Worst case scenario: Beyond repair

For many, the appeal of property investment is buying ‘bricks and mortar’. Having an asset you can see and touch gives people a feeling of security.

However, the physical nature of this investment also makes it vulnerable. A house or unit may incur structural damage or even complete destruction from forces beyond any person’s control. Though nothing can control Mother Nature, there are steps you can take to protect your assets.

What are the risks?

Leaving aside intentional damage by a tenant or another person, properties can be harmed in a worrying number of ways.

Depending on the location, the most dangerous issue may be natural disaster, warns Belinda Butler from Terri Scheer Landlord Insurance Specialist.

“Unexpected weather events such as storms, fire and floods can cause severe structural damage to properties,” she says.

Statistics from the federal government’s Emergency Management Knowledge Hub show wide-scale disasters happen infrequently but have devastating effects.

Since January 2012, six major bushfires have destroyed over 546 homes across New South Wales, Tasmania, Victoria and Western Australia. In addition, in early 2013 Cyclone Oswald claimed six lives and damaged over 4,000 homes, around 2,000 of which were deemed uninhabitable, according to the Queensland Reconstruction Authority.

However, even relatively minor events can have dire outcomes if they happen in your backyard.

Munzurul Khan from Keshab Chartered Accountant warns that situations like a tree falling through the roof or a burst pipe can ruin a property’s resale or rental value. Natural land movements under the property may also threaten its long-term prospects, he says.

Buyer’s agent Todd Hunter from wHeregroup highlights termites as a major threat. The impact of these tiny insects can be far in excess of their size. Indeed, according to the Victorian Building Authority, termites cause more harm to Australian houses than fire, floods and storms combined.

In Mr Hunter’s experience, properties in certain states are at particular risk.

“Places like Victoria and South Australia don't seem to have the termite issues the rest of the country does,” he says. “In places like New South Wales, Darwin, Western Australia, you certainly need to have those inspections done.”

When considering an investment property, think about the location and whether an extreme weather event may occur in the area.

Before you buy

The surest way to safeguard your asset is to do due diligence before you buy.

Although most investors evaluate growth drivers when choosing an area, many overlook risk factors like natural disasters.

“When considering an investment property, think about the location and whether an extreme weather event may occur in the area. Properties that are away from flood plains or bushfire risk areas are likely to appeal to investors as it generally reduces the risk of a claimable vent occurring,” Ms Butler says.

If investors intend to buy in such areas, understanding local conditions may help them pick the most resilient properties. For example, buyers in the tropics could benefit from understanding the differences in building codes, Mr Hunter suggests.

“If you're purchasing in that top end of Australia, right across WA, Darwin or Queensland, you need to make sure the property you buy is built to cyclone standards,” he says.

“Different states have different regulations on that and they build houses completely differently. They can withstand a lot more than a normal house can.”

On the other hand, Mr Khan suggests certain property types may be prone to particular defects. How a home is constructed, what materials are used and its age will heavily influence its chances of surviving a violent storm.

Some properties are already damaged when they go on the market. Mr Khan encourages investors to complete all relevant searches before committing to a purchase.

“When you buy the property, you need to do your due diligence, building and pest reports and strata searches. If there are any structural defects, you should find them at this stage,” he says.

According to research carried out by Mr Hunter’s company, up to 50 per cent of buyers forego building and pest inspections. He says booming auction markets are partially to blame.

“People are sick of paying $400 or $500 to get building and pest inspections done, only to lose out on bidding for the property,” he says.

In his view, this cost-cutting is a short-term saving with long-term risks.

“A building report is very cheap insurance to make sure the property you're buying is in good shape,” he says.

However, a positive building report is no guarantee the dwelling is in perfect condition. Mr Hunter says while building inspectors generally work to a high standard, mistakes do happen and there may be little recourse for buyers.

“Many inspectors have clauses that get them out from responsibility for anything that happens after the case,” he says.

“A report minimises the risk but it doesn't negate the risk completely.”

A building report is very cheap insurance to make sure the property you're buying is in good shape.

