Proper Wealth from the Nova Cafe EP 4 – Property Insurance and How to Protect your Asset Base

Hosted in the Nova Cafe by our MD Paul Mahoney, Proper Wealth explores all aspects of wealth creation with a specific focus on Property. This fourth episode covers Building and Protecting your asset base, Property Insurance and Landlords porfolio with Andrew Wynne Jones from Simple Landlords. Click above to watch the fourth episode.

Paul Mahoney:

Welcome back to Proper Wealth with me Paul Mahoney. Today’s episode is dedicated to property insurance. When it comes to building an asset base it’s very important to protect that asset base and that’s where insurance becomes very handy. On the show today we have Andrew Wynne Jones from Simple Landlords. Welcome to the show Andrew.

Andrew W.J.:

Thank you Paul.

Paul Mahoney:

We’re going to start with a look at what you should be considering when it comes to investing property from an insurance perspective, so the things to take into account when deciding whether you could or shouldn’t invest. So over to Andrew. What are the things that people should be considering when deciding whether to invest or not.

Andrew W.J.:

It’s a very good question and what we find is that actually people don’t think about insurance when they look to invest in property, so it’s usually quite far down the list, and we need to try and educate people to bring it up the list. This is probably your biggest asset and you need to make sure you have the appropriate cover in place. In this day and age there’s so many review sites out there. We use TripAdvisor if we go stay in a hotel or go on holiday. Do your research on insurance companies, so look for companies that have reviews and openly publish reviews.

Once you’ve done your research next thing to do is to get some prices from the insurers, and it’s very, very important to consider the type of property that you’re looking to invest in, it’s location, the construction of the property. All of these have certain what we call red flags, and from an underwriting perspective these are the things that will effect the price of your insurance policy. So things to consider would be the type of property itself, so is it a standard semi-detached house, or is it a converted mill. Obviously completely different risks from an insurance perspective. Construction of the property, so has it got a slate tiled roof, or is it a thatched, so again, these things add cost to your insurance.

Location’s key and at the moment flooding is obviously quite a hot topic in the insurance world, so understand whether the property’s in a flood area, understand what the flood defenses are like, but they key really is to make sure you get some prices before you invest in that property.

I always remember one example of a landlord that we deal with that he bought a chapel and converted it into a number of flats, very high end, beautiful property, but what he didn’t do is consider the cost of the insurance before he did that, and so he thought he was going to get a great yield, he thought he thought he was going to get great tenants, and he did, but the annual cost of the insurance was over $5,000 and that had a significant impact to his profitability.

Paul Mahoney:

So is it fair to say that the more outside of the box that particular property is the more likely the cost is to be higher?

Andrew W.J.:

Absolutely, yeah, and one of the reasons for that is that you’re restricting your market, so you’re restricting the number of companies that are willing to quote for that particular risk or to give you the cover, so with insurers you probably have ten or 15 main insurance and a standard risk most insurance companies would like, and by standard risk it would be your typical residential let, so detached, semi-detached, terraced house, professional, retired, students, that sort of thing. So a good quality risk. The moment you start to move away from the sort of typical risk you start to restrict the insurers that are out there to quote for you, and the moment that you start to restrict the insurers then the price starts to go up because there’s less competition.

Paul Mahoney:

So if it’s fairly straightforward then insurance is probably less of a concern.

Andrew W.J.:

It is.

Paul Mahoney:

But it’s still important.

Andrew W.J.:

Exactly. So even if the property is a fairly straightforward risk you need to understand flooding in particular in this day and age, so there are some great tools online. Environmental Agency do a great flood check, and this allows you to see if your property is in an area that is likely to flood, whether that’s rivers, seas, or even surface water. Insurers use these tools and they’re available to you and I as well.

Paul Mahoney:

So for a buyer would they do that themselves? Would they get their solicitors to do these checks?

Andrew W.J.:

Your solicitors will do the checks, but before you get to that point you should do them yourself. You should make yourself comfortable that the property you’re buying you and all the nuances and the potential issues that you may come across.

Paul Mahoney:

And is fire becoming more of a consideration? Seems a pretty hot topic.

Andrew W.J.:

We are seeing more fires, partly cause by your bonfires and tenants leaving candles near windows, but we’re also seeing an increase in cannabis farms, so this is where quite innocently you let a property to good quality tenants. You don’t inspect it, you don’t go and see them. They just keep paying you the rent, and over a period of time they’re cultivating some illegal substances in their roof. You need hot lights for that. Quite often they catch fire.

