What it means
Landlords depend on rent to pay their mortgage, insurance, maintenance and taxes. If a tenant stops paying, the landlord still has to cover those costs, and it can take months to recover the property through legal channels.
Rent guarantee insurance reduces that risk by paying out the missed rent during the claim period. Insurers normally set conditions before they will issue a policy.
They check the tenant's references, credit history and income, and may require that rent is no more than a set proportion of earnings. If a tenant is accepted, the policy covers the landlord for a monthly benefit up to a limit, and many policies include legal expenses cover for evictions.
Policies commonly have a waiting period, a cap on the number of months covered and an excess, which is the amount the landlord bears first. Claims usually require prompt notice of arrears and proof that the landlord has followed the correct legal process.
Cover does not usually apply to damage to the property, which is dealt with by a separate landlord policy. The cost is typically a modest percentage of the annual rent, and it may be tax-deductible as a business expense for an investor.
Property managers and agents often offer it as part of a package. Investors with many properties sometimes choose to self-insure by holding a cash reserve, which suits those with enough scale to absorb occasional losses.
When deciding whether to buy, landlords weigh the premium against the probability and size of a default. Properties let to tenants with strong references present lower risk than those let to people with patchy credit histories.
Lenders also look more kindly on rental properties that carry cover, as it supports the mortgage payments.
In practice
Real-world examples.
Example
A landlord who owns a single flat buys rent guarantee insurance to protect against the risk of a tenant losing their job. When the tenant stops paying after eight months, the insurer pays the monthly rent for three months. The landlord meets her mortgage payments without dipping into savings.
Example
A letting agency offers rent guarantee cover to all landlords on its managed properties. The agency vets each tenant against the insurer's criteria and collects the premium with the monthly rent. Landlords value the extra assurance, and the agency earns a commission.
Example
A small property investor with 25 flats decides against insurance after calculating that annual premiums would exceed his average yearly losses from arrears. He builds a cash reserve equal to three months of rent from his portfolio. This is a deliberate choice to self-insure.
Formula
Calculation
Claim paid = Lower of (Covered arrears, Policy limit)
Covered arrears = (Months of arrears - Waiting period months) x Monthly rent
Premium cost = Annual premium / Annual rent
Suppose rent is $1,500 a month and the tenant stops paying for 4 months. The policy has a 1-month waiting period, so covered arrears = (4 - 1) x 1,500 = $4,500, and the policy limit is $5,000. The claim paid is $4,500, the lower of the two. With an annual premium of $540 on annual rent of 1,500 x 12 = $18,000, the premium cost is 540 / 18,000 = 3% of rent.Case study
Seen in the real world.
Linden Row Lettings is an illustrative, fictional agency managing 150 rental homes for private landlords. After a spell of tenant defaults, several landlords threatened to move their properties to other agents.
The agency partnered with an insurer to offer rent guarantee insurance at about 3% of annual rent. Tenants were screened using the insurer's rules on income and references, which also reduced the number of risky lettings.
Over the next year, arrears claims fell and three landlords received payments after tenants lost their jobs. The illustrative lesson was that insurance and careful tenant checks work best together, since one lowers the chance of claims and the other pays when they happen.
Watch out
Common mistakes.
- Assuming the policy covers every kind of loss, when it normally pays only unpaid rent and sometimes legal costs, not property damage.
- Ignoring the waiting period and the monthly limit, which determine how much is actually paid out.
- Letting to a tenant who does not meet the insurer's checks, which can make the policy invalid.
Questions
People also ask.
Does rent guarantee insurance cover damage to the property?
No, damage is normally covered by a separate landlord or buildings policy, so check which risks each policy covers.
How long does the insurer pay rent?
Most policies pay for a limited period, such as several months, or until the tenant leaves and the property is recovered, whichever happens first.
Is the premium worth it?
It depends on how likely a default is and how much a missed rent would hurt you, so many landlords compare the premium with the cost of holding their own cash reserve.
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