Landlord insurance is the home and contents insurance you take out on your rental property, which is used to generate rental income. It is specifically designed to safeguard investment property owners against the risks associated with renting their property.
A landlord insurance policy covers a variety of insured events based on the policy chosen by you. From typical home loan inclusions, such as natural disasters and fires, to tenant-specific issues, such as loss of rental income, property damage or theft, you can claim landlord insurance to protect your investment financially.
Who Needs Landlord Insurance?
Your regular home and contents policies will most likely not provide cover when the property is let out on rent. You should consider taking out landlord insurance if you are:
1. A Landlord
If you’re a landlord and your investment property is the primary source of income, you would benefit from taking necessary steps to minimise any potential risks and financial losses. You should therefore purchase landlord insurance to protect your rental property and income.
For example, suppose your tenant or guest engages in malicious acts or accidental damage to your rental property, and you don’t have a landlord policy. In that case, you may have to pay for expensive repairs out of your own pocket.
Likewise, if a tenant claims to have gotten injured while on your rental property, you may be legally liable to pay compensation, even if it wasn’t your fault. A public or legal liability cover is meant to cover you for injury, death or damage to a tenant on rental property.
2. Offer Short-Term Rentals
Also, suppose you let out a room or some part of your home for temporary accommodation or short-term tenants, like those listed through Airbnb. In that case, you can access short-term landlord insurance policies designed especially for your unique circumstances.
For instance, some policies cover when guest tenants break a formal lease or do not vacate when their stay is complete. In addition, some insurers offer a unique cover, where you only have to pay premiums on days when the property is rented.
Notably, short-term tenants are considered risky by some insurers. Therefore, you should inform your insurer if your investment property alternates between lying vacant and short-term tenants. They may ask you to compensate for the higher risk by paying an additional premium.
What Does Landlord Insurance Cover?
You can apply for landlord insurance coverage on any investment property, such as a unit, house, apartment or townhouse.
The events insured by a landlord insurance policy vary depending on the provider. However, here are some components that landlord insurance covers:
- Tenant-Related Cover: Includes cover for rent default, accidental damage/malicious damage by a tenant or their guest, loss of rental income from an insured event, and legal costs in case of settling disputes in court. It also includes public liability cover and other related liabilities of investment properties.
- Building Cover: Covers damage caused by insured events such as natural disasters like floods, earthquakes, storm damage, lightning, fires, and falling trees. It also covers disasters like impacts and explosions, burst water pipe vehicle collisions, acts of vandalism on your rental property and legal liability.
- Contents Cover: To provide cover for damage to the contents of your investment property, for example, furniture, fixtures, carpet and other contents of the house—the cover safeguards against natural calamities and other insured events.
Many policies also include an excess (the amount you’ll have to pay if you claim on your policy).
Some insurers also give the option to choose your excess or safeguard the sum insured by you at an additional cost. This provides you with more money, up to a specific limit, in case your sum insured is insufficient to cover the cost of rebuilding.
Furthermore, if there are costly items you want to insure, you may have to discuss them with your insurer and have them separately added to your insurance policy. However, any extra or optional covers you apply for increase your monthly premiums.
What Does Landlord Insurance Not Cover?
Landlord insurance does not cover all kinds of damages to a rental property. Standard exclusions include:
- General wear and tear.
- Damage caused by pests and rodents.
- Parts of the property not rented out.
Likewise, a landlord insurance claim does not hold if the landlord has breached the formal lease agreement with the tenants.
What’s the Difference Between Landlord Insurance and Building Insurance?
Building insurance is also known as home or property insurance. Home and landlord insurance mainly cover you in case of an insured event, such as a flood, fire, earthquake, or storm. But they are not the same.
Moreover, your building insurance may not cover your rental property where you and you receive rent as a landlord.
If you’re unsure about the extent of coverage on your building insurance, you should read the product disclosure statement for a clear understanding. Alternatively, it’s advisable to contact your insurer for any additional queries.
Home Insurance vs Landlord Insurance
Home insurance typically protects homeowners in case of financial loss caused due to damage to their property. The different home insurance products include home insurance, contents cover and combined home and contents cover.