Avoiding damage to your asset

Although bad luck can strike at any time, many risks can be recognised and prevented. Property investments are not “buy and forget”. Mr Khan reminds investors.

“You still need to look after the property as time goes on and it grows older. Make sure the basic maintenance and repairs are being done on an ongoing basis so it doesn't create any structural problems,” he says.

Addressing any issues quickly can ward off more serious trouble down the track. Mr Khan learned this the hard way when one of his rentals developed a water leak. To avoid spending a few hundred dollars to repair the issue straightaway, he chose to take some shortcuts.

“Then I realised the leak had spread through the whole bathroom. I had to take out literally the whole wall and the vanity and other fittings. To re-do the whole bathroom cost me over $10,000, whereas I could have easily solved it for $500 or $700 maximum if I had acted in the due time,” he says.

Investors also need to understand the specific dangers associated with their area and plan accordingly.

“With things like flooding or cyclones or bushfires, I do homework on those to try and mitigate the risk as much as possible,” Mr Hunter says.

In cyclone season, this may involve removing tall trees or loose objects that could crash into the property. In bushfire zones, it may mean keeping the gardens pruned and gutters clear, he says.

Certain properties may also require more up-keep than others. As an example, Mr Khan has found Queenslander-style homes raised on wooden stumps need to be carefully monitored for deterioration.

“If you have wooden stumps, no matter how strong they are, they have a limited life. You need to make sure those stumps get replaced or repaired in time as opposed to having to re-do all of those at once,” Mr Khan says.

Regular inspections can bring to light potential structural issues early, according to Ms Butler. Especially for interstate investors, a good property manager can be integral to keeping abreast of any warning signs.

“Your property manager on their inspections should notice if there is an uneven floor, if the kitchen cupboards won't close or the doors won't close properly,” Mr Hunter says.

“That should be brought up in the course of the inspections.”

Mr Hunter is also a believer in arranging an annual visit from a pest inspector in termite-prone regions.

“It's a cheaper solution than having the full treatment done. It's a preventative measure and if there is something there, the annual inspection will have caught it very early,” he says.

It's all good and well saying you have landlord insurance or building insurance, but what does it cover?

Insuring against disaster

In truly unfortunate cases, there may be nothing the investor can do to save their property. If a house is battered by the elements, or even destroyed, the investor has few options. Having insurance in place can soften the blow in these circumstances.

“When tragedy strikes around us, insurance often jumps to front of mind. It’s a stark reminder of the need to ensure our possessions are adequately protected,” Ms Butler says.

However, simply having insurance is not enough. What the policy will cover and the types of damage that are included in it will determine whether the investor receives a payout and whether or not they can rebuild. Mr Khan warns not all insurance companies operate with the same policies or processes.

“It's all good and well saying you have landlord insurance or building insurance, but what does it cover?” Mr Khan says.

Many owners affected by the Brisbane floods in 2011 were left in the lurch when they discovered their policies did not protect them from inundation. While most policies now include flood cover, other exceptions also exist, Ms Butler says.

“Termites and the land shifting under foundation at a property are not generally covered under building insurance,” she says.

While reading pages upon pages of fine print is tedious, understanding the contract thoroughly is the only way to ensure you are fully covered, Mr Khan says.

Ms Butler also encourages investors to seek out an insurance policy tailored towards rental properties. Several weeks or even months of lost income could drag down an investor’s portfolio.

“Seeking a specialised form of insurance cover can protect investors from many of the risks associated with owning a rental property and help provide that peace of mind should the unforeseen occur,” Ms Butler says.

“A good building insurance policy should cover for loss of rent, including circumstances when the property cannot be tenanted until the damage is repaired. This will help ensure the landlord continues to receive a steady flow of rental income.”

As an additional guarantee, Mr Hunter recommends all investors keep a “rainy day” fund.

“We always push our clients to make sure they have a slush fund to help them through those tough times,” he says.

While few properties are lost to violent weather or unexpected damage, being fully prepared for such situations gives every investor peace of mind.

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