Property Investment
3 min read
Author: Tom Greene
Business Development Manager with 5 years Property Management industry experience. Property Investor in Christchurch
Reviewed by: Tiffany Bracey
Property Manager Team Leader at Opes Property Management Auckland.
Property investors often take out less insurance than they should.
And they do it because they're thinking they’re saving money ... while lumping the responsibility on the tenant.
But this often backfires. Here’s how to figure out how much your insurance excess should be, because the answer may surprise you.
In this article, you’ll learn how much your insurance excess should ideally be, and why increasing it to save on premiums can sometimes backfire.
If a tenant damages your rental property ... they have to pay your insurance excess.
So if they cause $5,000 worth of damage, and your excess is $1,000, your insurance company pays $4,000 and the tenant pays $1,000.
But here’s the twist: the lower the excess the higher your monthly insurance premiums are,
so landlords often have an incentive to take out insurance with a large excess. That way insurance premiums are cheaper. And if there is damage ... the tenant pays the extra cost (the excess).
But in the real world? It’s not that simple. And in fact, it can end up costing you more.
How much you pay for house insurance depends on things like where the property is and how much you’re insuring it for.
But as a ballpark, house insurance might cost you:
That’s if you have an excess of $500–$700.
So how much could you save if you increased the insurance excess?
Let’s say there’s a couple in Auckland paying $2200 for their insurance per year, with a $500 excess.
If they raise the excess to $2,500 their annual premium might drop by around $200 a year to around $2,000.
But if they lower their excess to $400, that same premium could jump $300 to $2,500 per year.
So, yes, a higher excess can save you a few hundred dollars a year, but there are downsides.
The problem with taking on a larger excess is you could find you have to pay it yourself anyway.
Let’s say a tenant causes damage to your property. The insurance company pays out some money, and the tenant has to pay the excess ($2,500).
Most tenants don’t have $2,500 just sitting in the bank.
So who pays? Well if you want to fix the damage ... you do, otherwise the work doesn’t get done.
Yes, tenants might be liable for the excess, but that doesn’t mean they’ll be able to pay it, especially not immediately.
So when something goes wrong, you, the landlord, could be the one covering the cost upfront.
Sure, the tenant might agree to repay you in instalments of $10 a week, but you’re the one who has to stump up the cash in the meantime. Whereas if you had a smaller excess, not only is the tenant more likely to pay, but if you do have to pay it, it doesn’t hurt so much.
A lot of investors don’t end up claiming on insurance because the damage doesn’t meet the excess threshold.
For example, let’s say your excess is $1,000. Your tenant scratches the floors, and the repair quote comes back at $800.
Insurance won’t cover it. They (or more likely you) are the one footing the full bill.
If this happens more than once a year, those “premium savings” vanish fast.
Sometimes, the savings from a high excess just aren’t worth it.
If you end up paying the excess yourself (as many landlords do) you’re not saving money – you’re just shifting the risk onto future you.
That’s why I often recommend a house insurance excess of around $500-$700, but it does depend on the risk you are willing to take.
So ask yourself: “If something goes wrong, how much can I comfortably afford to pay upfront – without stress?”
Then talk to your insurance broker and run the numbers.
If raising your excess saves you just a few dollars a month, is it really worth the gamble?
Instead, pick an excess you can realistically afford to cover, without assuming your tenant will pay.
Business Development Manager with 5 years Property Management industry experience. Property Investor in Christchurch
Tom Greene is the Business Development Manager at Opes Property Management in Christchurch with over five years of industry experience and is also an experienced property investor. Tom provides tenancy guidance and insight to those both starting and continuing their investment journey.
