A middle-aged, well-dressed westerner drops by to view your flat. He immediately strikes you as an intelligent, well-mannered, and incredibly charming man. He makes you laugh with some witty jokes, and mentions he’s a psychologist at a nearby hospital who’s looking for a place closer to work. After some more chit chat, you finally shake his hand and reach a verbal agreement to rent your flat to him.
I’ve just described the perfect tenant right? Actually, I just described the fictional serial killer Hannibal Lecter to prove a point. It’s impossible to predict whether you’re renting to an honest tenant, or one from hell. So before you sign a tenant lease agreement, sign another document first – a landlord insurance policy.
Why Is Landlord Insurance Important?
Landlord insurance is a relatively new concept in Singapore. It was first offered in 2009 after a growing number of tenants absconded, defaulted on their rent, or violated the terms of their lease agreements. Many of these tenants were shafted by the global recession and lost their job, creating a domino effect that screwed landlords out of thousands due to:
- Loss of rental income due to absconding tenant(s)
- Loss of rental income due to rent default
- Loss of rental income due to lengthy repairs for property damage
- Damage to property exceeding security deposit amount
- Payment of legal fees for the eviction of tenant(s)
- Payment of fees for property agent to find new tenant(s)
Unfortunately, landing a bad tenant is similar to contracting some exotic tropical illness that saps your strength (financial in this case) month after month. By the time you finally “evict” the sickness from your body, you’ve lost about 30kg, which will take months of rehabilitation to get back to normal.
Protecting yourself from the unexpected is what getting an insurance policy is all about. As Alfred Chia, CEO of SingCapital, states:
“As a landlord, you have three remedies to dealing with a rental loss situations:
- Issue a writ of distress to seize the tenant’s goods to pay rent owed.
- Issue a writ of summons to sue the tenant for failure to pay rent or any other lease contract breach.
- Terminate the lease by exercising your power of forfeiture (if this right is expressed in the lease terms).
Carrying out any of these three actions isn’t free, as you’ll have to pay any legal costs. At this point, expect a drop in rental income as legal fees and upcoming mortgage payments begin to mount. If you’re not protected with the right insurance policy, then prepare to end up with empty pockets even before your tenant-related problems are solved.”
Landing a good tenant who’ll pay rent on time and adhere to the terms of the tenant contract isn’t as easy as you think. But if you want some tips on how to find someone who’s less likely to skip out on rent, read this.
Why Should I Buy It… and How Much Will I Pay?
Imagine having a tenant who hasn’t paid rent in 2 months and refuses to vacate your flat. You finally decide you’ve had enough and engage a lawyer to pursue legal action. By the time you evict his ass, you’ve had to eat the mortgage payments for 3 months (foregoing potential rent in the process), pay legal fees, and now you’ve got to pay for repairs because your tenant decided to trash your place like a celebrity in a hotel room.
Nothing will drain your savings account faster than a demonic tenant who won’t pay rent. But if you had a landlord insurance policy, you’d cut the loss of several months’ rent down to one or two months. Four years after the policy was introduced, landlords are still losing thousands because they either don’t know it exists, or see it as another “useless” insurance product.
But if they knew paying a yearly premium of 1.25%* of their annual rent would have saved them months of lost rent – you bet your ass they’d buy it.
To put things in perspective, here’s an example of what you’d lose vs. paying the insurance premium:
$4,500 monthly rent X 3 months’ defaulted rent + $4,500 Property Agent Fees = $18,000
$4,500 monthly rent X 12 months X 1.25% = yearly premium of $525
*Premium based on QBE Insurance policy, but the premiums can vary based on insurance provider.
What Does Landlord Insurance Cover?
We’ll use QBE’s policy for the purpose of this article. QBE’s 1 and 2-year landlord insurance policies will cover landed properties, private condominiums, and HDB flats. And with a yearly premium that’s only 1.25% of the yearly rental value of your flat ($250 minimum) you gain coverage for the following incidents:
- Absconding Tenant(s): If your tenant decides to rob a bank and absconds in the middle of the night, you’re entitled to compensation of up to 4 months of lost rent.
- Rental Default: If your tenant decides that he doesn’t feel like paying rent anymore because it’s against his “religion,” you’re entitled to compensation of up to 4 months of lost rent.
- Lost Rental from Property Damage: If your tenant’s attempt at DIY “renovation” damages your flat badly enough to make it untenable, you’re entitled to compensation of up to 12 months of lost rent.
- Lost Rental from Inaccessibility: If you can’t access your property because there’s a Kaiju running around your neighborhood, you’re entitled to compensation of up to 12 months of lost rent.
- Lost Rental from Murder/Suicide: If your tenant was a serial killer who kept his victims in the flat’s storage room, you’re entitled to compensation of up to 12 months of lost rent. (Exorcism of flat not included)
- Lost Rental Due to Death of Tenant: If your tenant passed away during his tenancy, leaving your flat unavailable for immediate rental, you’re entitled to compensation for up to 6 months of lost rent.
- Eviction/Failure to Surrender Property: If your tenant suddenly decides that your flat is the perfect place to establish the “Republic of Tan,” and won’t leave until evicted, you’re entitled to compensation of up to 4 months of lost rent.
- Lost Rental from Theft by Estate Agent: If your “trusted” property agent collects rent from your troublesome tenant and decides to convert it to a Tissot watch and a Bose sound system, you’re entitled to compensation of up to 3 months lost rent.
- Legal Costs Associated with Eviction: Any legal cost(s) associated with eviction such as engaging the bailiff, locksmith, or auctioneer up to 1 month’s rent will be covered (minus a policy excess of $200).
Additionally, if you claim coverage on any of the incidents listed above, you’ll be reimbursed up to 1 month’s referral fee to pay your property agent for finding your next tenant – but only if you take out a new policy for your new tenant.
As for deductibles, all of the incidents listed above require a deductible of 2 months’ rent. The only exception is for theft of collected rent by your property agent, which has a deductible of 1 month’s rent.
Final Thoughts to Consider
I know you’re anxious to start renting out your flat to Hannibal Lecter now that you know you can reduce your financial risk as a landlord. But before you put pen to paper, read the terms of coverage closely. Let us look at QBE’s policy as an example:
- You cannot enact a policy midway through a rental agreement – it must be signed at the beginning of a tenancy agreement.
- You can transfer your policy to a new property owner if you decide to sell your flat.
- Your policy cannot be cancelled or refunded.
- You will only receive payment up to the end the tenancy contract if your tenant defaults on his rent with 3 months remaining.
- You will not receive any payment for loss of rent if your tenant activates his/her diplomatic clause.
- Your policy will not extend automatically after the period ends, so you’ll have to sign up for a new policy to stay covered.
So before signing your policy, know its limitations so that you’re not caught off guard when your find out that you can’t collect for lost rent if your foreign tenant uses the diplomatic clause, or your policy lapses instead of continuing automatically.
Also, if you’re thinking about becoming a landlord, don’t make the jump until you’ve read this and understood what’ll be required of you. As a new landlord, you’re more vulnerable to losing money from a bad tenant.
Do you have any tenant horror stories that could’ve been prevented by landlord insurance? Share your experience with us on Facebook!