If you’ve scrimped and saved in the hopes of achieving financial security through an investment property it makes sense to insure such a valuable asset.

It’s no secret that Australians are among the most real-estate obsessed people in the world.

Around two million Australians own an investment property. A disproportionate number of these people have their own business. They are typically hoping to set themselves up financially through what they see as a safe, easy to understand investment (and perhaps reduce their tax through negative gearing).

Buying property might be less complicated than attempting to play the stock market, but all investments have the potential to end in tears. Ian Mabbutt, the Head of Personal Lines at Steadfast Underwriting Agencies, explains why it’s a good idea for investment property owners to make sure they have the right landlord insurance.

What is landlord insurance?

“Landlord insurance is the home and contents insurance you take out on a property you own but rent out rather than live in,” Ian says. “It’s a policy that will cover you for most things – public liability, storm damage, fire, theft and so on. That noted, these policies don’t cover wear and tear. Also, if owners want to be covered for loss of rental income they need to choose – and pay extra for – the rent-cover option. Loss of rental income is the biggest issue owners face but rent cover isn’t standard on landlord insurance policies.”

“For some specific, small issues the rental bond system works well. But an investment property is a significant asset so it’s sensible to insure it adequately”

Why do I need insurance when there is a rental bond I can claim on?

“I was once involved in a claim where a massive gum tree toppled over, crushed the tenant’s car then split a house in two,” Ian says. “Nobody was injured but the repair bill was over $400,000. For some specific, small issues the rental bond system works well. But an investment property is a significant asset so it’s sensible to insure it adequately.”

Does landlord insurance cover me if I rent my investment property out on Airbnb?

Only if your insurer signs off on it first, Ian warns.

“Short-term renting isn’t a new phenomenon,” Ian observes. “People have been letting out their weekenders on the coast for many years. But properties that alternate between being vacant and being used by short-term renters are a riskier proposition for insurers. If someone wants to let out their property through Airbnb, they need to check it’s OK with their insurer first. Their insurer may then ask them to pay a higher premium to compensate for the higher risk. If your existing insurer won’t provide insurance in these circumstances, there are plenty of others who will.”

How is my premium calculated?

“Contrary to what some people believe, rising or falling property prices don’t have much impact on premiums,” Ian says. “The sale price of a property isn’t relevant to insurers. They focus on how much it will cost to repair or rebuild it.”

Your landlord insurance premium will largely be determined by the likelihood of you making a claim and the potential expense of that claim.

“Landlord insurance works much like home and contents insurance,” Ian says. “If you have a property in a cyclone area, you can expect that to be factored into your premiums. If that property is, say, made of timber rather than bricks, then the insurer will bump up the premium further.”

But two factors distinguish insurance for a property you rent out as opposed to one you live in.

“Insurers have comprehensive data on the rates of rental default across Australia,” Ian says. “The more common rental default is in the neighbourhood your investment property is located in, the higher your premium is likely to be.”

Insurers also get nervous about vacant investment properties and ones that are rented to unscreened tenants.

“Most policies will have a limit, usually 60 days, on how long the property can remain unoccupied,” Ian says. “Insurers prefer for investors to use a real-estate agent. Insurers believe this makes it more likely the property will be rented out to a quality tenant who will look after it.

I’m busy and I’m not an insurance expert. How do I make sure I’ve got the right cover?

I’d recommend consulting with a Steadfast insurance broker. They’ll take the time to determine your particular needs. Then they can go to the market to check what policies are available and provide advice about which are the best ones.

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