Key aspects of rent guarantee insurance

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Do you own a property that you are thinking about renting out? Are you worried about the risks you may face if you rent out a home that you own? If so, we recommend that you should read this article carefully, since it details the key aspects you should know about rent guarantee insurance. It also describes the protection that this type of policy can offer you as a landlord against possible non-payment of rent by your tenants.

This type of insurance is becoming increasingly popular among landlords, since it not only protects them against cases of non-payment of rent, but also offers complete coverage for legal defense costs related to the housing being rented out. It is not easy to take your first leap into renting out a home you own to a stranger. We have all heard about cases of unpaid rent, damage to the property, problems between tenants and the neighbors, etc.

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Whenever you rent out a property there are multiple problems that can arise. Property owners usually defend themselves against these by requesting personal guarantees or bank guarantees from their tenants, as well as payment of a security deposit or two months of rent. Rent guarantee insurance provides landlords with a way to supplement these types of protection.

Coverage

Rent guarantee insurance protects a property owner against tenants who become unwilling or unable to pay their monthly rent, by covering payment of the unpaid rent due (up to a maximum number of months, depending on the terms established in the insurance policy). However, although this is the primary type of coverage and the main attraction of insurance of this type, it is not the only benefit.

In fact, when you contract a rent guarantee insurance policy, you typically gain access to a diverse range of guarantees related to defending and protecting your interests in relation to your rented property:

  • In the event of non-payment by your tenants, the insurance can reimburse you for the total amount of the unpaid monthly rent payments, up to the time limit established in the policy (quantified in months).
  • The insurer will also rely upon attorneys specialized in the subject to make a claim against the tenant for collection of the unpaid rent, before any effort needs to be made to evict the tenant or pursue other legal actions.

However, if it becomes necessary, the insurance company will also handle the legal procedures required to obtain a judicial order and/or ruling to evict a tenant who refuses to pay, so that you can make the rental available to a new tenant as soon as possible.

  • Reimbursement is also guaranteed for material damages or losses that a tenant may cause to the rented home. For furnished rentals, some policies will even cover damage caused by a tenant to the furniture and other items (up to the limit established in the policy).
  • There is also a legal advice service available to answer any questions you may have about your rights and obligations as a landlord.

Requirements for contracting a rent guarantee insurance policy

In order to formalize a rent guarantee policy, insurance companies will first analyze the financial solvency of the tenants you are considering renting your home to. This is reasonable, since if these individuals do not pay their rent, it will be the insurance company that must assume responsibility for the amount corresponding to the rent payments that have not been received, as well as any possible costs related to collection of the debt.

Because of this, the insurer will typically perform an economic viability study on the potential tenant. In a manner similar to the process used for a loan or a mortgage, the company assuming the risk of non-payment wants to have sufficient guarantees to make sure that the tenant will be able to make the monthly rent payments. It is typical that a potential tenant will be considered as unsuitable (or in other words, the insurer will not agree to offer the policy) if the amount of the rent represents more than 40% or 45% of the tenant's monthly income.

In order to carry out this analysis, the insurance company may request a variety of documents to verify the renter's financial solvency:

  • For employees: it is typical to ask for the two most recent salary receipts, to evaluate both the employee's income and the amount of time they have spent at their present job. In this case, insurers put a higher value on permanent employment contracts, since these offer better guarantees of future payment compared to temporary contracts.
  • For self-employed workers: potential tenants who are self-employed are usually asked for their two most recent quarterly VAT statements, as well as their most recent personal income tax return.
  • Pension earners: retirees receiving pension benefits are usually asked for evidence of their retirement status as well as proof of their monthly income, such as a bank statement. In relation to this process, it is also worth mentioning that insurance companies also check the main credit default lists existing in Spain.
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When is a rent guarantee insurance policy useful?

In addition to all of the guarantees and coverage types we have already mentioned, contracting a rent guarantee insurance policy gives you more peace of mind and better protection against the risks involved with renting out a home that you own. First of all, the financial study carried out by the insurance company will help you select the right tenant. The insurer also manages the process for collecting any unpaid rent that is due, and if this proves to be impossible, the company will provide reimbursement for the unpaid rent. The insurer also handles the procedures required (both inside and outside of the courtroom) to evict a tenant from your home in cases were this becomes necessary. Finally, some insurance products on the market even cover damage caused to the rented home by the tenants, up to an established limit.

As for the cost of this insurance, there are many options to choose from on the market, but the price usually does not exceed 5% of the annual rent as established in the leasing contract. BBVA does not currently sell this type of insurance, but you can consult the rest of the home insurance product catalog.

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