Paul Mahoney:

Right, and that’s a growing thing.

Andrew W.J.:

It is. We’re seeing more and more of those, which is a worry.

Paul Mahoney:

Right, and I suppose that would certainly effect it from an insurance perspective if you’ve got something like that going on.

Andrew W.J.:

It would, absolutely. It’s not something you can consider pre-investing, but you should really think about the type of individuals you’re letting to and you should think about your strategy as a landlord, so how often are you going to inspect the properties. Are you going to meet the tenants yourself? Are you going to do the referencing yourself? Or are you going to completely hand that off to your letting agent?

Paul Mahoney:

So it seems fairly sort of standard due diligence that you should be doing anyway before investing in a property, but considering each of those factors from an insurance perspective as well.

Andrew W.J.:

Absolutely. Can’t stress that enough, because you don’t want to be in the position where you think you’re going to make a nice profit but all of that is wrapped into your insurance costs.

Paul Mahoney:

Yeah, and I dare say something a lot of people overlook.

Andrew W.J.:

It is, absolutely. Very much so.

Paul Mahoney:

What should people be considering from a policy perspective? Are there certain things they should be looking for?

Andrew W.J.:

It’s really down to the individual landlord, so it’s your property, it’s your tenant, it’s your appetite to risk, and don’t forget that insurance is a way of transferring your risk to somebody else in return for a small premium, so it really is a personal choice, but you need to understand what options you have out there and you need to make sure that for you as a landlord you are adequately protecting yourself against the risks that you worry.

Paul Mahoney:

Okay, and in doing that would you say people should be doing it for themselves through things like which.com or should they be seeking advice or a mixture both?

Andrew W.J.:

It’s probably a mixture of both. There is a wealth of information out there at the moment. There’s some great information on websites, and so it’s easy to find but it can be quite confusing, especially with all the other changes that landlords are having to cope, so if you are unsure, pick up the phone, give them a ring.

Paul Mahoney:

What’s the question you get asked most by landlords? What are the frequently asked questions or the things to look out for?

Andrew W.J.:

Things to look out for really are diversification. We’re seeing in this current market the landlords that are growing are the ones that are diversifying, so you need to make sure that your insurer has a strategy to cope with you diversifying your portfolio.

Other key topic is leasehold versus freehold. Obviously a pick of a hot topic at the moment. New builds often are being sold on a leasehold basis. You need to understand what that means to you as the owner of the property or the owner of the lease, so do you need to have building insurance. If you don’t have building insurance, is the freeholder taking care of that? So you need to understand your obligations under the terms of that lease, and you need to make sure if you’re not buying builders insurance yourself, that you’re either making a contribution to it or that you see that there is insurance in place, and even for a leasehold property, so if you own, say, a flat in England and Wales, chances are it’s going to be on a leasehold basis, so even if you don’t have to source and pay for the building insurance yourself what you should consider doing is taking out a basic contents policy because what that will do is it will include an element of liability cover, so even if your flat say is unfurnished you’ve probably left some light fittings, probably even some white goods in there, and it’s important to have liability cover because if your tenant were to injured themselves on anything that’s still your responsibility, your item, you could find yourself in a difficult situation.

Paul Mahoney:

Am I right in saying that covers things like carpets and fixtures and fittings and all that type of thing as well? If they were to flood, or they leave the tap, or there’s a small fire or something like that it covers those sorts of things.

Andrew W.J.:

It would do, yes. I mean, it does depend on the cover you get, and there are different options but some insurers call it limited contents. Some insurers will sell you a contents policy at the very basic level of cover, say £5,000, but they should all include that element of cover, and that’s really important. You need to make sure you have that.

Paul Mahoney:

So it seems that the things that we’ve be covering this, in terms of what to consider before investing is where the property is, if it’s in a flood zone, if it’s ticking all the fire safety boxes, what your insurance options, I suppose where that property fits on the sort of in the box, out of the box sort of scale, and therefore what the costs are going to be. Is that fair to say?

Andrew W.J.:

It’s fair to say, yes. One thing that you can consider are optional extras. We know that about 86% of landlords only buy on price, and that’s something that again people need to consider. Cheapest isn’t always the best. Look at the options that are available to you. Loss of rent. Rent guarantee is a great product. If you require your rental income to pay the mortgage on the property you need to protect that, and it only costs you a couple of percent of your monthly income, so look at the optional extras, consider your own risk appetite. Consider what would happen if your tenant stopped paying you rent for six months. Could you pay the bills.

