Why rental insurance is an important part of owning a rental property

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Why rental insurance is an important part of owning a rental property

Property investment can bring great financial rewards, but having tenants live in your property is also very risky business. Rental insurance is an important part of owning a rental property because it safeguards you and your property manager against financial risks such as:

Property damage

From fires and floods to malicious damage and vandalism, there are many ways your property can be damaged unexpectedly. As the property owner, you are responsible for costs such as repainting, cleaning and replacing the carpets.

Public liability

If a tenant has a serious accident within a rental property, they may have grounds to make a negligence claim against the owner of the property.

Loss of rental income

The success of your investment depends significantly on your tenant paying their rent on time, every time. If they are suddenly unable to, rental insurance can prevent you from losing money.

Legal expenses

Rental insurance can eliminate the need to pursue outstanding money in court if your tenant defaults on their rent. You may also have legal expenses if you need to evict a tenant, and rental insurance can cover these too.

Even though there’s no legal requirement to have rental insurance, many property managers will insist on you having some level of coverage before they agree to take on your property. In fact, it’s now standard best practice in the real estate industry. A good rental insurance policy simply minimises risk and ultimately makes everyone’s job easier.

The perfect tenant’s circumstances can change

Throughout life, everyone will experience the unexpected – and your tenants are no exception. They may come with glowing references and appear financially secure on paper, but there is always a risk of your tenant’s life circumstances changing at any moment. Let’s face it, even the death of a tenant is a risk property investors must take into account. Unfortunately, this is one of the most common rental insurance claims.

Even the most ideal tenant has the potential to default on their rent or suddenly break their lease. Without rental insurance, you may need to pursue outstanding money in court, which is both stressful and time consuming for everyone involved.

Public liability protection

It’s also impossible to know how a current or prospective tenant will react if they injure themselves within your property. If they decide to make a claim against you for negligence, your rental insurance can protect you and cover their compensation.

A tenant may also wish to claim compensation for the disruption they experience from any ongoing repairs to the property.

Building insurance only covers the external building

You may think rental insurance isn’t necessary if you already have building insurance. However, this insurance does not cover loss of rent, or any damage to the contents of the property, such as curtains, carpets, blinds, light fittings and so on. In fact, your Owners Corporation building and public liability insurance only covers damage and accidents that occur on the outside of the building.

Rental insurance is designed specifically to cover you in the event of tenant-related risks that aren’t included under your building insurance.

Damage costs can be much higher than your bond

A standard rental bond is four weeks rent, and is intended to cover any damage that occurs during the tenancy. However, this is unlikely to cover the cost of damaged caused maliciously by the tenant, their guests or intruders, or the accumulated loss of rent when the tenant is evicted.

Malicious damage is motivated by malice, vindictiveness or spite, and can include things like holes kicked into doors and walls, slashed curtains and smashed windows. As the cost of repairing this kind of damage can be much higher than the bond amount, it would be naive for a property investor to consider their rental bond to be adequate risk protection.

You can’t control the weather

Queensland is particularly prone to weather disasters, and storms are a major cause of damage to property. Investing in rental insurance will not only save you time and money after severe storms and natural disasters, it also makes the repair process a lot less stressful for everyone involved.

Insurance is a tax deduction for property investors

As it protects your property, its assets and the income you receive from your tenants, rental insurance is one of the most important purchases a property investor can make. Insurance premiums also happen to be tax-deductible, so it really is a win-win for you, as well as your property manager and your tenants.

However, it’s crucial that property investors read the fine print to check that the level of coverage meets their needs. For example, some policies will only provide cover for fixed-term leases, but not when the lease is in the continuation period, so it’s really important to read the product disclosure statement thoroughly!

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