Both landlords and tenants need to consider taking out insurance and we strongly recommend all of our landlords cover themselves by taking out landlord insurance. Below we provide you with a few tips on what you need to consider when talking to insurance companies.
Even with the best tenants, the best property manager and the best landlords, damage can occur (and likely will at some point). Whether the damage is accidental or deliberate, Landlords should insure their rental property against any damage.
Note: Tenants can arrange their own insurance to protect their contents and to also cover liability for damage to the landlord’s property.
Put simply – if you are a landlord, make sure you have landlord insurance that covers your property, and that the cover is for a rental property. The Residential Tenancies Act 1986 (link) requires you to pay the premiums charged for that insurance.
You will want to check exactly what your policy covers. Some insurers cover issues to do with tenancy (for example, vacancy periods and damage by the tenant). Speak to a few companies so that you can compare the various options available to you.
It is also advisable to talk to your insurance company about their requirements for making claims. Some insurers will require you to prove you’ve completed a thorough tenancy selection process before honouring any damage claims.
Another consideration is the chattels that are listed in the tenancy agreement. You may also choose to insure them as part of your agreement. Any damage to these items won’t be covered by the tenant’s contents insurance.
There are many very good providers of landlord insurance in New Zealand. We have found AMI, AA and State to provide good customer service and a variety of comprehensive plans but of course we recommend you do your own research and talk to a few companies before making a final decision.
Using a realistic example, Paul Wilson from Your Investment Property magazine, provides an excellent example of how to calculate how much landlord insurance you need:
This is an example only but you will see some of the costs that need to be allowed for when estimating your level of landlord insurance cover.
You bought a property in 2000 at a cost of $215,000 (land value $95,000), the building is valued at $120,000.
- You take out building and contents insurance of $120,000
- You currently, in 2012, have the property rented at $1950 per month
- The property is currently valued at $435,000
- The building is valued at $85,000
During your ownership you have:
- reduced your building insurance because you know that the value is depreciating
- been able to claim depreciation because the building was only 2 years old when you bought
- been able to increase rent because of demand
- used the equity to purchase further investment properties.
You now have a fire at the property which does more than 50% damage to the building:
- you now have no rental income but still have to pay a mortgage
- the quotes and repairs are going to take 4 months to complete so you will lose at least $7,800 in rent, maybe more if it remains vacant after repair
- you have had quotes on replacement and it is going to cost $120,000 to replace the damaged area and repair the smoke damage, etc. to the rest of the building
- you have a bill for $20,000 for rubbish disposal
- the tenants are claiming for damage and relocation a cost of $12,000 because the fire was caused by faults in the wiring
- on top of this, some personal down time or costs should also be factored in
A quick calculation of these costs for the four months is:
$7200 mortgage repayments
$6280 loss of rent
$120,000 replacement costs
$20,000 rubbish removal
$12,000 claimed by tenant
$5,000 personal down time or costs
$170,480 total bill for restoring the property to a tenantable condition
At the end of the day you may have a building worth $100,000 but that is still a far cry from the $170,480 you have to outlay to have the house rentable again.
This means that you will be out of pocket by $70,480 in value of the property, but if you only had $85,000 insurance to start with you will actually have to find $85,480 for the total repair.
A pretty compelling case for being fully insured!
To discuss further give Chris Whaley, the goodGround Property Manager a call on 022 3554 221.