So, you have just purchased your first property and are feeling excited about the prospect of kick-starting a successful investment portfolio.
You are on path to financial freedom and it feels good!
However, to ensure you don’t veer off track, you need to make sure you are protecting your new asset and the income you are set to derive.
How does one do that? Well, selecting the right insurance provider is an important part of the investor journey and can mean the difference between owning an asset or a liability.
A good landlord insurance policy offers extra protection not typically included in standard home and contents policies including cover for insured events (such as fire, storm and flood), loss of rent, legal liability and tenant-related damage.
However, it isn’t ‘one size fits all’.
Cover, premiums, excess and limits can vary from insurer to insurer.
To make sure you are well protected, it is important to be guided through the maze of insurance jargon to find a policy that best protects what is important – your investment and income.
Here are five common pitfalls you need to avoid as a first-time property investor…
Underinsurance is rife among Aussie property owners.
In fact, the Insurance Council of Australia (ICA) estimates more than 40 per cent of households fail to correctly assess the value of their home and contents.
Many owners inadvertently find themselves underinsured simply by underestimating how much it would really cost to replace their investment property and its contents.
Remember building costs and standards change and you need to base your sum insured on the amount it would cost to rebuild the property (not on the original purchase price).
TIP: Engage a quantity surveyor, builder or sworn independent valuer to get an accurate estimate.
And don’t forget to factor in other expenses such as demolition, debris removal, and architectural, engineering and council costs.
When it comes to the sum insured for contents, make an inventory of the contents within the rental and ensure replacement costs are up-to-date.
This is not a joke – there actually is such a thing as having too much cover.
While you don’t want to be half-protected, you also don’t want to be protected for more than you own.
If you do over-insure, it essentially means you are paying more than what you need to.
For example, you may live in an apartment building and decide to take out a landlord, contents and building policy.
BUT, your body-corp is likely to already cover the building under a strata titled policy.
This means, you are paying for building cover when you actually don’t need to.
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If you partner with the right provider, and select a good landlord insurance policy, it will typically offer cover for these areas:
- tenant damage and loss of rent;
- contents insurance;
- building cover; and
- legal liability.
Depending on your property and requirements, you may need a policy that covers ALL, or only a few of these areas.
The main confusion comes from those who own strata titled properties (such as apartments, villas or units).
This is because the body corporate may insure the building and common areas in the property – including common hallways, garden and driveway.
Because these are covered through the body corporate, many landlords assume they do not need to purchase insurance themselves – this is not the case.
The body corporate does not offer protection for unit contents including non-fixed appliances, furniture and electronics, and does not offer protection for loss of rent or legal liability.
So, a landlord and contents policy is still required.
In addition, the type of tenancy can impact your insurance.
While a periodic tenancy agreement (or month-to-month agreement) may be beneficial as it allows for more flexibility in the tenancy, many policies require a fixed-term lease to be in place at the time of a loss.
So, make sure you understand your coverage regarding periodic leases and lease continuations and determine whether your insurer will pay out during this type of tenancy.
There are many reasons premiums vary from insurer to insurer and policy to policy, including amount of cover, sum insured, excess and limits.
Excess – the portion of the claim you must pay before the rest of the claim is paid – is a big one to look out for… some insurers charge low premiums but high excesses which almost render a claim worthless.
When looking for an adequate insurance policy, it is suggested a decision is based on value and need, not price.
TIP: Loss of rent is a common claim made by landlords, so look out for a policy that has $0 excess on loss of rent claims.
Even the best property manager cannot control or predict a tenant’s relationship breakdown or job loss, or an attack by Mother Nature, which is why it is important to invest in extra protection.
Example: A tenant has been living in a property for more than five years and has built a strong relationship with their property manager.
Because the tenant has a perfect record of paying rent on time, and has been residing in the property for so long, the landlord asks the property manager to cancel the landlord insurance on the property.
Unfortunately, two months later, the tenant loses their job and income.
The first thing the tenant stops paying is rent.
What was meant to be a cost-saving decision, turns into an expensive mistake.
Sharon Fox-Slater is the Managing Director of EBM RentCover and was part of the core team that helped launch one of Australia’s first landlord insurance policies into the market.