When it comes to your investment strategy there is nothing more important than protecting your assets you have worked so hard to acquire and build up.
Insurance is a vital part of your asset protection however for many it is neglected and has terrible consequences.
Insurance is a real financial pain as it is not cheap when you may be starting out with your first investment property. It’s hard to justify the cost when there is a very low chance you will ever need to claim. Depending on your local taxation regulations (speak with your qualified tax professional) it may be tax deductible though which helps.
There are two types of insurance that would apply to an investment property.
– Building and Landlords.
– Personal Insurance (Life, Trauma, TPD, Income).
Building and Landlords Insurance
Building insurance covers total building loss/replacement as to agreed policy amount. This is usually required for any mortgage that a bank holds over your property. They would want to see the valid certificate of insurance before settlement.
Landlords insurance on your investment property is optional however highly recommended. It covers two main things – loss of income and tenant damage. Loss of rent cover for up to 12 months if property become unfit for letting due to an insurable event. Rent default by tenant cover, Cover for theft, malicious acts or vandalism by tenants. $20 million legal liability cover for injuries to people, or damage to property. Electric motor burn out and power surges. Accidental glass breakage.
Most insurers also have pay by the month premiums at no extra cost.
By needing building insurance to satisfy the banks lending, you have covered the major risk -losing everything (your capital).
The second risk is cash flow and outgoings – Your rent and property damage. If you lose rent you lose cash flow, if your property gets damaged, it can dramatically increase your outgoings and temporarily halt your cash flow.
Now the third and not thought of risk is being sued by a tenant for accidental injury or the like. This is uncommon however in our litigated world lawyers love this kind of thing (court battles, court proceedings and suing people in general).
Being sued because your tenant tripped over a wet and twisted board on your balcony because the gutter was leaking over the top of it is an all too real circumstance which could leave you seeking your lawyers protection in court. Having legal liability included in landlords insurance allows you to sleep at night.
Having insurance does however lift your game as a professional property investor, as the insurance companies that are billion dollar risk insurers will only insure events that are actual accidents. They will investigate as to whether or not you for-filled your policy requirements and provided a fit and safe dwelling for your tenants to live in.
Gone are the days of just “getting in some tenants”. You have to run it like a business and ensure it has all the makings of a well run and maintained house fit for tenants that lives up to the tenancy requirements. Leaving that balcony railing with some termite damage might not seem like a big deal however who would be sued if your tenant fell off the balcony because of that lack of maintenance. I’m sure you would also be thinking about how thorough your managers are now too. As some insurers also require regular inspections as to maintain the required level of maintenance.
Personal Insurance is not everyone’s cup of tea however if passing on debt free assets to your siblings, next of kin or desired charity is a priority on your unfortunate passing then you will need personal insurance.
A burden many face is being laden with their next of kin debt upon their untimely death or passing. Having debt is sometimes essential to buying investment property however passing this on to an unready sibling or family member could be a horrifying ordeal.
Also most children do not fully realise that if their parents insure their lives for the full amount of debt owing they could get a free hold property portfolio.
Personal insurance usually covers two things.
– Life, Trauma and TPD Cover
– Income Protection.
Life, Trauma and TPD cover is about insurance covering accidents/circumstances which cause death (life cover), a serious health issue like cancer and illnesses that impede your ability to work for a certain time (trauma cover) or a serious impairment that would take away your ability to ever work again (TPD cover).
These all are usually paid out by a lump sum amount.
Income Protection Insurance cover is a cash flow protection method to ensure you can fund your outgoings of daily life and the possible shortfalls of your property portfolio.
Most would view this is a must have if you need your regular income to pay the bills etc. Living with out your income could be a dire situation and the last thing you want is to start selling up your assets to pay short-term bills. This sort of cover is by regular payments for a predetermined time period with the intention of you recovering and retaining your income.
Insurance is now a necessary evil and we have to accept the cost and ensure we for-fill our obligations to help in a smooth flowing high growth property portfolio.