Protection against Loss

So far, it all sounds great, doesn’t it?  However, if you think that owning an investment property is going to be completely trouble free, think again!  There are a few areas that may put you at risk, and that’s okay, as long as you protect yourself against those risks.

In the first instance, we emphasise that we do everything possible to minimise your risk.  Part of that is in the process of obtaining suitable tenants for your investment property.  We endeavour to secure tenants with 12 month leases.  At the end of 11 months, we contact the tenant, and we ask: ‘What do you want to do? Do you want to stay, or do you want to go?’ If they decide to stay, we secure them on another 12 month lease, with a rental increase if the rent has gone up.  If they decide to go, that’s okay, because we ask the tenants if we can show people though the property during that final month of the tenancy.  We also endeavour to secure tenants that have been in one job for three years, one place of residence for three years and have an income three times the rent.  So, think about it, if you have a tenant who has been in one job for three years, and one place of residence for three years, that shows stability.  And, if they have an income three times the rent, that shows affordability.   We call that the “3×3 criteria”.

So let’s take a look at some of the potential problems, as well as how you can be protected against them.

Mary has been a tenant for eight weeks.  She tells you that she is home sick.  When we qualified her, she met the 3 x 3 criteria - she was a nurse for eight years, lived in the same house for five years and her and her boyfriend have an income more than three times the rent.  But… She is homesick.  She misses her mother.  We tell her “Mary, you signed a twelve month lease.  You are liable for the rent until the end of that lease or until we find another tenant”.  She says “I know, I know”.  Anyway, you go to see her two days later.  She has gone.  She did a midnight flip!  Mary was not a nasty person.  She just wanted to go home.  But, as she was in such a panic to get out, her seven year old daughter spilt a bottle of red cordial all over the carpet and the removalist accidentally punched a few holes in the walls.  She left about $1200 worth of damage to the property, and she is three weeks behind in her rent.

We step in and repair the walls and carpet.  The total loss (including the unpaid rent) is $1800.  The bond covers only $800 of it.  But, the insurance company will step in and give you $820 of the remaining $1000 (assuming an excess of $180 on the policy).  So, there is no need to worry.  Even the $180 comes from the funding account.

Here are some more examples

1. Mary calls Bill while he is at the pub. “Bill, I am throwing a BBQ. Invite Jack.” Bill yells across the bar “Hey, BBQ at my place”. Fifty people turn up and trash the place. In this case, Bill actually invited them. Most insurance policies state very clearly that if you invite people into your home and they damage the property, the insurance company will not pay. Our insurance company will! We will kick out the tenants, and the insurer will repair the damage and pay the loss of rent until we find another tenant. The only cost - the $180 excess. Again, paid from the funding account.
2. Mary comes home and finds Bill on the lounge with another woman. Mary is not happy. She kicks him out, throws his clothes on the front lawn, changes the locks, won’t talk to us, won’t talk to you, won’t pay the rent and definitely won’t talk to Bill. Mary goes to court and pleads “hardship”. “Look what this man has done to me. My seven year old daughter and I have nowhere to go… and I have no money!” In this case, it may take us three months to get her out. The insurance company will pay for all the loss of rent until a new tenant moves in, and all it costs is … $180! And, yes, the funding account pays it.
3.  Absolute worst case scenario… They burn the place down. Touch wood, it has never happened. But, it could. In that case, the insurance company removes the debris, rebuilds the property to the way it was before, and pays the loss of rent as well. Again, the only cost is the $180 excess.

Many people do not buy investment property because of the horror stories they have heard about “tenants from hell”.  But, the fact is, it doesn’t really matter what the tenants do.  There is no need to stress, because you are insured!