Do you want to be a landlord? Do you want to buy low and sell high? Make lots of money being a bigwig in the rental business? Recent changes in investment property underwriting may make for both a safer venture along with higher acquisition costs.

Let’s say that the idea of buying and selling residential real estate for fun and profit has begun to catch your eye with a little more frequency than it once did. Maybe it’s because there’s been an economic hardship in your community and property values have taken a beating. Or that interest rates are at historical lows you just can’t lose money on any deal because you can charge a whole lot more in rent that what you’ll have to make in mortgage payments. Whatever the reason, there are some recent lending changes that may affect you. The biggest change may be a Rent Loss Coverage requirement by your lender.

Rent Loss Insurance is essentially what it sounds like. You pay an extra premium to not just cover the house but also if you lose rent. How can you lose rent? The most obvious way is to not have a tenant. Some policies will pay you, the landlord, a predetermined amount of money should your rental unit not produce. These premiums can vary depending upon an assortment of variables and the rent loss payments are restricted in both time and amount but you can expect to collect rent loss payments if there is a catastrophic event that makes the unit uninhabitable until repaired. You can receive interim payments while you find a more creditworthy customer or build a new roof.

Is Rent Loss Insurance a good thing or a bad thing? It may be neither. Is automobile insurance a good thing if you’ve never had to use it? When you invest in Rent Loss Insurance you may find that you never need it, but it’s always there in case you do. Rent loss coverage usually means that the owner carries a policy equal to a minimum of six months gross rental income should income stop due to a covered hazard, like fires or trees falling through roofs.

Some new lending guidelines make Rent Loss Insurance a requirement, not an option. Recent changes in Freddie Mac (FHLMC) guidelines require that if an operating loss can be expected when acquiring a first investment property then you can expect to buy additional insurance coverage in the form of rent loss.

Do you own more than one investment property? Do you own three? Ten? If you have more than one investment property then Freddie Mac will require that rent loss coverage be placed on all owned units regardless of income.

How is an Operating Loss calculated? An Operating Loss is usually determined by comparing gross monthly rent proceeds less mortgage, tax and insurance payments along with maintenance, utilities and a vacancy factor. Let’s say that your rental unit estimates $400 in annual repairs, $600 in utilities and $200 in maintenance, or about $100 per month. Let’s also say that the vacancy factor for rentals in your area is around 10% and you monthly rent is $600. Ten percent from $600 is $540. By subtracting your operating expenses of $100 then you have an income net gain of $440. Rent Loss Insurance is not required by the lender in this case. But if your rent is $600 and utilities add up to $250 per month, depreciation of $90 per month, unusually high vacancy factor of $150 plus $200 in maintenance and security, then you have an operating loss of $90. Hello Rent Loss Insurance.

There are several things to consider when investing in real estate, with insurance being near the top of the list. If this is your first investment property or just one in a string of purchases, you might want to consider the cost benefits of Rent Loss Insurance. And if you own more than one property and are buying another, remember that Rent Loss Insurance may be a requirement, not just an option.

Published: January 10, 2003

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.