Paul Mahoney:

Okay, so on the rental guarantee options, because generally people do borrow to invest in property and if their tenant takes off or just stops paying how does that work?

Andrew W.J.:

You’d need to make sure that you have your tenants property reference. That’s usually a condition of that type of policy, and they normally need to be on an insured short hold tenancy agreement, so just understand the stipulations of that type of policy before you buy, but typically if your tenants don’t pay you would hand it straight over to your insurers. They would usually serve the relevant notices and follow that claim through for you, and if the tenants continued to not pay the insurers would pay you the rent that they’ve agreed to and they would manage the eviction process as well.

Paul Mahoney:

Okay, so it seems that it provides a bit of a safety net for property investors and peace of mind.

Andrew W.J.:

Absolutely, and typically only about 10% of landlords will have that type of cover and it’s probably an awareness piece. I think it’s an excellent product to have, especially if you’re concerned about what would happen if that tenant didn’t pay.

Paul Mahoney:

So that’s generally just that people don’t know it’s available.

Andrew W.J.:

I would suspect so.

Paul Mahoney:

Okay, well all our viewers do now.

Andrew W.J.:

For a small, very small monthly charge, and the way to look at it is a percentage of your monthly rent, so if you’re only paying away two or three percent of that monthly rent you get that safety net.

Paul Mahoney:

Well, thanks very much for that Andrew. That was very informative. We need to go to break now. Join us after the break for a discussion on what landlords should consider when it comes to property insurance.

Speaker 3:

Proper Wealth is brought to you in association with Simple Landlords Insurance. At Simple Landlords Insurance we believe in keeping things simple, so for the last ten years we’ve offered landlords topnotch cover a t a reasonable price. Simple as that, and that’s probably why nine out of ten of our customers love us. We can get you covered from as little as £115. We’ve got a five start defaqto rating so you know you’re in safe hand. You’ll build your own and only ever pay for what you need, and you’ll get a no fuss, no nonsense service from our Yorkshire based team. You get peace of mind and we get happy customers. Simple isn’t it? Give us a ring on 0808 1725600 or visit simplelandlordsinsurance.com.

Paul Mahoney:

Welcome back to Proper Wealth with me, Paul Mahoney. Today we’re talking about property insurance and we have Andrew Wynne Jones from Simple Landlords. Andrew, what are some of the biggest mistakes you see people make, or some of the most costly things when it comes to property investment I suppose from an insurance perspective?

Andrew W.J.:

So we know that not that many landlords inspect, and quite often landlords are a bit conscious of not wanting to interfere with the tenant, so they’re a bit worried about coming across as a bit pushy, or they might be a little bit intimidated by the tenant, so what we’ve found that has worked really well for some of our policy holders is for them to blame us. So speak to your tenant and you say, “Well, my insurance company needs me to inspect twice a year,” as an example. That takes the pressure of you as a landlord and it passes the blame onto somebody else.

Paul Mahoney:

So you’d say every six months is better than every year.

Andrew W.J.:

I would say so, yes, and importantly, look up. Look for damp patches. Look for disrepair. Make sure your pipes are okay, especially as we come into winter. We see lots of storm claims coming over the Christmas period and that’s often due to loose tiles, guttering not quite being fixed properly, so have a proper look inside and outside of the property.

Paul Mahoney:

Would you say that some people don’t inspect or aren’t as concerned about inspecting because they have insurance?

Andrew W.J.:

Potentially. The risk of that is that if something catastrophic were to happen, so going back to the escape of water example, an average escape of water claim for Simple Landlords is in excess of £5,000 and often takes over three months to put right. The bigger losses need your tenants to move out and if your tenants are moving out of your property you still need to pay your mortgage.

Paul Mahoney:

Wouldn’t the rental guarantee cover kick in there if you had that option on your policy?

Andrew W.J.:

Most policies should have something they call loss of rent cover as part of the policy, and what that does if you have a claim, so if you have a claim for escape of water for fire, for flood, part of that claim will be either the rent that you would have received if the tenants were there, or the cost for you to rehouse your tenants if you want to, so it’s a slightly different cover, similar terminology, but yes, making sure you have the right insurance would cover you for rent for the period.

Paul Mahoney:

Okay, so inspect your properties more often to avoid any potential issues.

