The costs of being a landlord are ever-increasing and it’s tempting to shave a few pounds off the bottom line whenever you can. But is skipping rent guarantee insurance the way to do it? It certainly comes with its risks.
Rent guarantee insurance offers financial protection to landlords in case the worst happens. But how likely is it? Are there cheaper options? And what exactly is the financial protection you get from having insurance?
In this article, we’ll explain what rent guarantee insurance is, what it covers, and the pros and cons of investing to help you decide whether it’s an essential spend for you.
What is rent guarantee insurance and what does it cover?
Rent guarantee insurance protects landlords in the event a tenant doesn’t pay rent. When your tenant defaults on payments, the insurance allows you to reclaim the costs of the unpaid rent.
In many cases, insurance also covers the costs of any legal fees associated with common landlord claims. For example, when evicting them from your property or recuperating the costs of severe damage they caused.
Usually, you can expect cover for up to 24 months of unpaid rent, but the specifics depend on the insurance policy. With the UK eviction process generally taking up to 6 months, this covers most landlords from income loss until the tenant is evicted.
Rent guarantee insurance can cover:
- A maximum of 24 months of unpaid rent
- Rent coverage for up to 3 months after a successful eviction
- Legal fees for undisputed and unpaid rent
- Legal fees for tenant eviction
- Legal fees associated with recuperating costs for damage caused by the tenant
- Legal fees to evict squatters or any unauthorised person living at the address
- Information, advice and representation for any related tenancy disputes
- Evicting the tenant(s)
- Recuperating costs for property damage
- Evicting unauthorised persons living at the address
- Vetting tenants :
Inspecting the tenant’s financial background with a fine-tooth comb can certainly reduce the risks of defaulted payments. Sometimes, this can be enough to justify not investing in rent guarantee insurance.
Yet in today’s climate, anything can happen. It isn’t necessary “bad” tenants who refuse to pay their rent for months. Even the best of tenants can end up in an unexpectedly poor financial situation and unable to pay rent.
- Requiring a guarantor:
Requiring your tenant to list a named guarantor is another way to prevent income loss in the event a tenant can’t pay. Guarantors must pay the tenants’ rent when the tenant can’t, so the landlord always has their rent payments covered.
This can be easier to manage compared to submitting an insurance claim. Yet, just like the tenant, the guarantor may be unable to pay the rent themselves, especially if the tenant defaults for long periods.
It’s also worth remembering that requiring a guarantor on the tenancy agreement can deter some tenants from renting the property in the first place, too. Not everyone who rents has someone in their life willing to be a guarantor.
- You don’t have a signed tenancy agreement to hand
- You don’t have evidence that the tenant passed tenant referencing
Is it mandatory?
No, rent guarantee insurance is certainly not mandatory for landlords. Unlike other insurance, it’s optional and landlords can choose whether or not to invest in it.
Yet for some landlords, rent guarantee insurance is considered essential. Without protection, landlords are left open to risk – and it’s a risk that isn’t worth taking for most.
Pros of rent guarantee insurance
Most importantly, rent guarantee insurance offers financial security and peace of mind. But there are other benefits, too.
Guarantees rent every month
As the name suggests, rent guarantee insurance guarantees the landlord their rent payments every month.
Once you make a claim for missed rent in line with your policy and it’s been authorised, the costs associated with the unpaid rent can be reclaimed.
Covers costly legal fees
Evicting a tenant isn’t always easy. Numerous measures are rightly in place to protect tenants from unfair evictions. Yet this can make it difficult (and expensive) for landlords when they’re well within their rights to end a tenancy.
Most rent guarantee insurance policies fund the legal fees associated with evicting a tenant, all the while covering the costs of the unpaid rent.
Standard legal fees covered by rent guarantee insurance can include:
Offers easy access to advice and representation
Most rent guarantee insurances don’t just offer legal representation, they’re also on hand to provide information and advice when you need it most.
If a sticky situation starts brewing with your tenant, an insurance company may offer access to a free helpline to talk things through.
Without submitting a claim, you can get advice on your options and ways to mitigate further issues. Or you can check what you’re covered for should things escalate.
Provides peace of mind
Most landlords agree that rent guarantee insurance is good to have for financial reasons, like keeping on top of buy-to-let mortgages and letting agent fees. Yet almost all say the reason they invest is for the peace of mind that comes with it.
