Smart investors often add commercial property to their portfolio. Lower volatility, potential tax benefits, yield and capital growth can make commercial property an attractive option. If you’ve recently purchased a commercial property for investment, whether it be a retail shop, a factory or warehouse, or an office, there will be a number of things to organise, such as financing, conveyancing, and insurance.
Your bank will likely require you to have insurance for the property in place as a condition to settling the loan so it’s a good idea to make sure that you’re on the front foot, rather than leaving it to the eleventh hour. The insurance isn’t just a box to be ticked for settlement; it also protects your investment and the financial benefits that you expect to see from it. Insurance for your commercial property isn’t complex, but it is important to get right. Here is a brief summary of what types of protection are available:
- Property – building: This is generally a mandatory requirement from your bank. The bank may stipulate the value that you must insure for. Where the bank doesn’t specify the sum to be insured, you should seek advice on the potential cost to rebuild the property, taking into account the size and quality of the building, the materials used and the access available (poor access and sloping sites may inflate rebuilding costs). Your insurance broker, a valuer, or builder, can help you with setting an appropriate insurance sum.
- Property – contents: Consider whether you are purchasing any fixtures or fittings that won’t fall under the definition of “building”. This could include items such as hot water systems, air conditioning units, and basement car-park pumps.
- Business interruption: This is important to have in place in case your building or contents is lost (e.g. in a fire) or damaged (e.g. due to storm water) and you are unable to collect rent from your tenant. Your obligations to the bank won’t cease and business interruption insurance will help protect you from financial stress during this time.
- Rental Default: This is generally not a bank requirement, but you should consider it as a savvy and informed investor. Rental default insurance may assist when a tenant’s lease is terminated by a court for non-payment or when your tenant fails to vacate at the end of paid rental period and refuses to pay additional rent owed.
- Public Liability: Public liability is a critical insurance to have. This protects you, as a landlord, where injury is caused to a third party or there is damage to a third party’s property.
A few other things to note when it comes to insuring your commercial property:
- Know your property. Be aware that should hazardous materials be present (such as asbestos) your insurance may be compromised. It’s also handy to know when the building was built and when it was last rewired.
- The type of tenants in your property will be a key factor in driving your premium. Some types of tenants are less desirable when it comes to insurance (e.g. gun shops, brothels, tattoo parlours or manufacturing that involves highly flammable or toxic chemicals). In these cases don’t leave insurance to the last minute as it can take longer to arrange an appropriate policy.
- The cost of landlord insurance is almost always paid by your tenants. Having said that, it’s advisable not to leave it to the tenant to organise, as the policy is to protect you, not them! You should check details such as the name on the policy and that the type of cover and level of cover is adequate for your circumstances.
- You may be buying into a commercial property which is part of a commercial strata title property where there should be a property manager arranging building insurance. It’s important to understand if this is the case and to know what you are covered for.
- The bank often requires to be noted on the policy as a financer, be prepared to give insurance policy details to your insurance broker.
Finally, insurance products and premiums can vary quite considerably between insurers and it’s useful to have an informed discussion with your insurance broker to fully understand what is being arrange to protect your investment.
Yvonne Choong, Chief Operating Officer.
Learn more about Yvonne.
Disclaimer: This article has been prepared without taking into account your objectives, financial situation or needs and should be regarded as general advice only. Before acting on this advice you should consider whether it is appropriate for your needs and has regard for your own objectives and financial situation. We encourage you to consult a finance professional before acting on any advice provided in this article or found on this website.