I'm willing to bet that one of your top two fears as a landlord is ending up with a tenant who doesn't pay the rent.
That fear is well founded: it can take months to get rid of a troublesome tenant, even when the case is totally clear-cut. And for all those months, you're stuck paying your mortgage and other bills with no money coming in.
Like lots of unpleasant things in life, you can insure against this happening – and it's known as Rent Guarantee Insurance (RGI).
Very simply, the idea is that if the tenant stops paying the rent, the insurance kicks in and starts paying you directly. Meanwhile, the insurance company starts taking action to recover the money from the tenant – and (depending on the policy) they will often pay the court costs if it's necessary to eventually evict them.
This sounds brilliant – so what's the argument against it?
When I interviewed an insurance expert on The Property Geek Podcast, he said that he didn't buy RGI because the insurer is just backing a winning horse: they will only cover tenants who've passed a robust referencing procedure… and if they pass, they're very likely to pay their rent anyway so it's not necessary to pay for the insurance.
This is a logical approach to take. Insurance companies need to make a profit – so evened out over many years, you're going to be better off by not taking out insurance. With Buildings Insurance you can't afford the worst case scenario so you have little choice but to pay – but with a non-paying tenant, you probably can afford the worst case, so overall you're likely to be better off taking the risk.
Why take out RGI?
If we acknowledge that you could afford the worst case and you're likely to end up worse off in the long term as a result of taking out RGI, why would you do it? There are a few good reasons
1: You absolutely don't need to worry about whether you get paid or not. Even if there's only a 2% chance of a tenant falling behind with payments, it may be worth paying to completely remove that concern from your mind. You may be financially worse off ultimately, but prefer the predictability.
2: It enforces discipline. Because the RGI will only be approved if the tenant passes a strict referencing procedure, there's no temptation to take a risk – you can only accept a tenant if they pass referencing. For example, on one occasion recently I had a tenant fail referencing because of a CCJ from several years ago. Normally I'd have to make a judgement call about whether I should accept them, but because I wanted the RGI I had to insist on them getting a guarantor in order for them to pass referencing.
3: It reduces the size of the contingency fund you need to keep. For example, say a tenant stops paying rent one month into a 12-month tenancy. Without insurance, it could easily take six months (plus legal fees) to get rid of them – during which time you’d still need to keep paying your mortgage and all other costs. With insurance, you’re only out of pocket for a couple of months until the insurance kicks in. As a result, a far smaller “emergency fund” covers even the most serious problems a landlord can face.
How to buy Rent Guarantee Insurance
Like any other kind of insurance, there's a huge number of competing products out there, all with different prices and selling points – and it's almost impossible to know which is best.
Some of the points to look out for are:
- How long does it take for the policy to kick in? Typically, policies will start paying out once a tenant is two months in arrears – which will be a month and a day after the rent due date, as rent is paid in advance.
- Is there an excess? Some policies have an excess of a month's rent, others don't.
- What's the cap to what's covered? It might be the number of monthly payments, or a maximum monetary value.
- What legal expenses are covered, if any?
Every policy will have conditions and exclusions, and it's your job to find out what these are and check that the policy is suitable.
There will also be requirements about how and when you need to notify the insurer about a missed payment, so make sure you're aware of this too. What you absolutely don't want is to believe you're covered, and only find out when the worst happens that you're not because of something you've done (or not done).