Monday, 16 July 2012

Investing in Real Estate: What Insurance should you have?

This post forms part of my Investing in Real Estate series which attempts to cover every facet of owning an investment property, from researching to negotiating, to financing and renovating your property and a variety of other topics.  This post will cover insuring your property and the types of insurance that you should have as a real estate investor.

There are three basic types of real estate that every investor should have for their investment property
  • Home insurance:  This is for the building itself
  • Contents insurance: Although you may not have any contents in the house you may be surprised what counts as 'contents'
  • Landlord protection insurance:  Insurance against the possibility of damage and other financial woes your tenants may cause your property
Home Insurance

Most people would never question buying home insurance for their investment property.  They insure their own houses, cars etc so it just makes sense to insure your investment property as well.  When insuring your property (and this is true for your own home as well) you should look out for:
  • Are you adequately covered?  What would it actually cost to repair your house - make sure that you aren't under insured.  I think it's safer to be a little on the high side of insurance cover.  Home insurance premiums are generally pretty cheap so adding a bit more doesn't do any harm.
  • "New for old replacement" - This looks particularly attractive to some people who cannot work out how much they should insure their house for.  It promises to replace all the damaged fittings with brand new products.  Although this sounds amazing there is a sting in the tail - it says nothing about quality.  There is every possibility that the quality will be the same but I'm not willing to risk it so I go for fixed cover packages.
  • Check for specific exclusions:  Often there are specific exclusions to cover which you wont see unless you read the fine print of an amazingly dense product disclosure statement.  A common exclusion is for floods and flood damage.  Australians would probably see the problem with this straight away given recent events (we have had particularly bad flooding recently across the country in areas that have not had an issue in the past) so just because it hasn't happened before doesn't mean it cant happen.
Contents insurance

Most investors try and save a bit of money by not having contents insurance.  They say that since they don't have contents in the property and the tenants should be taking out their own contents insurance that this is an unnecessary insurance cover.  However there are things which you consider part of the house which count as contents
  • Carpets for example are typically classified as 'contents' and not part of the house.  It is a significant cost to bear if you have to replace these yourself when you thought the insurance would cover them
  • Electrical products (included fitted products) such as light shades, dishwashers etc also count as contents
  • Have a look at home insurance exclusions and you should be able to see what you need to cover with contents insurance

You do not need to go overboard with contents cover - just estimate how much it would cost to replace all these sort of items. 

Landlord's protection insurance

This is a type of protection specifically designed for landlords.  It provides protection in the event of:
  • Intentional damage to your property by tenants (this is not covered by your home insurance)
  • Tenants not paying rent
  • Costs of litigation against tenants regarding rent
  • Clean up costs not covered by your bond
Note that while it is essential that you have landlord's protection insurance, policies are not standardised in the way that home insurance policies are.  You need to look at:
  • Waiting periods:  Generally you need to wait for your bond to run out before you claim on insurance.  The time you need to wait differs though
  • Period of cover: Generally for things such as rent recovery there is a maximum recoverable amount which varies
  • Cover for damage:  This tends to vary between insurers as well
Each insurer is different so it is worth going through each policy in details.  The cost of landlord protection insurance is much lower than you may expect (and is reduced if you use an agent to manage your property).  I think it is absolutely essential for all investors to have this protection and saving a few dollars here is not what you want to be doing.

Next time...
My next post on investing in real estate will cover specialist landlord protection insurance companies versus general insurers.

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