Buy-to-Let Wisdom: The Importance of Having An Insurance (2024)

• Real Estate Industry
• 15th July 2022
• Tsharna Daniel

The buy-to-let investment is profitable, offering investors the opportunity to gain financial success. Despite being the highest yielding and most resilient asset class, it certainly does not come without challenges. One such challenge is insurance - because if one gets into this business without knowledge of policies, they are exposing themselves to unknown risks. LV= conducted a study in which more than one out of ten landlords (13%) did not have landlord insurance on their property, and another 2% did not know whether their policy covered specialist risks. As a result, more than £600 million in expenses are coming straight from their pockets rather than being reimbursed by insurance. This is where buy-to-let insurance coverage comes in handy. In this article, we discuss the types of landlord insurance available, and the risks associated with not having one.

What is Buy-To-Let Insurance?

An insurance policy for buy-to-let properties (also called landlord insurance) targets landlords in the buy-to-let sector. As part of the policy, the landlord is protected against the risks associated with renting out a property. This includes tenants not paying rent and causing damage to the property. This is different from general home insurance, which is not applicable for a landlord who rents their property out unless the tenants qualify as lodgers. A landlord buy-to-let policy provides coverage against the property owner's liability and damage to the property or contents in the event of a flood, fire, burst pipe, or storm. While it is not a legal requirement in the UK, it is well advised to consider it before entering the rental market as an aspiring landlord to remain protected from sudden expenses.

What is HMO Landlord Insurance?

Because an HMO is a multi-tenanted property where all amenities are shared among tenants who, by law, do not belong to the same family, HMO landlord insurance is a specialist form of insurance specifically designed for landlords who rent houses in multiple occupations. This opens up a wide range of potential issues including a higher risk of damage to the property and/or contents, whether caused maliciously or unintentionally. Insurance coverage for HMOs is not a one-size-fits-all proposition. Instead, one will be covered for the basics and will have the option to select additional coverage items. HMO policies differ entirely depending on the provider, but are generally available as the following three types:

1. Landlord Contents Insurance – covers all contents in the HMO, including those in communal areas.
2. Landlord Liability Insurance – protects the landlord from legal costs and compensation in the event that someone is injured or suffers a loss while on the premises.
3. Unoccupied Property Insurance - during periods when the property is temporarily vacant, such as when the tenant is on vacation or when a student is away on term time.

What is the average cost of Landlord Insurance?

One must try to know the costs of landlord insurance during the process of purchasing a rental property or multiple types of properties. Without obtaining a detailed quotation, it may be difficult to determine the cost of landlord insurance. Several factors must be considered, including the level of coverage. According to NimbleFins research, landlord insurance starts at an average of £170 for no-frills, buildings-only coverage for a typical UK property with a rebuild cost of £200,000. However, prices can vary depending on a number of factors such as the rebuild value, style of property, year of construction, and optional features.

There can be a great deal of difficulty in finding the most suitable and top-tier insurance providers for landlords. If you aren't sure of your needs, it can reveal a lack of awareness, resulting in greater risk exposure. In the midst of the abundance of insurance providers out there, the following stand out as the top picks:

What insurance is a landlord responsible for?

It has been mentioned previously that buy-to-let insurance is not a legal requirement for landlords, but the open option has left landlords rushing to protect their income as they are facing the highest interest rate increases in seven years after the recent financial crisis and other regulatory disruptions in Europe, resulting in a heavy increase in buy-to-let tax bills since they cannot claim the tax back on mortgage repayments. As explained by Quotezone, property price increases are creating uncertainty within the buy-to-let market, with a surge in renters being priced out of the buyers’ market creating demand for rental properties and a boost in landlords. The first quarter of 2022 has seen a 37% increase in demand for landlord insurance, compared with the same period last year. As more changes are expected, including the introduction of energy performance certificates (EPCs), some landlords may have to spend additional revenue before 2025 to ensure their properties meet the new requirements.

Is it worth getting landlords insurance?

It is often the expensive costs of assets that drive people, in general, to avoid protection because it is just too costly. It is clear, however, that you will be doing more harm than good to your long-term assets, thus, negatively affecting the growth of your rental yields since you will be spending more than necessary. Therefore, it is helpful to know that there are steps you can take to ensure that your investment is protected to the greatest extent possible. Besides reducing your risk to the absolute minimum, there are also several tips that can help you lower the cost of your insurance policy. Among them are:

1. Price comparison -comparing quotes is a much better approach than simply choosing the first provider you encounter. In this way, you will be able to compare not only prices, but also coverage levels.
2. Make security improvements - security measures are elements insurers will require you to include in your property, such as superior quality windows and doors with secure locking mechanisms. You will, however, find that some insurers offer incentives and discounts if your house is equipped with additional security features as well.
3. Reduce vacant periods - a vacant property poses a significant risk of damage, crime, and theft if it remains vacant for an extended period of time. For insurers. they are likely to charge much higher premiums if your property remains vacant for prolonged periods of time, as there is a higher probability of an incident occurring. Therefore, it is desirable to reduce this period of time.
4. In full payment - By paying in full, you will reduce the monthly payments from taking such a large chunk of interest, starting from 20%. When landlords have the financial ability to do so, they can play smarter and reduce insurance costs notably.
5. Consult with an insurance broker - they are typically independent companies, with no ties to any particular insurance company. Their unbiased advice can be tailored to meet the specific needs of your business and personal life. Most often, simply talking to you will suffice to find the best policy from the insurers they work with.

Final thoughts

For many years, the property industry has made real estate investors huge sums of money through rental income, appreciation, as well as other asset profits. Your cash flow is more likely to grow as the interest rate increases. Additionally, as insurance rates rise due to inflation, which is the current climate in which we live, it is vital that you ensure that these costs do not weigh you down and eat up a larger part of your rental income. As much as we strive to reduce our expenditures, cheaper does not necessarily mean better quality. You will receive that for which you pay. So, take steps to ensure that you are in a position where you can afford to protect yourself to a higher degree and avoid problems from all directions. As we have seen, landlord insurance covers a variety of risks, and prices differ according to the provider and policy, but we strongly recommend that you speak with an adviser who can quickly identify your needs and make high-quality recommendations that will benefit you in the long run and ultimately allow you to walk away knowing you are protected from potential disruptions in the future.