states to require relocation assistance in the event that the unit’s uninhabitable and the tenant has to move permanently. Some of that expense may actually be covered by the renter’s insurance policy. Typically, I think that that would come from the landlord’s policy. Um, but occasionally there, there will be some provision for it in the tenant’s policy. We can also talk about injuries briefly. So if the tenant has guests over and one of their guests’ trips and falls down a flight of stairs, uh, we’ll say they sustained a broken arm during the fall, they got off pretty easy.

Andrew Schultz: (03:14)
That guest is probably gonna try to Sue you for coverage of their injuries. If your tenant has renter’s insurance, your insurance company would, in turn, try to subjugate that claim back to the tenant’s renter’s insurance policy, because the tenant is responsible for their guests at all times while they’re on the property. So keep in mind that the tenant would likely not be found liable in this situation. If the guest would to grab, for instance, a handrail and the handrail ripped off the wall, that would be on you as the landlord due to a failure to maintain the property. Um, but in an instance where like a tenant’s guest is injured, that would be something that would fall on the tenant’s policy. What about pets? If your tenant has a dog and the dog bites someone, their renter’s insurance should cover that dog bite. So the dog is owned by the tenant and not by you as the landlord.

Andrew Schultz: (04:03)
So in theory, you really shouldn’t have any liability in a situation like that, but at least here in the state of New York, they practice what I like to call shotgun law, fire a lawsuit at everybody and see what sticks. So chances are you would wind up getting named in the lawsuit, regardless. And again, this is a situation where your insurance company should be attempting to subjugate that claim back to the tenant’s renter’s insurance policy. Most rents insurance policies will have a coverage in there in the event that the tenant’s apartment gets broken into and items are stolen. Uh, it may even cover items that are stolen out of a tenant’s vehicle and things of that nature, depending on how the policy is set up in the event, that the person who broke in caused damage, the tenant renter’s insurance policy would likely cover that damage.

Andrew Schultz: (04:46)
So again, your policy is the landlord on the property’s not gonna cover their belongings. So if the tenant wants that coverage for their belongings in the event that something gets stolen, or even if something gets damaged, they’re gonna need a renter’s insurance policy to get that coverage. What about property damage? I have a couple different scenarios that I’ll present here. Your tenant is upset with you when they move out for whatever reason, and they decide to punch a dozen holes in your wall on the way out the door, the tenant willfully committed that act, and more likely than not, the damages are not going to be covered by the tenant’s insurance policy. Um, they were willful in that destruction. If you will, in that instance, the tenant’s going to wind up having to pay for those repairs outta pocket. Now, what about a situation where the tenant puts a stopper in the sink and starts running some water to wash dishes, then they walk away for a second and it causes the sink to overflow?

Andrew Schultz: (05:39)
Generally speaking, that would be something that a runner’s insurance policy should cover. It’s not as though the tenant willfully committed the act didn’t willfully commit the damage, but the damage did occur. That’s one of those situations where tenant’s, uh, insurance policy is probably going to pick that up. Another scenario kind of a worst-case scenario would be a fire caused by the tenant leaves a candle, uh, burning near a curtain and it catches the curtain on fire. You know, the fire’s accidental. It wasn’t their intention of setting the fire. But this is exactly the type of scenario where the tenant’s renter’s insurance should be kicking into cover the cost of the damages. As a result of that fire, it’s worth noting that you need to take a look at the policy to see what the coverage limits are on your tenant’s policy. If the policy doesn’t cover enough to, for instance, rebuild the property in the event of a full lost fire, is it really enough coverage?

Andrew Schultz: (06:30)
So that’s a conversation that’s worth having with your insurance broker to see what sort of requirements you should be setting for rent’s insurance. So can you require rent’s insurance? This is gonna vary from state to state. Some states have no laws requiring you or prohibiting you from requiring renter’s insurance. And other states will have laws that prohibit you from making it a requirement. And I guess the logic there is that they think it’s putting an unfair onus on the tenant to take on this extra burden of cost for this renter’s insurance policy. But I kinda look at it from the other perspective. I think having tenants that don’t have renter’s insurance puts an unfair onus on the landlord. There are a lot of scenarios here where your insurance co-policy could refuse to pay out because someone else caused those damages. So if you can’t require that tenant that you’re renting to, to carry the coverage, it kind of leaves you with a gap in your coverage.