Andrew W.J.:

Exactly, and blame us if you need to. We don’t mind.

Paul Mahoney:

Okay. It’s always the insurers fault.

Andrew W.J.:

Exactly.

Paul Mahoney:

Any other mistakes you see people making.

Andrew W.J.:

We do, we see landlords that don’t have the right type of policy. We see landlords that don’t have policies at all, so if you think a home owners policy might be a bit cheaper, so you take that out. There’s no point doing because once you have a claim and once the insurers know it’s rented chances are they won’t pay that claim, so you need to make sure you have the right type of cover in place, and don’t buy on price. 86% of landlord buy solely on price. Look at reviews, look at feedback. It’s open, it’s there on the internet, so do your research.

Paul Mahoney:

I suppose really [inaudible 00:15:25].

Andrew W.J.:

Yeah. Know what you’re covered for.

Paul Mahoney:

I’d say that’s fairly common that people are living in a property, they no longer live there and they then rent it out and don’t think about changing their insurance.

Andrew W.J.:

Exactly, so the sort of non professional landlords, the accidental landlords if you like.

Paul Mahoney:

That’s about half the landlords in the UK.

Andrew W.J.:

It is. That’s correct, yeah. I mean, it’s a segment that we see as diminishing slightly with all the changes that are coming in with section 24, but it’s still a few million properties.

Paul Mahoney:

Yeah, it’s becoming more professional, the landlord market.

Andrew W.J.:

Exactly.

Paul Mahoney:

Okay, all right, and what are some of the things people should be considering when it comes to actually making claims, making sure those claims are actually paid.

Andrew W.J.:

It’s interesting that most landlords don’t think about claims. Most landlords, rightly so, think about legislative changes coming, they think about right to rent checks, they’re thinking about tax, they’re thinking about section 24, all these things going on and they’re not thinking about claims. As we touched on earlier some of our biggest claims we see are escape of water. You need to make sure you’re covered properly for those, so you need to make sure you have the right level of policy, because being without a tenant in your property for three or four months can be devastating for some landlords.

Paul Mahoney:

I suppose it would be quite catastrophic if you assumed your claim was going to be paid for something like that and it’s not.

Andrew W.J.:

Absolutely, absolutely, so you need to read, you need to make sure you understand what your policy covers. A lot of them nowadays are written in what we call plain english. It’s still full of jargon, but if you’re not sure, pick up the phone and ask us. That’s what we’re there for.

Paul Mahoney:

Andrew, would you say there’s an image in the market of insurers trying to avoid claims, a negative perspective?

Andrew W.J.:

I think that was the case 20, 30 years ago, but I certainly think insurance companies have made great strides in the last five, ten years, largely helped by the regulation that insurers have to adhere to. The insurance companies that are thriving in today’s market have embraced the regulation. They embrace protecting the consumer, and they make sure that their claims journeys are visible, their feedback is obvious and easily findable, and they also make sure that they make it very clear in their documentation what you need to do if you’re unhappy about a decision that they’ve made, so it was a bit of a stigma for the industry. I think it probably still is in some areas, but it’s something that we, as insurers, have become an awful lot better at and I hope that as we move forward that image will go completely.

Paul Mahoney:

Okay, so there is some recourse that landlords can follow if they feel like they’ve been unfairly treated.

Andrew W.J.:

Yes, absolutely. The first thing you need to do is contact the insurance company that you’re dealing with. You need to go through their own complaints process, and this is always manned by independent individuals, so these guys will take a completely independent view of the scenario and what’s happened, and they will then make a decision. If you’re not happy with that decision you can then take it up with the financial ombudsman, so you do have a number of areas that you can follow if you’re not happy with the decision the insurance company has made.

Paul Mahoney:

Okay, so do the right thing yourself initially, understand your policy, make sure you’re covered, but if you feel as though you’re unfairly treated then there is channels that you can follow.

Andrew W.J.:

Absolutely Paul, yes.

Paul Mahoney:

Okay, and how would you say that insurance or insurers can help landlords of the future.

Andrew W.J.:

The market, the buy to let market, the investment market is changing, and we, as insurers, are seeing more individuals buying more properties, so you’re having your accidental landlord probably impacted a lot more by the section 24 changes coming in and the right to rent. A bit nervous. Those landlords are dropping away a little bit, but we’re seeing the portfolio landlords increasing their portfolios, and we’re seeing them diversify as well, so we’re seeing them moving from say a straightforward residential let portfolio to some mixed commercial, bit of service, even some holiday lets being thrown in there as well, so make sure that the insurer that you’re with has the ability to diversify as you diversify your portfolio because what you don’t really want to do is have four or five different insurance companies insuring you if you’ve got ten properties.

