Avail data reveals that the 8 million independent landlords in America own the majority of the rental units nationwide. Rental real estate is undoubtedly worth investing in since it is an excellent source of passive income. However, it is also risky since any damage to your property can cost you money and tenants. Fortunately, you can lower these risks by taking several wise precautions. If you want to learn more about protecting your rental property investment, take a look at these points.
- Run it like a business
A rental property is a great investment avenue and a business, so starting to think this way immediately after becoming a landlord is crucial. Consequently, select the proper business structure to secure your assets from the risks associated with landlordship. For instance, by structuring your rental property enterprise as an LLC or other corporate entity, you can mitigate the risks from internal liabilities like lawsuit threats from visitors or tenants. Forming an LLC for your rental property business is preferable because it offers similar protections minus the complications of a traditional corporation. You can even create a separate LLC for each house if you have multiple rental properties, ensuring that they are held as individual assets from one another without any shared liabilities.
- Purchase a home warranty plan
A home warranty plan is vital to protect the contents of your rental property, so investing in a great one is worth it. Home warranty plans cover various major home systems and appliances when they break down. As such, you won't need to fund any huge repair bills out of your pocket when your tenant's heating and cooling, plumbing, and electrical systems become faulty. Similarly, you won't need to pay exorbitant amounts to fix appliances like refrigerators, washers, dryers, and ovens when they break down. Instead, your home warranty plan provider will fund at least part of the repair to ease the burden on your shoulders. Besides saving significant cash, investing in a home warranty plan as a landlord can also save you time and effort. Your provider acts as the intermediary between you and various contractors, so you only need to call your warranty company when tenants report a malfunction. Then, the warranty company searches for a suitable contractor to handle any repairs, keeping your involvement in the entire process minimal. Since these companies have to work fast to guarantee a good level of services, problems will be solved quickly, improving your tenant retention rates and helping you attract more renters. However, many experts advise paying close attention to the coverage and contract terms since some companies may sneak in clauses that will enable them to avoid payments.
- Get landlord insurance
When your house becomes a business, you need a lot more than homeowners' insurance to protect it adequately. Homeowners' insurance is designed to safeguard owner-occupied properties. It doesn't offer the necessary protection you need as a landlord if something goes wrong on your property, whether deliberate or accidental. Therefore, taking landlord insurance is your best bet to cover the unique risks you face as a rental property owner. This type of insurance covers you for common occurrences that can cause damage to your property. It also covers any furnishings in these buildings and your rental income. You can even customize your insurance plan to enjoy extra cover for periods of no occupancy, lost rent, and accidental damage. Furthermore, take a landlord insurance plan that includes liability coverage, so you will be protected if one of your tenants is injured on your property and manages to prove your responsibility in a law court.
- Conduct thorough background checks on tenants
Bad tenants are undoubtedly the bane of landlords, so it is crucial to act proactively to avoid terrible renters at all costs. Your rental income depends on the reliability of your tenants, and how they treat your property is as essential as them paying on time. Therefore, run background checks on anyone who applies to stay in your property to protect your vital investment. Fortunately, there are many ways to accomplish this these days. For starters, you can use Equifax to know their credit score to obtain a fair idea of their financial standing. Then, reach out to their current employer to know how reliable their current job is.
In addition, look through any criminal convictions database in your state and the country to see whether your prospective tenant's name pops up in either of them. A countrywide check is especially essential because you can't be too sure that applicants are telling the truth about their past, so keep this in mind. Also, consider looking them up on social media to know some more about who you are allowing into your rental property. You can do the majority of your background checks with a computer and an internet connection. Alternatively, consider hiring specialized services to run these checks to save time, which may cost you some good cash.
- Insist that tenants pay security deposits
Many experts agree that your rental agreement should include the payment of a security deposit or rental bond to protect your investment. This fixed sum is typically paid to you at the start of the tenancy. It acts as standard protection against any breaches of the lease agreement by your tenant. The security deposit covers common issues like rent loss and property damage. This deposit is held in trust throughout the rental period, and you will refund it to tenants at the end of the agreement if no breaches occur. Your property value determines how much your tenants should pay in security deposits or bonds, so research this before entering into any lease agreement. However, remember that a standard deposit is often the cost of one month's rent, although different state laws regulate the maximum amount you can charge.
- Conduct regular inspections
Regular inspections are crucial to ensure that your rental property is in top-notch condition, so prioritize checking your houses often. These inspections can help you find out and address essential issues in time, offer you much-needed peace of mind, and keep tenants more motivated to maintain the property well. You can schedule routine visits to your property on fixed dates or periods. For instance, if your renter is on a one-year lease, you can do a 6-month lease inspection twice. A quarterly assessment might also be more feasible for you, depending on your unique situation. During these inspections, ascertain the overall quality of your property by checking for water damage, water leaks, fire extinguishers, pests, furnace filters, window and door seals, smoke batteries, and the state of any appliances. Furthermore, decide whether you will conduct these visits yourself or have a trusted appointee do it on your behalf. Although routine inspections are standard, an occasional surprise visit is necessary to discover precisely how your tenants behave. However, ensure that these surprise visits are outlined in the lease agreement to prevent any misunderstandings.
- Know the risks you are liable for
Individual landlords obtained a reported $353.7 billion in rental income in 2018, which is a lot of money. However, any savvy business person understands that top-line revenue doesn't necessarily imply bottom-line profit. Indeed, many landlords lose money on their properties each year, with legal issues being one of the significant reasons why landlords keep running at losses. It is not uncommon for tenants to sue landlords over minor issues. Even if you win, the many legal fees you will have to pay can drain your finances. Therefore, be more aware of your landlord responsibilities by learning about what you are liable for, so you can avoid falling victim. For instance, you will be held responsible for building code violations, dangerous animals or pets, and hazardous conditions on the property. As such, handle all these issues proactively to avoid any legal battles that can harm your rental property business.