Residential property investment is a popular option for many self-funded retirees, and those approaching retirement. However, owners of investment properties may not be aware that they may need different insurance products from normal home and contents policies, writes Rob Whelan
While everyone has heard bad tenant stories, the biggest risks property investors face are similar to those that affect all property owners – loss or damage as a result of storms, floods, cyclones, bushfires, as well as house fires and theft.
As a landlord, you can protect your investment property, protect your property’s assets and protect the income you receive from your tenant with landlord insurance. This all comes down to understanding your level of risk, and identifying where you might be vulnerable to loss or damage.
For example, your investment property may be located close to bushland that may be vulnerable to fire, which makes the property more susceptible to bushfire risks. Or the property may be in the tropics where cyclones are common, or near a river or creek that may be prone to flooding.
Many insurers offer landlord insurance, and there are specialists that focus on this type of insurance. Take time to shop around for a policy that is best suited to your particular risks, remembering that the least expensive policy may not always be the one that is best for you. Insurance brokers can help with difficult-to-insure risks or complex circumstances.
As Christine Holm makes clear in the case study, landlord insurance offers her peace of mind.
TYPES OF LANDLORD INSURANCE:
Landlord building insurance
Covers your property against risks from catastrophes, such as fire, storms and other natural disasters. Most policies include fixtures permanently attached or fixed to your property, such as built-in-wardrobes, kitchen cupboards, fixed floor coverings such as floor tiles (but not carpets) as well as exterior fittings such as awnings, pergolas, fixed rainwater tanks and solar panels. In addition, home improvements such as a garage, carport, in-ground pool, and driveways may also be included.
Landlord contents insurance
Usually includes cover for fixtures such as light fittings, carpets, rugs and floating timber floorboards, ovens, stovetops and window coverings. Contents policies may also include above-ground pools and spas including fixed accessories. Many insurers will require you to list all items in the property’s most recent property condition report as part of your insurance. If your investment property is part of a strata-titled building, contents can also include temporary walls, floor and ceiling coverings and any fixture or structural improvement that the body corporate is not required by law to insure.
Financial loss
Your landlord insurance policies can protect yourself from financial loss caused by damage to your rental property by your tenants or their guests, whether accidental, deliberate or malicious damage, as well as theft of your property by your tenants.
Covering missing rent
Loss of rental income can leave you in severe financial difficulty. If missed rental payments will cause you financial stress, check if your landlord insurance policies cover you for missed rental payments.
For example, landlord insurance may cover the loss of rent due to:
Tenants leaving without paying (absconding)
Defaulting tenant (by termination notice or by court order)
Damage has left your property unable to be leased (untenantable)
Failure to give vacant possession
Tenant hardship, which occurs when a court awards your tenant a release from their obligation to pay rent for a certain period of time due to hardship (for example, if they are unable to work due to injury or illness)
Death of a tenant
Other options
Landlord insurance policies can also cover your legal expenses if you have to take action against a bad tenant. Specialist landlord insurance providers will sometimes even include the cost of replacing locks on the property if your tenant has vacated the premises and has not returned the keys.
Short-stay landlord insurance
If you are a landlord of a short-stay rental property, such as a holiday rental, and your property is professionally managed, a short-stay landlord policy that covers situations unique to holiday properties may be appropriate. These can include the death or serious illness of a guest and consequent difficulty in subsequent rentals, and failure to give vacant possession when a short-stay tenancy is complete.
Is your property professionally managed?
Keep in mind that many insurers offer two different types of landlord insurance policies: one for properties that are professionally managed; and separate policies for investors who decide to manage the property themselves. This reflects the lower level of risk associated with properties that have a property manager.
“Take time to shop around for a policy that is best suited to your particular risks, remembering that the least expensive policy may not always be the one that is best for you.”
Stay on top of the paperwork
Most insurers will require that you have a written rental agreement that states the term of the rental period, the amount of rent and the bond your tenant needs to pay. If you make a claim, insurers may ask you to provide a rent ledger or receipts, property inspection reports, proof of ownership for any item that is part of your claim, receipts, valuations or model and serial numbers.
Case study: Christine Holm
Christine Holm from Sydney bought her first investment property 20 years ago with her husband Mark and they have added other investment properties over the years, including two in their self-managed superannuation fund.
Christine, 52, said: “We wouldn’t own an investment property without landlord insurance, it’s only a small cost each year and tax deductible too. If your investment property is bank-financed you have to insure the building anyway, so it’s easy to include landlord insurance with your building policy.
“I have read many books about property investment, including stories about people having problems with tenants, and they all recommended landlord insurance. Most tenants are decent people who will pay their rent on time every month and look after your property but there is always a risk that you might get a tenant who won’t do the right thing.
“To me landlord insurance offers peace of mind so when you have a problem with a tenant you will not be financially out of pocket. We had to ask some tenants to leave, and had some concerns that there might be a problem but they left quietly, and we were covered if any damage had been done to the property.
Christine’s landlord insurance tips: Top 4 must-haves
Theft or burglary by tenants or their guests
Malicious damage or vandalism by tenants or their guests
Loss of rent due to tenant default
Liability cover if someone is injured
Shop online: When a policy is due I search online for the best cover available, especially those insurers that have easy-to-navigate websites
No claims? We haven’t ever had to claim on a policy but that’s not a reason for not having landlord insurance. To me, it offers peace of mind
Learn all you can about landlord insurance I subscribe to a couple of property investment magazines, which include many stories on landlord insurance
LANDLORD INSURANCE TIPS
Check the defined events in your Product Disclosure Statement to make sure they cover you for the risks you face
Insurers may treat professionally managed properties differently to if you manage the property yourself
Holiday properties may require a shortstay landlord policy
You can reduce your premium by taking out a higher excess
Ask your insurer for any discounts. For example, you may be able to combine a landlord insurance policy with your own home building insurance policy and receive a discount
Be aware that claim limits may apply to specific contents items such as televisions and other electrical items (excluding whitegoods)
Limits may also apply for theft by a tenant or their guest, and for vandalism or a malicious intentional act by a tenant or their guest
Policies may only allow a rent default claim under Buildings Insurance or Contents Insurance but you can’t claim under both
Check your policy to see if it covers contents inside the property that you allow your tenants to use
Check your PDS for examples of how insurers may pay a claim
Strata insurance policies will not cover you for the risks associated with leasing your unit or apartment
An insurance broker can help find a policy that’s most appropriate to your needs
To find a policy that matches your needs, visit www.findaninsurer.com.au
More Information
www.understandinsurance.com.au guides you in simple, easy-to-understand terms through the process of understanding your risk, buying insurance, finding the right policy, ensuring you have enough coverage, controlling your costs and making a claim
Use the ICA’s Find an Insurer service – www.findaninsurer.com.au – to help you find an insurer. This is a free service
About
Rob Whelan is Executive Director and CEO of the Insurance Council of Australia (ICA). The ICA is the representative body of the general insurance industry in Australia, which is a significant part of the financial services industry. ICA members provide insurance products ranging from those usually purchased by individuals (such as home and contents insurance, travel insurance and motor vehicle insurance) to those purchased by small businesses, larger organisations and not-for-profit organisations. In November 2013, the ICA launched Understand Insurance, a national consumer financial literacy initiative that helps consumers make better, more informed decisions by demystifying insurance.