Paul Mahoney:

Well, that was going to be my next question. For a landlord that has ten or 20 do you find that they will generally go with the one insurer and is there economies of scale across a portfolio as opposed to just one property?

Andrew W.J.:

There are, yeah. So you have economies are scale, so it tends to be a little bit cheaper to lump them all together. You also have one point of contact, whether that’s claims or whether that’s servicing the policy, and more importantly you have one common renewal date, so it’s generally much easier to manage as a landlord, lumping them all together and having them under one portfolio.

What I would say though is if you have a portfolio say of residential properties, and you buy a commercial property you might want to think about stripping that commercial property out from that portfolio, and the reason being you’ll have more choice if you have a straightforward residential let portfolio than if you have a mixed portfolio. So you may actually find it a little bit cheaper to insure nine residential lets and one commercial separately as opposed to insuring all of them under one policy, so you need to do a little bit of research.

Paul Mahoney:

Okay, a little bit of a pearl of wisdom there. I’d say a lot of people wouldn’t pick that up, so that’s definitely worth looking into. You mentioned before about diversifying portfolios and certainly something that is happening a lot at the moment is the development rights, a lot of commercial to residential conversions. Sometimes a little bit of that will remain commercial and some will be residential, so mixed use. Are there things to consider with regards to mixed use properties.

Andrew W.J.:

There are, yes. Some insurers will insure them as a residential property. It generally depends on what the commercial element of the risk is. If it’s above an office or a hairdresser, or something that’s relatively low risk for an insurer perspective typically you can insure that on a residential policy. If you’re above a fish and chip shop or a late night takeaway then that has a lot more risk to the insurer and they tend to insure those separately.

Paul Mahoney:

And is that the fire element or why is the risk higher with the different type of commercial?

Andrew W.J.:

It is predominantly fire and the requirements of, say, a takeaway food outlet to make sure that all of their ducting is cleaned and maintained to appropriate standards, so there’s a lot more risk to the insurer to taking on that than just to the standard estate agent with a flat above it.

Paul Mahoney:

Following the Grenfell disaster has there been any change from the insurance perspective there?

Andrew W.J.:

We are finding that more people are making sure that the cover they have is suitable for their needs. So Grenfell was a terrible tragedy but it did make people look at their cover and say, “Well, if that were to happen to me and my portfolio do I have the appropriate cover in place? Can I make sure my tenants can be rehoused quickly and easily?” So it’s made people think about the cover that they have.

Paul Mahoney:

Right, okay. It seems there’s lot more regulation coming in around cladding and that sort of thing. Is that something that insurers look at, or is that something that landlords should be considering when it comes to buying this sort of [inaudible 00:22:32]?

Andrew W.J.:

It’s definitely something landlords need to be considering, and it is something that insurers consider as well. So insurers would look at the construction of the property, especially blocks of flats now, so they’d paid a lot more attention to the type of cladding on a property, so as a landlord if you’re looking to invest in that type of property, know what you’re getting yourself into first.

Paul Mahoney:

Okay, so it seems from an insurance perspective it’s pretty much in line with the rest of the buy to let in that things are becoming a bit more complex, so there’s a bit more to consider, perhaps more potential for the reason for advice or the reason to at least do thorough due diligence as well.

Andrew W.J.:

Yes, exactly. I couldn’t agree more. There’s a wealth of information available online. You have professional insurance brokers in a lot of high streets nowadays. You have call centers staffed by professional staff at the end of the phone, but as insurers we need to make sure that we adapt our products and our offerings as the market changes as well, so we need to invest in technology. We need to make the journey of buying a policy a lot more straightforward. We’re using technology a lot more, so you find over time insurers will adapt in line with the market.

Paul Mahoney:

Thanks very much Andrew. Very informative information there. Very, very relevant to landlords. Andrew Wynne Jones from Simple Landlords, thanks very much for you time. Thank you for joining us on Proper Wealth. Join us next time for a discussion on the property market today, where it’s going, the changes and things that landlords should be considering.

Speaker 3:

Proper Wealth is brought to you in association with Simple Landlords Insurance.

 

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