On the other hand, a landlord insurance cover includes many similar risks as home and contents insurance. In addition, it also covers risks that are unique to a rental property. For example:
- Loss of rent
- Costs of legal action related to renting default and evictions
- Cost of repairs due to vandalism
- Accidental glass breakage
- Other unexpected damage caused by tenants
As an investor, landlord insurance policies are beneficial when it comes to maintaining a consistent return on investment for your investment property.
How Much for Landlord Insurance?
The average price range of landlord insurance policies is between $1,000 - $2,000 in the different states. However, in North Queensland, the figures hover above $3,000 and sometimes even $4,500 annually.
When you apply for a landlord insurance policy, your insurer will consider various factors to determine the premium amount on your policy. The key factors include:
- Investment Property Type: Typically with standard landlord insurance policies, units or townhouses are less expensive to cover than houses.
- Price of Rent: Landlord insurance is specifically designed to cover you for an insured event such as loss of rent. It means that the higher the price your charge tenants on your rental property, the more will be the cost of your premium.
- Property Location: If your rental property is situated in an area known for extreme weather events such as storms, floods and high crime rates, it will push your premium cost further.
- Level of Cover and Excess: If you opt for a wider cover, premiums will likely increase proportionately. Nevertheless, if you have an excess, it could offset your premium. In this case, the higher the excess, the cheaper your premiums will be.
- Replacement Cost of Contents: Depending on the replacement cost of items, such as curtains and carpets in the landlord’s contents cover, your insurance costs will increase or decrease.
- Claims History: If you have regularly made claims on your landlord insurance policy, you may be considered a higher risk and therefore charged a higher premium.
- Property Structure: The property’s age and type of construction materials used in the building will affect insurance costs. For example, constructions using sturdier materials are often cheaper to insure.
- Security Features: If your property has security features like an alarm, cameras or secure locks, you may get a discount on your premium.
Is Landlord Insurance Compulsory?
There are bound to be additional risks when renting your home to unknown tenants. Although landlord insurance isn’t a legal requirement for landlords in Australia, it has become an industry best practice and an important risk management strategy.
Is Landlord Insurance Tax Deductible?
According to the Australian Taxation Office (ATO), you can claim a deduction for expenses, including insurance (loss of rent, public liability, building, and contents), only if you incur them yourself. Therefore, your tenant should not pay them.
You may be entitled to claim an immediate deduction for this expense in the income year.
Is Landlord Insurance Worth it?
Depending on your circumstances, you may not want to take landlord insurance. Here are some essential facts to help you decide:
- Extreme Weather Events: According to a report published by the Insurance Council of Australia, extreme weather events over the past year until September 2022 cost Australian households an average of $1,532. This figure is expected to increase in future.
- Tenant-related Events: According to recent trade reports, loss of rent comprised more than half of landlord insurance claims received from landlords. Of this, 80% of the claims for accidental and malicious damage also claimed for loss of rent.
Most landlords shy away from landlord insurance premiums because of the costs. However, since landlord insurance is tax-deductible, the net cost isn’t as high as you think. More importantly, their protection will likely be well worth the price tag. Nonetheless, the decision ultimately has to come from you.
What Should I Look For When Buying Landlord Insurance?
Before you purchase a landlord insurance policy, you must understand what your coverage should include. Here are some handy hints:
- Cost of Premium: You will want to ensure that the premium won’t break the bank but offers enough coverage to protect your investment. Compare policies and pricing from a few different insurers to see which provides the best value for money.
- Policy Inclusions: As a landlord, you must decide on the type of coverage you need for your property. Choose a policy that adequately covers the essentials, such as loss of rent, property damage, and liability.
- Policy Exclusions: Ask about exclusions in the policy, such as damages by pets and other animals. This helps you know know what’s not covered. Also, read the product disclosure statement and Target Market Determination (TMD) to understand the policy well.
- Discounts Some insurers offer discounts for taking out multiple policies or if you have a security system installed at your rental property. It’s worth inquiring about any potential discounts to help lower the cost of your premium.
- Excess: A lower excess usually means a higher premium, so it’s important to find the right balance. At the same time, you don’t want your excess to be so high that you can’t afford to pay for it.
How Joust Can Help Future Landlords
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The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.