When we buy a house to live in, the first thing we do is take out insurance on the property as it comes naturally to us to protect ourselves and our family. However, when it comes to an investment property we may not think about taking out landlord insurance not understanding the importance of it until it’s too late.
So, what is landlord insurance and why is it so important? Like any form of insurance, it is a safety net. A contingency plan for when unexpected things happen. Landlord insurance can help protect you against a number of things that other policies don’t, and when its specifics have been taken into consideration, it isn’t all that expensive. Being an investment expense, landlord insurance is also tax deductible.
Building insurance alone doesn’t cover everything that has the potential to go wrong in a landlord/tenant situation. The contents of a building, for example, are not covered by building insurance, which means that should your property become flooded, the fittings and carpets would not be covered by the policy. This could prove to be a costly oversight.
Another crucial element of landlord insurance that isn’t covered in alternative policies is loss of rent. Whilst not all policies will protect against all potential situations, most tend to cover the three most common issues:
- Loss of Rent
- Loss or Damage to contents
- Loss or Damage to building
It is always good to have a plan in place for the rare occasion when things do not go according to plan. The most common features of landlord insurance is to cover intentional damage to your property caused by the tenants or their visitors, cover the rent in events where the tenant does not pay, covering any theft, and also any legal fees which you could incur if either you or your tenants decide to take legal action over damage to the house.
We wanted to share with you some real life case studies of scenarios that have happened in our office in the last 12 months, and after speaking with our insurers, they are advising the claims for these types of claims are massively up on previous years.
1.Tenant loses job and can no longer afford rent.
Fantastic tenants in a property, always well maintained and rent always on time. Suddenly one of the tenants is made redundant and although they are keeping up with payments, there is no sign of a job that will support their rent and living expenses any time soon. So the tenant flags this with us and advises they are probably going to need to break lease, as they can no longer afford the rent. In a break lease situation the tenant is responsible to keep paying rent until we find a replacement tenant at the same rental amount, or alternatively be responsible for any shortfall in re-negotiated rent. However in the current rental climate, to find a suitable tenant, this can take time. Unfortunately after persevering, the tenant could no longer afford to pay the rent, and vacates the property and ceases rental payments. The good news about landlords insurance, is it covers rent loss in all types of situations including this one (some insurers will cover until the property is re-tenanted and other are capped at a certain amount of weeks). We can’t control everything that happens to a tenant, and this is why landlords insurance is so important. For approximately $300 per annum, you can have peace of mind incase something out of your or our control occurs. Just because your tenant loses their job, doesn’t mean your bank won’t put a hold on your mortgage payments, so please ensure you are adequately protected. We can’t stress this enough.
2. Death of a Tenant
Fortunately for us, we haven’t had this occur to us, but have had close colleagues in the industry that have. The property manager discovered that one of their tenants had passed away in their home. While this was a sad situation it did prove to come with some challenges. The police had to be called and the body removed and specialist cleaners needed to clean the area.
When the property was finally ready to advertise after a number of weeks, legislation required that the prospective tenants be informed that the previous tenant had passed away in the property. The property was vacant for another 3 months.
Fortunately, in this case, the owner’s landlord insurance policy meant that rent was covered from the time of the death until a new tenant could be found, in this case three months. The tenant’s bond, on application to the court, was released to pay the cleanup expenses, but this can also take time as a death certificate is required to action this. This is just one of the unexpected and unforeseeable scenarios which could cause a huge financial burden to a property investor.
3.Tenant goes through marriage separation and can no longer afford rent.
A family in a home, rented for a number of years. No issues throughout the tenancy until one day they advise you they are separating and things get difficult between the husband and wife. One wants to try and take responsibility and the other does not. Unfortunately one person on their own can’t not afford the rent, and as separations can take time to go through court etc, funds can be short until court orders are in place. Similar to the above scenario, the tenant decides to vacate mid tenancy as they can no longer afford to pay the rent. Obviously priority is to get a new tenant into the property, but who pays the shortfall in rent if you don’t locate a new tenant straight away? Who pays re-leasing costs (advertising and leasing fees). This is something that a good landlord insurance policy will cover. Please be mindful as not all policies will cover everything, this is why it’s important to do your research. What is the excess in these scenarios? Some policies have massive excesses and nearly make it pointless to claim, where others have low excess and very easy processes when it comes to claiming.
For more information on landlord policies call Radi Estates on 9275 2945 and we can share our experiences with you, to assist you in making an informed decision when choosing a landlord insurer.