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Rented Property Insurance
Landlord insurance is a subject many property investors tend to shy away from, as they quite wrongly believe it is an unnecessary expense that reduces the potential of annual rental income. Unfortunately and with hindsight, many live to regret making this flawed and poorly judged decision.
Longstanding and experienced landlords with large portfolios have a substantial advantage over those with just one or two investment or buy-to-let properties. Even when a disaster happens to one property resulting in the sudden and unexpected cessation of rental income, they can be reassured that income from the other properties they own will ordinarily support cash-flow continuity. A potential financial crisis can therefore be averted.
Most landlords do not enjoy this luxury and even a relatively minor event can create a domino effect, bringing a property investor’s income strategy down to earth with a hard and painful jolt. Mortgage payments can easily become a much bigger burden and additional repair or building expenses can potentially cripple annual profit expectations for months or even years to come.
Specialised landlord’s insurance protection is therefore a necessity for most – and an absolute essential for anyone just starting out on a property investment career.
One of the common misconceptions amongst new landlords is that an existing domestic policy will suffice. In fact, such policies usually offer wholly inadequate protection for a rented property situation – and many prohibit leasing completely (so check the small print of your policy now). Specialised insurance for landlords should be obtained, as these policies recognise and address the needs of property investors and offer much greater cover for tenancy-related events.
Rent guarantee insurance is highly recommended for any landlord whose buy-to-let mortgage payment schedule is entirely dependent on the continuity of rent being paid by the tenant. Despite even the most comprehensive tenant referencing procedure and carefully scrutiny of tenant applicants, anyone can acquire a non-paying tenant. The tenant may lose their employment or be made redundant at any time or other expenses higher up their own particular priority list could interfere with their normal good rent payment record. Whatever the circumstances, their rent arrear problem could become your mortgage repayment problem … with much more serious consequences.
Rent guarantee policies ordinarily cover tenant arrears for a limited period of time (3 to 6 months is usually the case) or they offer the rent to be paid while the defaulting tenant is evicted with a court possession order. Associated legal protection is useful in these circumstances, as it will pay for the services of an approved solicitor to deal with the possession case. All policies are slightly different, so read the terms and conditions of each first, before making your preferred choice.
Specialised building insurance for landlords is extremely important, because ordinary domestic policies simply don’t provide the kind of protection most buy-to-let investors need. In fact, most domestic policies prohibit letting and these will therefore offer no protection whatsoever against unforeseen events. In addition, the owners of leasehold houses and apartments should be aware that the policy commonly offered as a part of service charge fees will not usually cover tenancy situations. These ‘block policies’ frequently only offer protection for damage to the common parts of a dwelling, such as a roof, hallway or stairwell.
Standard domestic policies will also not ordinarily offer to provide a tenant with temporary alternative accommodation where a property has been rendered uninhabitable due to flooding, fire or other damage. The landlord can find themselves suffering on two levels – firstly, they may have no rent coming in from the ousted tenant; and secondly, they could be held liable to pay for the tenant to be temporarily housed in a local hotel or some other comparable accommodation. Needless to say, in this scenario, adequate cover from a specialised insurance policy can prove to be worth its weight in gold.
Landlord content insurance is another advantage, particularly for high quality fully furnished rented dwellings. While many standard policies offer excessively high minimum value cover, specialised landlord policies reduce the total minimum value of furnishings covered to make them much more cost effective. These policies often also offer additional protection to the landlord-tenant situation, including an extension on the standard maximum 30-day empty period.
There are a great many styles of insurance packages available to and specifically tailored for landlords, regardless of the size of property being rented or its location. More importantly, these policies provide investors with levels of protection that extend beyond standard packages, while offering substantial peace of mind at relatively low cost. And remember that the cost of premiums can be included as allowable expenses set against a landlord’s annual tax submission, making them even more affordable.
In my opinion as an experienced and time-served property investor, landlord insurance should be an essential element to be included in the overall assessment of yield when considering a particular property purchase. I would class it in the same way as tenant referencing, management agent services and refurbishing plans – in other words, a crucial component in the buy-to-let or investment property profit-calculation forecasting strategy.
Books by Tony Booth
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