As a super fund trustee, your job, whether you like it or not, is to protect your fund’s assets in the same way a prudent person would look after another person’s money. So if your SMSF owns real estate then you’ll have to give some thought to landlord’s insurance and if you’ve borrowed to invest, it will most likely be a requirement of your lender.
As you, your relatives and your close business associates can’t rent residential premises owned by your super fund, you never really know how well your fund’s investment is being treated by its tenants.
Protecting your super fund’s real estate investment isn’t only about protecting the building structure from fire, water or storm damage and your contents from theft. Break-ins and vandalism can also result in a loss of value, or large repair bills.
Landlord’s insurance is quite similar to homeowner’s insurance but there are some important differences.
All of the recent claims experience and problems about home insurance applies to landlord’s insurance as well. (For example flood and storm damage.) Insurers go through good and bad patches in relation to their claims’ experience. Comments about poor claims treatment from 12 months ago on the Internet may no longer be valid.
Shop around every year
The landlord’s insurance market is very competitive and insurers are adjusting their policies all the time. Some offer discounts for multiple policies and some banks offer discounts if you have a mortgage, credit card, term deposit or bank account with them.
Because of the constant changes to policy terms and the cost of insurance, it’s not a good idea to assume that today’s best insurer will be top of the pops tomorrow. At the moment there are more than 20 insurers offering products.
It therefore seems good commonsense for an SMSF trustee to carefully shop around each year for the best deal. Ask the insurer how many complaints they have received and how many have been forwarded to their External Disputes Resolution Scheme.
A frequent mistake most property investors make about landlord’s insurance is to purchase on price only. Naturally you don’t want to over pay for this insurance, but you do need to make sure that all aspects of your fund’s property you want insured are covered by the insurance you purchase.
An important point to note – all the brokers I spoke to for this article seem to push specific product provided by one insurer. If you want to deal with a broker, make sure they have the ability to offer product from a range of insurers.
Rental losses
You also need to consider if you need to insure for the loss of rent. This might be particularly important if your super fund needs the rental income to pay fund expenses, pension payments or interest on a Limited Recourse Borrowing Arrangement.
In some ways, you’re at the mercy of your tenants. While you’ll have legal recourse for unpaid rent and accidental or deliberate damage, it may be hard to collect what your tenants owe you. If your tenants simply decide not to pay and abscond before you can reclaim the arrears, your super fund’s income may be significantly lower.
Many policies only provide insurance four weeks after a tenant leaves. This means it’s important to have a full month’s rental bond. Rental losses are a highly variable area of landlord’s insurance. Make sure you protect what your fund needs.
Property damage
Bad tenants who don’t keep property in good order may end up costing you a great deal in repairs. Tenants who make their own misguided alterations or deliberately vandalise fixtures can end up creating even more expense for you as the landlord.
If the property is furnished, or comes equipped with other items that can be taken away, theft or damage to the property’s contents may be an issue. Much of this expense may be covered by the tenants’ deposit, but if the costs are higher than the deposit amount, you may find yourself out by the difference.
Here are some items that should be included:
- Wall and floor coverings (typically wallpaper and carpet or tiles)
- Appliances
- Sewerage and drainage
- Wiring
- Pipes
- Gas and plumbing systems
- Pool, spa
- Carports and awnings.
Legal liability insurance is another important issue. You need protection if your tenant or a visitor to your property is injured and it can be proved it was your fault.
Building insurance needs to cover full or partial destruction of your property as well as loss of rent while the rebuilding or major repairs are being completed.
Important common terms used in landlord’s insurance
The following terms are some of the key issues you need to examine closely before purchasing landlord’s insurance, as it is these provisions that drive how good your insurance is.
- Accidental damage insurance
- Vandalism or malicious damage
- Damage to the contents
- Legal liability coverage
- Legal cover
- Rental default
Strata-titled property
Finally, here’s a short note about strata-titled property. The body corporate should be paying insurance that protects the property. However this insurance won’t cover the contents you might provide in your super fund’s property, for example, dishwashers, curtains, blinds, carpet and so on. If your super fund owns a strata-title property you should consider insuring against the damage or theft of these particular items (as well as the loss of any rental income for the reasons we discussed above). As an SMSF trustee you should consider getting “strata title protection” in case the body corporate is under-insured.
Important:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report
- Peter Switzer: Which is the bigger threat – North Korea or Wayne Swan? [1]
- Paul Rickard: The best bank loans for buying property through your SMSF [2]
- Penny Pryor: Clearance rates – the lull before the perfect storm [3]
- Andrew Nelson: Weekly broker report – Bluescope and Tabcorp upgraded to buy [4]