Andrew Schultz: (07:23)
If you will. This last part is actually very, very important. If you take nothing else from this entire segment, I hope this is the point that you take with you in the event that your tenant has a renter’s insurance policy. You need to have them name you as an additional insured on the policy. You don’t want to be listed as just an additional interest. You need to be named as an additional insured. And I’m gonna explain the difference here briefly. An additional interest would be a third party that needs to know when there are changes in the coverage on a property. So a good example of this would be your mortgage company. If you drop your insurance coverage and they, they need to know about it because they have a vested interest in that property. They hold the mortgage on it. So if the thing burns down and there’s no insurance, they’re at a loss on that note that they’ve provided you in order for you to secure that property.

Andrew Schultz: (08:10)
So typically if they see that you dropped your coverage, they’re gonna put coverage in place on your behalf. And it’s going to be very, very expensive. Now, an additional insured would be someone that is added to the policy who gets the benefit of the policy’s coverage. Essentially the tenant’s insurance policy is going to protect you and the tenant, both when you’re named as an additional insured, just being named as an additional interest is not enough. You need to make sure that your tenant has you named as an additional insured on their renter’s insurance policy. There are some companies out there now that are starting to offer policies that do things like cover lost rents and damage caused by tenants. That’s a little outside of the scope of what we’re talking about here today, but we may have some more information on that In a future episode.

Voice Over: (08:58)
Forum quorum, where we scour the internet for ridiculous posts from landlords and tenants.

Andrew Schultz: (09:06)
We’re onto our first forum quorum segment of the day. This one’s an interesting one dealing with personal property. And I know we’ve talked about personal property on the podcast before, but never quite like this. Let’s go ahead and jump right in here. I have a tenant who I gave 30 days notice to, and they left a vehicle with all of the tires flat in the driveway. They say they do not have a new address yet. Can I tow the vehicle? It’s been six days since they moved out and left the keys in the house and they’ve refused to do a walkthrough. So I know, like I said, I know we’ve talked about personal property. Uh, I wish that there was a little more information on this question specifically what state the property is in, because I think that that’s probably gonna be the most critical question, um, that I would ask if I had this person with me, this is one of those situations where personal property laws very greatly from state to state.

Andrew Schultz: (09:56)
So for instance, here in the state of New York, we’re acquired to store a tenant’s personal belongings for a reasonable amount of time. The problem is reasonable amount of time. Isn’t actually specified anywhere in the statute. So most landlords will typically hold a items for a period of 30 days, and then we dispose of them. But could you get a judge that says that 30 days is not long enough? Yeah, possibly there’s nothing in the statute that says that 30 days is long enough. You could get a judge that says that you should have given more time. It’s probably gonna depend on how you went about notifying the tenant that they had until X date to remove their belongings. But either way, I digress, some states will also allow you to charge the tenant for the storage of their stuff and require the tenant to make payment for that storage before they’re given access to their stuff.

Andrew Schultz: (10:41)
So it’s definitely worth checking into your state legislation to see what rules apply to you there. Now, how does all of this apply to a vehicle? Unfortunately, this is, again, going to be a state-by-state type of, uh, situation. Different states have different property laws, as well as different motor vehicle laws that have to be followed. So if the vehicle’s been sitting on the property for longer than whatever the required amount of time is that you have to store the tenant’s personal property. At that point, I would think that you would have the ability to dispose of that property. Chances are you’re not going to have a title for the vehicle and every state’s a little bit different on how you go about acquiring a title on a vehicle when the title’s been lost or when the odor can’t be found or whatever the case may be.

Andrew Schultz: (11:21)
Um, so you may be left with limited options on how to actually get rid of the vehicle. Some junkyards will take vehicles without titles, just for the scrap metal and some yards can’t touch it. If it doesn’t have a title attached to it. A lot of times that boils back to state law, some junkyards will come out and just pick the vehicle up. Other junkyards require you to have the vehicle towed to them. Really what it boils down to is just a little bit of research on your part to figure out how all that process would play out. You may also be able to contact the police department to see if they have any options available at their disposal. At the very least, they’ll likely come out to check and see if the vehicle maybe has a stolen tag on it or suspended registration or something along those lines.

