If your tenants are no longer able to pay rent because they lose their job, fall ill or have to quit their work because they need to look after a family member, it can cause a difficult situation.
As a landlord, you want to be understanding, but renting out your property may also be your business and most likely you rely on the income to pay your monthly bills.
So, what can you do?
You can protect yourself by getting rental default insurance, which does exactly what sounds like - it allows homeowners to protect themselves against possible non-payment.
What is it and how does it work?
The insurance policy guarantees that homeowners can continue collecting the rental income, even if the tenant stops paying. It offers an alternative to requesting hefty deposits from renters, that they often can’t afford.
Many insurance companies also offer an additional service, which is a study of a tenant's financial situation, as a way of preventing these types of situations.
These policies also offer a lot more than just covering unpaid rent though, they also include lawyers’ fees, legal advice, payment for a locksmith in case of eviction, and compensation for vandalism. They can also act as a mediator between the landlord and the tenant.
Is it necessary?
According to the latest data available, luckily this claim is not made often. It accounts for around six percent of insurance claims, while the other 94 percent are other claims due to property damage for example.
The low rate of claims is partly thanks to the types of financial studies being carried out.
However, these incidents have been increasing according to the Rental Home Owners Association and the Delinquent Tenant File, particularly due to the Covid-19 pandemic, and now inflation is making it more difficult for tenants to keep up with rental payments too.
The latest data from the Spanish Rental Insurance Observatory (OESA) revealed that the number of landlords who took out this insurance in 2020, almost doubled.
They predict that around 30 percent of rental contracts signed in 2021 included this type of insurance and in the big cities of Madrid and Barcelona, it’s estimated to be around 40 percent.
Cost
One factor to keep in mind is the price. Rental default insurance is far more expensive than other types of insurance for landlords.
In general, the cost of the insurance is equivalent to 3-5 percent of the rental value. A report published by Unespa, employers of insurance companies in Spain, each case generates an average loss of €3,179, while damages generate a loss of €336.
Opinions
Last year, the Organisation of Consumers and Users (OCU) analysed the services offered by agencies that guarantee the collection of rental income. In conclusion, the agency recommended avoiding hiring these companies, given that "a well-informed owner can manage the rental satisfactorily and cover the risk of non-payment through a good insurance policy, at a lower cost".
However, they were mostly saying that you could save money if you manage all the rental services yourself without hiring an agency at all.
José Ramón Zurdo, general director of the firm Negotiating Rental Agency denied these claims saying that "a large part of the rental problems originate from poor management”.
What do I need to look out for when getting this insurance?
According to the Spanish Rental Insurance Observatory (OESA), there are several points you need to look at when buying this insurance.
- You need to confirm that the product offered is really insurance. Many private companies offer rental guarantees under the guise of insurance when they really are not.
- You can check if the company is legit and what its financial situation is like by looking at the General Directorate of Insurance, Funds and Pensions (DGSFP).
- Hire the rental policy through an insurance brokerage, which helps you find the best type of insurance for you.
- Find out what other coverage the policy includes in addition to non-payment such as lawyer and solicitor expenses if you to go to court.
- Hire a specialised policy, not linked to regular home insurance.
- Opt for insurance for at least one year. This is because, due to the usual in the case of non-payment of rent, a contract for a period of fewer than twelve months would be insufficient to cover all the money not received during the unpaid months.
- Renew the insurance every year. According to the OESA, "it is usual to pay the first year and then decide not to renew because the tenants are trusted." But as the situations change, there is still a risk.
What do I need to contract this insurance?
In order to take out the rental default insurance, a study of the tenant's solvency must be approved and they will not be able to spend more than 40 percent of their income on rent.
If the tenants are salaried employees you'll need their last two pay slips, an employment contract, ID and an application form signed by the tenants.
If the tenants are self-employed they will need to show their last income tax return, the last two social security payments, ID and a signed application.
And if the tenants are pensioners, they will need to show a pension certificate issued by Social Security, ID and a signed application.
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