What sorts of risks are you facing when you become a landlord?
When you invest in a rental property, you open yourself up to more risks than an owner-occupied homeowner.
First, there are risks produced by the property itself, such as tenant injuries. As a landlord, the law tends to hold you responsible for the safety of your tenants, regardless of who's at fault.
Other risks you may face are those presented by other activities that could threaten your equity/ financial investments in your property, such as lawsuits.
We've got ten tips to help you lessen your risks - and protect your financial investments - as you operate your rental property business.
1: Run Your Business Like a Business
Once you become a landlord, you're operating a business. Be sure you're treating it like one.
The right business structure will help you protect your personal assets from the risks of your business. By structuring your property rental business as a Limited Liability Company (LLC) or other corporate entity, you can manage the risks that come from inside liabilities, such as threats of a lawsuit from a tenant or visitor.
Typically, corporations protect owners against personal liabilities from business activities. An LLC offers similar protections, without the added complications of a traditional corporation.
Talk to an attorney for advice on how to structure your business. They can help you determine if an LLC or a corporation is the right structure.
2: Get the Right Insurance for Your Rental Property
When your home becomes a business, it needs a little more than homeowners' insurance to properly protect your investment.
Homeowners' policies are meant to cover owner-occupied properties, not non-owned or vacation rental properties.
Rental property insurance is tailored to address the specific risks you face as a landlord, offering protection for the property, your financial investment, income, and business.
3: Prioritize Safety
The best way to avoid a lawsuit or insurance claim for an injury on your property is to ensure that it’s safe.
- Understand the basic legal requirements for repairing and maintaining your property.
- Be sure that your property is fit and habitable and that you maintain it after a tenant moves in.
- Promptly respond to repair requests and take tenant concerns seriously.
Environmental hazards can often be silent or invisible threats to a tenant's health and safety. Do address hazards such as mold, asbestos-containing materials, carbon dioxide, and lead. Install carbon monoxide detectors, maintain HVAC systems, and act quickly if your tenant reports leaks or flooding.
4: Document Property Condition
Before a new tenant moves in, document the condition of your property. (In writing and with photos.)
Provide your tenant with a move-in inspection list.
Go over the list with the tenant. When a tenant moves out, perform another inspection and document the condition of the property again.
5: Learn Fair Housing Laws
Avoid fair housing complaints and treat all prospective tenants equally to avoid discrimination/ Fair Housing lawsuits.
Learn and comply with Fair Housing Laws, including:
- Have a written tenant selection policy and give a copy to applicants.
- Grant prospect requests for reasonable accommodations.
- Avoid rejecting applicants for reasons other than legitimate business reasons such as poor credit scores, disqualifying income, or negative references from prior landlords.
6: Accommodate Disabled Tenants
Be sure that your rental property is accessible to tenants with disabilities or impairments.
Check with the Fair Housing Act’s "design and construction" requirements.
Grant reasonable accommodation requests from tenants or prospects with disabilities. This could mean allowing a guide dog even if you have a "no pets" policy, installing grab bars in a bathroom, or a wheelchair ramp for someone with mobility impairments.
7: Be Consistent In Your Business Practices
Your rental property isn't just an additional source of income. It's a business. Be professional and consistent in how you operate it.
- Create and enforce rules.
- Be careful with prospective and current tenants’ personal and sensitive information.
- Have a written rental agreement signed by you and the tenant. If a rental agreement is about to expire, extend the term of the lease and put that extension in writing.
- Have all tenants complete a rental application with references and perform a credit check.
8: Be Prepared for Emergencies
When disaster strikes, it's usually with very little warning. An unexpected wildfire, flash flood, or other disaster could put your tenants physical safety and your investment property at risk.
Take steps to protect your property, tenants, and your business in the event of an emergency.
- Create an evacuation and emergency procedures plan and go over it with your tenants.
- Be prepared for power loss: generators, battery powered flashlights and radios can help keep tenants safe and healthy in the event of a power outage.
- Document the location of utility shut-off valves, which can minimize damage due to fire or other disaster.
- Keep a fire extinguisher on site with clear use instructions.
- Keep your computer files and important documents, such as your mortgage documents, notes, and rental contracts, backed up on your computer and secured in a fireproof, off-site facility.
9: Reduce Crime Risk
Not only can crime on your rental property cost you in terms of damage repair, but you could also be held responsible if you failed to provide adequate protection/ prevention against crimes at your property.
Be sure that your tenants are reasonably protected against crimes.
- Comply with state and local laws pertaining to security measures for rental properties. Make sure that alarms function and your tenants have the code for use.
- Check all door locks and window latches and upgrade if needed.
- Carefully screen your applicants as well as any employees who might be on the property.
- If a tenant has a reasonable request for a security upgrade to the property, be sure to honor it.
10: Avoid Tax Issues
Many landlords choose to rent their property for the tax benefits of owning a rental property. But with extra tax benefits comes extra tax responsibilities.
- Establish a recordkeeping system that tracks your business claimed income and expenses.
- Talk to a tax and/ or legal professional to understand how your business structure will impact your taxes.
- If you're preparing your own taxes, be sure you know what deductions you're entitled to.
- If your rentals earn a profit for the year, prepay those taxes by making estimated quarterly payments.
- Consult with a tax pro. If you're new to the landlord thing, be sure you talk to someone with experience who can help you maximize your deductions and minimize your chances of an audit.
If you run your rental property like a business, you're sure to avoid many of the risks and pitfalls that can come with property ownership. Like any other business, good risk management practices can help you see potential liabilities before they strike and give you the tools to mitigate lawsuits, claims, and unexpected surprises if they happen to you.