The cost of not having landlord insurance can no doubt be devastating.
I once had ideal tenants in one of my investment properties.
They were a couple who paid rent on time and never caused me any dramas at all.
Then, one day, that situation was flipped on its head when they broke up.
Not only did their relationship break down, but so were many walls and windows in the property.
The damage bill was more than $8,000.
At the time, it was early in my investing journey, and if I’d had to fund those repairs myself without being reimbursed, I probably would have been in dire financial straits.
The property may have remained empty for a long period of time while I saved the money to pay for the repairs, which would have been doubly hard because I would have had to make the mortgage repayments as well.
Thankfully, that scenario never came to pass because I had insurance, specifically a comprehensive landlord insurance policy.
The policy not only covered me for malicious damage by a tenant, it also had provisions for rental loss because of damage such as what happened in this instance.
Not only that, rather than lying awake at night fretting about how I was going to pay and manage the repairs, my property manager looked after the entire process for me.
Before I knew it, tradesmen were onsite undertaking the necessary repairs, then the property manager promptly found new tenants.
Not long after that, I was reimbursed for anything I had to pay for out of my own pocket that covered under the policy after my claim was lodged with the insurer.
Investment as business
I’ve always found it a little odd than some investors don’t treat their portfolios as a business.
In essence, property investment is a vehicle to create wealth over time – just like establishing and running a business.
Of course, business owners understand the importance of insurances to protect their asset, which is their business, as well as their income streams.
Novice investors, though, often don’t think that an insurance policy is worth the expense, perhaps because they have over-leveraged to start off with.
Depending on which state the property is in, as well as what type of dwelling, etc., a landlord insurance policy will usually cost you less than $1,000 a year – and that cost is a tax deduction as well.
Inexperienced investors will have no hesitation in insuring their own homes or their cars but become penny pinchers when it comes to their investment properties.
As well as malicious damage and rental loss, most landlord insurance policies provide cover for rental default and theft.
Say a tenant’s circumstances change, such as they unexpectedly get made redundant, and they can no longer afford the rent.
Then, possibly embarrassed by their situation, they pack up their belongings and leave in the dead of night.
In bad situations, they may even take some white goods with them to help “get back on their feet” so to speak.
If this was to happen to a landlord without appropriate insurance, it would likely create an immediate cash flow problem that may be difficult to recover from.
However, having cover for rental loss through abandonment of a property by a tenant as well as theft of some of your chattels means that investors don’t need to worry about how to financially manage until a new tenant is found.
Of course, these scenarios are not common.
Most tenants treat investment properties as their homes and ideally stay for the long-term – especially in properties that are in above average condition and in a superior location as well.
That said, just because an investor is more likely to secure a good tenant than a bad one, that doesn’t mean they shouldn’t be prepared for every eventuality.
It really is a small price to pay for peace of mind if you ask me.