With income protection, landlords don’t have to sweat the risks of tenant issues or unexpected notices – or deal with the financial fallout. If the worst happens, you know it isn’t you who’s paying for it when you have insurance.
Offers tax relief
Like other landlord expenses, the cost of insurance premiums (like rent guarantee) can be deducted from rental income, lowering the taxes landlords pay on property income.
While the effects may be small for single property owners, it can make the investment even more worthwhile knowing you’ll save a proportion of what you pay.
Cons of rent guarantee insurance
The cons associated with getting rent guarantee insurance are, first and foremost, financially related. Insurance costs money, which decreases profits for landlords.
There’s always the risk that insurance won’t cover everything a landlord has to pay, too. Hidden deep in the clauses may be loopholes that mean you aren’t protected.
But the most pressing cons relate to how there are other ways to mitigate the risks of unpaid rent, meaning your investment in insurance isn’t always that worthwhile.
Let’s take a look at the main cons of rent guarantee insurance.
It’s another landlord expense
Firstly, of course, rent guarantee insurance costs money, which can decrease the profit margins for landlords. Even though the costs may be on the smaller side, especially when compared to the costs you can lose out on, it all adds up.
Landlords with multiple properties can feel the hit the most, with insurance premiums racking up into the thousands. Especially in areas with low rent defaults, it can feel like a cost that genuinely isn’t worth it.
Hidden clauses can prevent protection
When investing in rent guarantee insurance, it’s important to do your research about what specifically it covers. If you want protection for a certain thing, the insurance might not cover you for it – unless you’ve taken certain steps beforehand.
For example, to get the legal fees covered by your insurance when claiming against a tenant for property damage, the items damaged must be listed in the original, signed tenancy agreement.
There may also be limits on how much the insurance company will pay. For example, they may only fund up to a certain amount each month the tenant skips payments, which may not be the total amount of rent missed.
Check all hidden clauses to ensure you’ve got the protection you need. If the insurance doesn’t cover you for what you’re after, it may not be worth investing.
Keep proper records of tenancy agreements and changes to tenancies for insurance purposes, too. Using a rental management software to track signatures and securely store documentation ensures you always have what you need, when you need it.
There are other ways to mitigate risks of unpaid rent
You don’t always need to rely on insurance to protect your income. You can mitigate the risks of tenants not paying rent by vetting tenants or requiring a guarantor. Yet these options aren’t foolproof and there are some risks.
FAQs
What’s the difference between rent guarantee insurance and physical guarantee?
A physical guarantee is very different from rent guarantee insurance, although both can protect landlords if a tenant stops paying rent or leaves without notice.
The difference is that a physical guarantee means requiring your tenant to name someone (a guarantor) who must pay the rent if the tenant defaults on payments. In most cases, it’s a family member or friend.
Instead of buying insurance and being insured by a company, the landlord enters into a guarantor agreement with the person in question.
While this offers protection, it still doesn’t cover all risks involved in unpaid rent. If the guarantor doesn’t pay, you still have to fund legal proceedings to recuperate costs and/or evict the tenant. Plus fund the costs of voids while you fill the vacancy with another tenant.
With a rental management software, landlords can access comprehensive tenancy documents, including a pre-populated guarantor agreement, and easily track payments.
When won’t rent guarantee insurance pay out?
Rent guarantee insurance won’t pay out for many different reasons, depending on the limitations of the policy.
Yet the most common reason insurance won’t pay out is if:
Keeping proper records of signed agreements is crucial for landlords with insurance. A rental management software enables landlords (both single and multi) to maintain proper records with ease – alongside helping to manage repair requests, payment reminders, inventories, and even financial accounts.
Is rent guarantee insurance worth it? Things to remember
Whether rent guarantee insurance is worth it depends on who you talk to. For some, it’s an essential expense that no landlord should scrimp on. But for others, rent guarantee insurance is simply a nice to have.
The benefits of the insurance are clear. While it costs money initially, it can save thousands later down the line and offer peace of mind that your assets are protected in the event things go wrong. Ultimately, whether it’s worth it for you depends on your bottom line and how much risk you can afford to take with your property portfolio.
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