What sort of risks are Property Investors exposed to when renting properties, how can risks be minimised and what insurances are there?
Being a property investor or landlord is not without risk and no matter what your personal circumstances are as a property investor some areas of risk you should consider are;
The property itself
The house should be insured for its full replacement value so that in the event of a major loss like a fire, earthquake, volcanic eruption or other similar event, the risk of having to find the money to properly rebuild your investment is transferred to an insurance company.
The replacement value you nominate should be adequate to cover the true cost of rebuilding, an allowance for a minimum of 2 years inflation, demolition costs and care to ensure you have full allowance for architect, engineers, building and resource consent costs. Losses affecting a part of the home are often more expensive to rebuild on a per square meter basis than a total loss situation where there is a blank canvas to work from, so replacement insurance not indemnity insurance ( or present value) is always recommended. For houses, two common ways of obtaining the “rebuild cost” are to either get a ‘Replacement Valuation”, or to do it yourself using a Cordell Calculation.
Ensure these are insured in addition to the house you are letting out. This could include blinds, light fittings, some floor coverings, appliances – such as stoves, dishwashers, refrigerators, washing machines and microwaves, etc.
Loss of rents
When the house is damaged and uninhabitable, your rental income is likely to stop. However the bills for rates, insurance, property management fees, water and any mortgage payments continue. Even if there is no mortgage you may be very reliant on a return on your investment for other needs. Make sure your insurance covers loss of rents from events that render your home/apartment/commercial premises uninhabitable.
Loss of rental income can also occur from other events such as; non-payment by a tenant as allowed under the tenancy agreement following prevention of access to the property or failure of public utilities, non-payment by the tenant following the tenant vacating the property without giving required notice or loss of rent following eviction due to non-payment. Whilst having Auckland Property Management Ltd manage your investment property these risks will be mitigated, events outside our control can occur, for example a tenant losses their job, their health deteriorates or their personal living circumstances change. Transferring these financial risks to an insurance company helps to secure the continuity of your rental income.
There are a number of areas of liability you should consider. Some of these are; liability as a landlord and / or as a property owner, for damage to the property of, or personal injury to; tenants and neighbouring property, tenant’s family and all guests and visitors (including contractors) to the property.
With the recent legislative changes there is a greater onus on property investors around the responsibilities of owning a rental property. Whilst engaging a qualified property manager will mitigate these risks, Statutory Liability insurance is always advised as a prudent safeguard when things go wrong. Statutory Liability insures against innocent breaches of numerous Government Acts such as Health and Safety. These policies invariably pay fines, reparation and legal defence costs. As insurance for “Health and Safety” fines is not permissible in New Zealand, the policies in this respect generally cover reparation and legal defence costs.
P.I.I.P (Property Investor’s Insurance Programme)
Auckland Property Management have partnered with Marsh and Vero Insurance to make available an exclusive package insurance package called P.I.I.P. to its Residential Property Investors. PIIP covers all the insurance areas mentioned above and does this in a manner that we believe is better than any alternative available and at a very competitive price.
Mortgage protection insurance
If meeting the mortgage commitments are reliant upon you working in addition to receiving the rental income, you should consider mortgage repayment insurance, so that in the event of illness, accident or death these payments can be met, or the loans repaid in full.
All insurance policies differ in the fine print and they all have different exclusions, conditions and excesses, so do not make the fatal mistake of comparing insurance on price alone. Check the policy to ensure it meets your needs.
If you need any assistance in this area, we suggest you contact either Gayleen Mackinnon or Peter van Baarle of Marsh Insurance Brokers for further information. Gayleen, Peter and the rest of the team at Marsh look after many of our property investors and have some special offers for Auckland Property Management’s clients.