Andrew Schultz: (12:02)
If it does turn up that the vehicle has issues, they may impound it right then and there. And at that point, your problem is solved more often than not. If there’s no issues associated with the vehicle and it’s parked on private property, the police are going to tell you that you need to deal with it yourself. They’re typically not going to tow a vehicle off a private property in a situation such as this. They really don’t have the authorization to move somebody else’s stuff in that instance, to be honest with you. So don’t just have the vehicle moved or removed from the property without doing a little bit of research to find out what the actual process is. You don’t want this tenant coming back to you and filing a lawsuit because you improperly handled their personal property in a worst-case scenario. Pretty much any landlord-tenant attorney should be able to give you a quick synopsis of what you need to do in a situation like this.

Andrew Schultz: (12:45)
Good luck with your new set of wheels. Our final segment this week is a forum quorum bonus round. This one deals with prepaid rent. Let’s go ahead and jump right in. I have a request from a new tenant that she would like to pay 12 months of rent in advance. What do you think? Should I allow it or not? It does kind of mess up the income for this year and next year’s taxes. And again, everything this week came from the Rent Prep from Landlord’s Facebook group. I wanna mention one tenant screening-related item here, and then I want to get to the meat of the question. If someone’s waving a big fat check in front of your face, make sure it’s not to keep you from doing a full tenant screening, screen them the same as everyone else, and do not bend your criteria.

Andrew Schultz: (13:24)
It can be tempting, but sometimes a big check is a big red flag. All right, let’s get into it. The simplest answer to this question is two, check your state law. I feel like I’m beating a dead horse every time we say that answer. Like it’s, it’s literally one of the first answers that comes to mind on almost every question that we get, but there are so many variables in different states when it comes to what is and what isn’t legal that you really do need to have a thorough understanding of the landlord-tenant law in the state that you’re operating in. So for instance, here in the state of New York, there didn’t used to be any sort of restrictions on what you could hold for security deposit or prepaid rent back in 2019, the housing stability antenna protection act, HS TPA for short put into place, a new piece of legislation that essentially prohibited landlords from having any more than one month of prepaid rent or more than the value of one month of rent as a security deposit.

Andrew Schultz: (14:20)
So if your rent is a thousand dollars a month, you can either have one prepaid month of rent on hand for a thousand dollars, or you can have a $1,000 security deposit, but not both. This is a classic example of legislation that hurt the people that it was designed to help. And I’m going to explain why prepaid rent or an additional security deposit was a very popular alternative for landlords throughout New York state, who wanted to rent to someone that didn’t quite meet their rental criteria. Maybe their credit score was a little bit low. Maybe they had some late payments or something in the past that was preventing them from getting approved for an apartment. And essentially at that point, we had three different ways that we could go on every single application. If the application screened out really well, that application would be approved with security deposit equal to one month of rent and the first month of rent and the due at the time of move-in, if it was a situation where they were close to qualifying, but not quite there, we could extend an offer to that tenant of a month or two prepaid rent or an increase in security deposit, which helps offset the risk to the landlord and gets the tenant into the apartment that they desire.

Andrew Schultz: (15:26)
Now, with this new piece of legislation, we could no longer do something like that. So the people that were on the cusp of approval before are now outright denials, landlords did not lower their selection criteria to accommodate the people on the cusp. Instead, they tighten their criteria to reduce their risk. I mentioned at the top of the segment about not flexing on your tenant selection criteria, there was no flex in our criteria here. We treat every application with a scoring system. So if that prospect scored such that they were eligible for approval with an additional fund, they would get that offer. And if they didn’t score that high, they were denied outright. This was not something that was offered to every tenant, regardless of how they qualified. It was literally a situation where someone would be one or two point short of qualifying. And we would say, okay, based on that, and based on what we’re seeing here, we can make this offer to you.

