Let's play a game. Close your eyes and think of all the years you worked very hard to save up the cash to either buy your first home and build up some equity in it, or to scratch together a deposit for an investment property.

Got that picture in your mind? Remember the hours? The focus? The time it took away from doing other things you would have preferred to be doing it?

Now think about why you did it. Was it to give your family more security in the future? To help you retire early? To enable you to buy a bigger and better home one day or move to a location you can't currently afford?

Now picture your (until now) perfect tenant in your investment home. Having a party.

There are people everywhere. There is alcohol and mood lighting and loud blasting music.

Someone missteps in a bid to show off a great dance move and hits a candle still alight in the birthday cake, which falls into a bowl of punch, and flames rapidly dart up your walls towards the ceiling.

Party attendees shriek in terror as your tenant dives into action, throwing buckets of water onto the flames, and her friends pull in the garden hose from the backyard, spraying madly in the rough direction or the glow. Meanwhile, the fire brigade is on its way.

The next morning, feeling a little sorry for herself, the tenant shows your managing agent through the property, giving them a good idea of the damage that has occurred.

Now, the question is, how much will you be out of pocket to fix this damage?

What is landlord insurance?

Within the rental space, a landlord is the owner of a property, a tenant is the person living in the property and usually, a hired agent will work as the intermediary between the two.

At the start of the tenancy, before the tenant moves in, they will be expected to pay a sum -- usually four weeks of rent -- upfront as a bond. This is a way of providing a little financial security to the landlord for any damage that may occur to the property during the tenancy.

In most cases, tenants do a great job looking after a property. But in some cases, deliberate destruction caused by anger, poor decisions or a number of other factors, carelessness, or just a simple accident can lead to damage of a property.

If that damage does not constitute normal wear and tear (be careful of the definition), and you have been smart and taken out landlord insurance, you may find your insurance will help you cover costs.

Landlord insurance basically addresses the gaps left by other insurance you may have on your home; it covers things like loss of rent for various reasons, deliberate damage by tenants or other people they have invited into the property, theft by tenants, and in some cases, legal fees.

Why do I need landlord insurance if my tenant pays a bond?

Needless to say, based on the example above, sometimes damage can occur within a rental property, for which the price tag comes in well above the meagre four weeks paid by the tenant as bond. In addition, bond is used to pay damage to the property once the tenants vacate, not during the tenancy.

There are many reasons to have landlord insurance, but three of the top reasons include:

· The bond may not cover the damage to the property.

· Your standard home insurance may not cover the type of damage to the property if the tenant is at fault and it certainly won't cover loss of rent.

· Taking legal action to recover costs beyond bond (if you don't have insurance) can be very expensive and risky -- you face the very real possibility of losing!

What does landlord insurance cover?

Like any insurance policy, different providers cover different things when it comes to landlord insurance. That's why it's very important to very carefully read all the terms of the policy before signing on the dotted line and paying the premium.

Most landlord insurance policies will not cover normal wear and tear -- and the definition of this can be a little tricky. One of our own office members had a tenant in their home while they travelled overseas. The tenant did quite extensive damage, and while the bond was used to cover part of the damage, it just didn't quite cover it all.

Fortunately, our team member had thought to take out a landlord insurance policy. Her hope was to make a claim so she could recoup costs associated with damage, like a chipped bathtub and quite a few broken tiles.

Not-so-fortunately, this damage was eventually considered normal wear and tear, and she was left to either live with it or cover the cost of repairs herself.

Again, very carefully read the policy for definitions and do some research to see what claims have and haven't worked for others. In saying that, if you do incur damage to your property that isn't covered by bond, make the claim -- claims are generally assessed on a case-by-case basis.

It's also important to remember that, just like health insurance, you can get the basics covered, and you can add optional extras to really amp up your protection.

Make sure you know what is covered in your base policy, and then look at what extras you may need -- you might want coverage for flooding, fire or other natural disasters, malicious damage, cover for contents if you have furnishings, damage caused by pets and theft. In some policies some of these items will be in the base policy, in others, it will be an extra.

What if I use AirBnB?

When it comes to holiday letting and short-term rentals, the landscape has changed markedly, and it's now common to even see real estate agents offering holiday accommodation through portals like AirBnB.

It doesn't matter whether your tenant is living in your home for two years or just visiting for the night, having insurance to cover any mishaps can ensure you don't end up out of pocket.

Call your insurance provider and ask them about special policies for short-term letting for new models like AirBnB -- even if you don't use an agent, this is crucial!

Protect your asset, protect your future

An investment property is actually an investment in your future, providing you the opportunity to make a profit from its sale in years to come, or to earn a passive income from rent.

Protecting this asset is incredibly important, as is making sure you don't end up with huge expenses because of rogue or careless tenants.

If you are purchasing or you have an investment property you are renting, having landlord insurance is really not optional.