18-02-2008
Re-touching the void
Gee Sahota suggests that getting the right type of landlord’s insurance could help you avoid months of lost rental income
As a buy-to-let investor, one of the worst problems you can experience financially is rental void periods. Typically this happens when you your property is vacant of tenants and you are not receiving rental income. However, it can also be attributed to more serious causes such as a tenant defaulting on payments, or even worse, the property becoming uninhabitable due to fire damage or flooding. Issues such as these can take months to resolve with the undesirable outcome of lost income.
Rental voids are a real blow for the buy-to-let investor, but if you are prepared you can cover such eventualities by investing in the appropriate landlord insurance.
Taking out a wider level of cover than just buildings and contents insurance is becoming increasingly vital for every landlord in the UK, whether you only have one buy-to-let investment or manage a portfolio of properties. Although landlord insurance is not required by law, it would be foolish not to take it out, especially in light of the fact that tenants can easily default on their contract and there is no way of predicting natural disasters.
Without the right insurance your finances could be in serious trouble if things go wrong. The two insurance covers suitable for rental income are Tenant Default insurance and Loss of Rent insurance. These can usually be added on to a single policy which would also include buildings and contents cover if needed.
Tenancy agreements
Aside from the need to buy insurance, it’s imperative to draft a good tenancy agreement between you and your tenant. Without it, if a tenant should fail to pay the rent or violate any of the other tenant obligations, a landlord may not be able to recover possession of the property from the tenant. With a standard shorthold tenancy agreement, a landlord will in most cases be able to take the defaulting tenant through the statutory motions to regain their property back.
However, it is a lengthy process that can take months to resolve, and if adequate measures aren’t taken it equates to months of lost income. In view of the length of the procedure for recovery of possession, it is crucial that landlords take action and buy insurance to cover this eventuality. Most insurance policies will include legal expenses too, so if you do need to invoke statutory procedures to push your tenants out and get your property back, not only will you receive the rental income, but you’ll be covered for the legal fees too.
Unfortunately, this type of insurance is an area that is often overlooked when landlords decide to rent out a property. The risks associated with rental properties are significantly different to owner occupied properties therefore you are well advised to use an insurer who specialises in this type of property insurance.
Getting the right cover
When looking for the right insurance, it is important to note that some insurers will not permit cover if you intend to place a certain type of tenant in your property i.e. student, multiple single sharers and those receiving state benefits.
In the event of property damage you can find insurance that will cover a multiple of situations from fires, smoke, flooding to theft, lightening and even aircraft damage. Some policies will give the option of malicious damage caused by the tenants - a valuable option for buy to let properties. You should always check the policy for exclusions to be aware of the extent of cover you are buying.
In the event that there is loss of rent following damage from one of many hazards similar to those described above, most policies will compensate your loss as long as it is specified in your policy documents. If the property is uninhabitable, this usually equates to 20% of the sum insured, although some policies may offer you up to 30%.
In 2001, there were over 150,000 possession hearings in relation to 2.7m rentals that took place. The risk may not seem that significant but if you need to receive your rent on a regular and guaranteed basis this insurance should be a high priority. Simply business allows you to compare and buy the right insurance cover for your buy-to-let property.
Rental voids are a real Achilles heel for the buy-to-let investor, which often cannot be avoided, however precautionary steps should be taken out to avoid loss of rent due to tenant defaults or serious damage to the property. In some cases, if a tenant is struggling to pay, it is good practice to show understanding and offer a payment holiday. Even though you’ll have reduced rent initially, some rent is better than no rent at all, saving you a lot of unnecessary headache.
