6 reasons to get landlord insurance
I am constantly surprised by the number of property investors who buy a property and then fail to adequately insure their new asset. Most know to get some building insurance, but an investment property is actually an asset that you can insure for loss of income due to a range of events, and many are unaware of just how to protect themselves against this type of loss.
Landlord insurance is a specific policy designed for this purpose, but not all landlord policies are the same. This particular type of insurance has special inclusions, and is only offered by a very small number of insurers. A landlord policy will generally have six components
1 Loss of rent
You can insure your property against loss of rent in the event that your property suffers damage which makes it unable to be tenanted for a period. Note that this provision will not pay your rent if your tenant moves out and you suffer a period of vacancy considered to be a result of general market conditions – that is, where vacancies are high and you just cannot find a tenant. It only covers loss – that is, rent which is lost due to damage, or a tenant who has vacated without notice, breaching their lease. You must be careful not to over- or under-insure – the company will only pay you the amount you actually lose, and you must prove that this amount represents true market rent.
2 Rent default and tenant theft
Where a tenant is in arrears on the rent and subsequently skips out, a landlord policy will cover the amount of rent in arrears. There will be a maximum amount which can be paid under any one claim, usually around $3,000, or a set period of weeks.
In addition, if anything has been stolen by the tenant, you can claim the cost of replacing the item, with the usual excesses applied.
This covers damage done by the tenant to the building which does not occur as a result of normal wear and tear. In other words, malicious damage done by the tenant that results in the inability to let out the premises until the damage is repaired, or otherwise impairs the capacity of your property to earn an income.
4 Ordinary house and contents
The policy will also include a component to cover normal loss to your building or contents through damage or accident, under the same circumstances as the house you live in. Note that if you have no furniture, then the contents may not need insuring, although your fixtures and fittings may. Also, if you buy a strata-titled property, the body corporate will already have in place insurance to cover the building. Be sure to thoroughly check this policy, however, as it may not cover the fixtures and fittings inside your four walls, and you may need some gap insurance, particularly where you add floating floors or significant window treatments.
5 Legal costs
Where you have an issue with a tenant, be it while they are in residence or after they have left, you may incur certain legal costs in resolving that issue (or recovering unpaid rent), such as the costs to attend a tribunal hearing or retain legal counsel. Most Landlord Insurance policies should contain an amount to assist with the costs of this recovery, including an amount for legal costs.
Be sure that the policy you are considering includes an amount for public liability, in the event that a tenant (or any visitor) suffers an injury and subsequently sues you for damages.
Landlord insurance is not expensive. Depending on the amount required, it usually only averages a few hundred dollars per year. Under no circumstances should you ever try to save a few pennies by refusing this type of insurance. If you include this in your calculations when assessing a property for cash flow you can ensure that your property is covered for loss and still delivers affordable cash flow.
Do be aware, though, that not all policies are created equal. Some property managers offer a pay-by-the-week policy which may suffice, but first check the inclusions, the exclusions and, most importantly, if there is any cap on claims. Some policies will only provide insurance up to a small limit, and others won’t pay more than one claim in a year, or won’t cover you for certain events.
Landlord insurance is an inexpensive way for you to protect your asset. You must consider this as a cost of investing, and allow for this expense when working out of you can afford to add an investment property to your portfolio.