Different investment types have different levels of risk and return. Investment properties carry their own unique risks when you consider the potential for property damage and tenant-related issues. Perhaps the biggest risk is that a tenant suddenly stops paying rent, halting your cash flow in its tracks.
A tenancy agreement will outline what happens once a tenant has stopped paying rent and the processes that must be followed. But there is a way to ensure this doesn’t have a detrimental effect on your cash flow: landlord insurance.
In this article, we will cover:
- What is landlord insurance
- Difference between loss of rent and rent default
- Should you have loss of rent or rent default cover?
What is landlord insurance?
Landlord insurance protects investment properties. While each policy differs, landlord insurance generally covers events like natural disaster, legal liability, theft, damage (both tenant and non-tenant related), legal expenses, loss of rental income and rent default.
On the surface, ‘loss of rental income’ and ‘rent default’ appear to be the same thing. But in reality, they’re not and this assumption could lead to underinsurance. Sometimes a policy may include one and not the other, so it’s essential to always read the fine print.
Difference between loss of rent and rent default
It’s important to understand the differences between loss of rent and rent default. Failing to do so could mean you’re out of pocket if your tenant stops paying rent.
Policies can differ greatly, but here are the essentials to know about both.
Loss of rent covers for the loss of rental income if your investment property is deemed partially or fully uninhabitable due to an insured event.
Loss of rent cover may be required after natural events such as flooding or fire. This could include damage not directly made to the property, for example street damage following a natural disaster that causes inaccessibility to the property.
Depending on the policy, loss of rent cover could be paid up until the property becomes habitable again, or up to the policy limit (e.g. 52 weeks).
Rent default covers you if a tenant stops paying rent. This often happens due to unforeseen circumstances on the tenant’s behalf such as reduced income, losing a job, illness or even death.
Even with the most comprehensive tenant vetting process in the search, you can’t predict the future and you may be in the situation where the tenant stops paying rent. Rent default cover can provide that peace of mind you need for these unknowns.
Should you have loss of rent or rent default cover?
The ideal situation is to be covered with both. Doing so means you will be covered for any unexpected situations that could cause your cash flow to cease – whether it be tenant-induced or macro factors.
You can make the process of finding the best-suited insurance policy easy with an insurance broker. They will discuss the coverage you want and find options you can choose from.
BMT Insurance is an expert in the area and works with reputable insurance providers to find a suitable insurance policy for you. In the event of a claim, the team can also manage the process end-to-end. To learn more about BMT Insurance and how they can help you cover your investment, call the team on 1300 268 467 or visit their website.