When you buy an investment property, you own a business asset and you therefore own an asset that produces income. So you should be insured not only for the typical contents and building cover in the property, but also against loss of income.
A good landlords insurance policy has a contents and buildings component, but it also covers you for loss of rental income, not only from fire and flood damage to the premises, but also when the actions of the tenants limit your ability to generate income.
Landlords insurance policies typically cover you for not only the behaviour of the tenants, but their guests. However, landlords insurance can be complex with many inclusions and exclusions that first-timers may not be aware of. Upon buying an investment property, engaging an insurance broker is a smart move to ensure that you are covered for what you need and that you pay the right premium.
Consider these inclusions:
- Deliberate or intentional malicious damage by tenants
- Loss of rent following an insured peril
- Loss of rent caused by tenant default
- Legal costs of tenant eviction and court orders
- Losses because of tenants’ hardship order
- Loss because of tenants death
- Loss due to tenant failure to vacate
- Loss because tenant prevents access
Landlord insurance policies are often complicated by their limitations and exclusions. For instance, does the policy have a weekly rent limit that it will pay? Is there a stand-down period? Do you have to absorb your losses for two weeks before you can claim?
There are other features of landlords insurance, such as the size of your liability cover (insurance against tenants and their guests suing you). This is worth getting right. Also, the re-letting costs after you make a claim for rental loss, and the associated costs of the claim (eg. valuations, legal costs, accounting costs, management costs, emergency call-outs etc.). Some landlords insurance excludes these things, and also excludes small costs such as changing the locks after a tenant eviction.
In other words, landlords insurance is a highly tailored product and when your current and future wealth is riding on your rental properties you should be very clear about how well you are protected should something go wrong.
One of your main metrics with property ownership is time; time produces capital growth but it also produces income. If you calculate your gross yield from your investment property as 10 per cent (5 per cent from capital growth and 5 per cent from rental yield) then you can’t afford to lose on the rental income.
For this reason, even small damages to your property or relatively minor legal matters with tenants can cost you the equivalent of a month’s worth of rental income (or much more). Start by getting three quotes from different insurers and see what they cover and for how much. If you’re still unsure, see an insurance broker.
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