Is the cost of Insurance a necessary Evil

Posted on Saturday, January 10 2015

Many property related expenses are increasing to the extent that investors are questioning whether property investing, in times of minimal capital gains, is really a viable option.

Take insurance. Comparing our policies in the last 7 years with an excellent landlords policy on, for instance, a pair of semi detached, two bedroom flats, the premiums have increased from $433.13 in 2003 to $853.81 in 2010 – that’s a 97% increase! A four bedroom house had a premium of $457.82 in 2003 which has increased to $619.54 in 2010 – a 35% increase. A three bedroom house $505.24 in 2003 to $632.06 in 2010 – a 26% increase. The rest of the portfolio premiums tell a similar story. None of these have had improvements that would affect the policy. They are all rented and have the same cover.

Some investors, especially with large portfolios have been considering whether to self insure or not. Some believe the savings in premiums across a portfolio, outweighs the risk of not being insured. I suspect if those that self insure live in Christchurch, the decision would have been deeply regretted and if in other parts of the country, those investors will be looking at insurance options all over again, in fact many are revisiting their options whether currently covered or not.

There are costs that repeat themselves, which a good landlords policy should cover:

Glass cover with no excess
Gradual damage (where, for instance a leak in the wall or under the floor causes unseen damage over time to joists, studs etc)
Drain clearing and repairing (e.g. roots blocking the sewer)

These are costs that can occur and probably will during the life of a rental property. It is worth at least checking if your policy covers you for these items and if not, how much more would a premium cost with that level of cover (without compromising other benefits of the insurance package). Replacement cover is also the ideal and while some policies will provide replacement cover for your own home that you live in, if the same property became a rental then that cover may not be available.

There are other aspects of cover specifically for rental properties such as intentional damage, landlords chattels, rental income while the property is uninhabitable, p labs etc etc. It is worth weighing up the risks and benefits. For instance the risk of intentional damage can be minimised with a good tenant application and checking procedure, however a leaking pipe joint may be a little harder to plan against. Compare the policies before insuring and periodically review your cover. A policy holder will also have obligations such as advising the insurance company if the property is empty for longer than a specific period of time and performing inspections every so many months. Contact your insurance company or broker for more information.

Tania and Kyle Elmer
Mana Property Management Ltd

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Expert's Bio

Tania & Kyle Elmer

Tania & Kyle Elmer are active investors with a large portfolio of properties in Dunedin and Central Otago and mentor investors in the techniques used to grow wealth through property investing. Kyle and Tania are Co-directors of the Leading Property Mangers of New Zealand (LPMNZ). Kyle is a past president of the Otago Property Investors Association (OPIA). They founded Mana Property Management Ltd to provide specialist management services to Discerning Landlords dealing in the quality end of the market. | Find Kyle on Google+

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