Regardless of how many rental units you own, you need to protect your investment with the right insurance coverage. That means covering the property in case of fire, vandalism, and other physical losses as well as protecting yourself in case of liability claims.

"You work hard to build a portfolio of income-producing property, so take the time to make sure it is adequately protected with insurance," says real estate investment expert Russ Whitney. "At the same time, you don't want to over-insure, so pay attention to the details of this process."

Russ Whitney is the bestselling author of The Millionaire Real Estate Mindset (Doubleday). He says the first step in insuring your rental property is to find an independent insurance agent with experience in this type of coverage. You want an independent agent so you can shop various carriers for the best rate and coverage package. Don't just assume that the agent who has been handling your personal insurance for years has the expertise you need; ask how much rental property experience the agent has, and if you're not comfortable that he or she can evaluate your needs and make appropriate recommendations, find a new agent.

If you own just a few units, or occupy one unit of a multi-unit building, your homeowners insurance may provide sufficient coverage. This is done with an endorsement called "additional residence rented to others," and it typically works for up to four separate residential properties.

Once you have built your rental portfolio beyond four units, you have two options for insuring the properties. You can either find an insurance company that will write separate policies for each property, or purchase a commercial policy that covers all your non-owner occupied properties.

What kind of coverage do you need?

Your insurance should pay for the cost of repairing or rebuilding the property after a covered loss, and should also allow for additional costs if local ordinances require upgraded materials. In addition, the policy should provide coverage for loss of rental income when the property cannot be occupied due to a covered loss. You should also have coverage for any furnishings and appliances you own which are located at the rental property.

Remember that your insurance will not cover contents belonging to your tenants; they need to obtain their own coverage in the form of a renter's policy. Jeffrey Taylor, property management expert and author of The Landlord's Kit recommends that you educate your tenan

ts on this issue by including a form that explains "the tremendous risk they take by not obtaining a relatively low cost renter's insurance policy."

Earthquake and flood insurance are typically issued as separate policies; if you are in an area where these events may be a concern, discuss the appropriate coverage with your agent. Russ Whitney points out that as a real estate investor, you may be viewed as a "deep pocket" if someone is injured on your property. Be sure your policy covers physical injury and also mentions libel, slander, discrimination, unlawful and retaliatory eviction, and invasion of privacy suffered by tenants and their guests.

Managing your insurance

Many insurers offer discounts if the insured property meets certain requirements. You may be able to reduce your premium if your properties have a fire alarm system that alerts either a central reporting station or the fire department directly. Some insurers will discount the premium if the properties have smoke/fire alarms, fire extinguishers, and deadbolt locks. And if the dwelling was constructed recently (generally up to eight years), you may qualify for a new home discount.

An increasing number of insurance companies are conducting inspections on rental property before they will provide coverage. In some states, they also require a satisfactory credit rating on the insured. Much like you screen your tenants, insurance companies are screening and refusing to insure high-risk landlords. They are also routinely offering new types of coverage and targeting new and different markets.

Once you have appropriate coverage on your rental properties, don't just automatically renew it when the policy expires. Review the coverage and be sure it is still what you need, and shop around to see if another company has a better rate.

Of course, cost is only one factor to consider when choosing an insurance company. Be sure the company is financially stable and has a solid track record for customer service and paying claims.

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