Andrew Schultz: (16:16)
Anyway, as I climbed down for my soapbox here, all I wanted to say about that was that you needed to double-check your state laws and understand what’s allowed before you accept anything more than a security deposit. And one month of rent. The next thing you have to understand is that this money is not an asset to you. It’s a liability. If a tenant, hands you a certified check for $12,000 and your rent is a thousand dollars a month for simple math here, you have an $11,000 liability and a $1,000 rent payment, the $11,000 should be put into a separate escrow account. And every month you should be transferring the rent payment from escrow to your operating account. So essentially every month, your liability reduces by a thousand dollars and you gain a thousand dollars of assets in the form of that rent payment. This, I would think should also take care of the tax concern that you had mentioned, the money sitting in your account as a liability and not as an asset, and would reflect that way on your balance sheet and your taxes as well.

Andrew Schultz: (17:14)
So technically you should not be getting taxed on the money until it converts from a liability to asset. It’s the same reason that you don’t get taxed on a security deposit to make it a little bit simpler. You should only be getting taxed on the income that you actually received in a given calendar year. I’m gonna recommend that you talk to an accountant about this. I’m not an accountant. I’m sure there’s a lot more intricacy than what I’m explaining here, but that gives you a little bit more of broad strokes to take to your accountant when the time comes. One of the most common pieces of advice that people give when asked about accepting 12 months of rent upfront, is that no, you shouldn’t do it because it makes it more difficult to evict that tenant. I’ve spoken to a couple different attorneys on this, and they basically confirmed the same thing that I was thinking in the event that you followed the instructions on escrowing, the money in a separate account, there should be no issue with evicting that tenant, you simply refund the prepaid rent that they haven’t been charged yet.

Andrew Schultz: (18:06)
Understand that when a tenant is evicted, you still are responsible for doing a security deposit disposition so that prepaid rent could be refunded to the now evicted tenant minus any damages after they move out. My recommendation would be take a bank statement showing that that money is an escrow. It hasn’t been spent and take that with you to court. When you go in for your eviction. I think that that’s probably where most people get hung up. They can’t prove that they still have the money that was prepaid, probably because they’ve already went ahead and spent it. And as a result, they’re now stuck with that tenant in the unit because the tenant has already prepaid them for that entire lease term. That would certainly make the eviction process a lot more complicated, but just accepting prepaid rent should not really create that many headaches for you.

Andrew Schultz: (18:49)
As long as you can prove that the money is being properly accounted for in escrow and can be refunded pending the results of that eviction hearing. At the end of the day, we can’t do 12-month prepays here in New York anymore. We did have a few student tenants that used to do like semester-long prepays back in the day. Um, but that was about as far as we would take it. We never did a full 12-month prepay that I can remember. Um, if you do decide to go with it, good luck to you. Don’t forget to do your tenant screening and make sure that you aren’t overlooking some major red flag security cameras are becoming more and more popular for rental properties. Find out where you can legally put your cameras, what you can use the footage for, and more by checking out rent prep’s latest guide over@rentprep.com slash blog today.

Andrew Schultz: (19:33)
That pretty much does it for this week’s episode of the Rent Prep for Landlord’s podcast. Thank you all so much for listening. We truly do appreciate it. Our goal with the podcast is to help as many people as possible make educated decisions when it comes to real estate. And you can help us to reach that goal. If you heard anything in this week’s episode or any other episode that will help someone that, you know, please do us a favor and share it with them. If you’re looking to get in contact with me, I can be reached over at whatsdrewupto.com from there, you’ll find links to everything going on with me at Own Buffalo, as well as other projects that we’re working on. Grab a copy of our free deal analysis tool today, right over there at ownbuffalo.com. There’s no obligation and it comes with a free companion video showing you how to use it.

Andrew Schultz: (20:13)
If you’re looking for top-tier tenant screening services, head on over to rentprep.com, there are multiple products to choose from including a tenant-paid option. And if you’re over 50 doors, ask about the enterprise-level programs and pricing. I’ve been an enterprise user of Rent Prep for years now, and it’s definitely changed the way that we screen our tenants. Check that out today, over at rentprep.com. Again, thank you all so much for listening. We’ll be back in two weeks with an all-new episode that you won’t wanna miss until then I’m Andrew Schultz with ownbuffalo.com for rent prep.com and we’ll talk to you soon.

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