11 Steps To Protect Your Rental Property Investment

There are many pros and cons to owning a rental property. If you’ve considered renting out your property, there are ways you can minimize your risk and protect your investment. You can protect yourself -- and your property -- from physical damage, lawsuits, and insurance claims, even if you’re a first time landlord.

What sorts of risks are you facing when you become a landlord? First, there are inside risks: those produced by the property itself. An example of this is a tenant who is injured on the property. As a landlord, the law tends to hold you responsible for the safety of your tenants. You’re generally held responsible for anyone injured on your property, regardless of who’s at fault.

Another risk you may face is an outside risk presented by other activities that could threaten equity in your property. This could be a business dealing that leads to lawsuit which could threaten your real estate investments.

#1: 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.

#2: Run Your Business Like a Business

Once you become a landlord, you’re operating a business. 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 complications arising from traditional corporation.

After you form an LLC for your rental property business, you will then transfer the property into your LLC with a deed. If you have multiple rental properties, you may consider forming a separate LLC for each one to isolate each property from the liabilities of each other.

#3: Safety Matters

The best way to avoid a lawsuit or insurance claim for an injury on your property is to ensure that it’s safe. Learn 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 tenants 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: Be Prepared for Emergencies

When disaster strikes, it’s usually with very little warning. In the event of a severe storm, earthquake, wildfire, or other unexpected situation, sometimes all you can do is be prepared for the aftermath. 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, note, and rental contracts, backed up on your computer and secured in a fireproof, off-site facility.

#5: Learn Fair Housing Laws

Avoid fair housing complaints and treat all prospective tenants equally to avoid civil rights legal actions. 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: Accomodate 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, such as allowing a guide dog even though you have a “no pets” policy, or 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 careful and consistent in how you operate it.

  • Create and enforce rules.
  • Be careful with prospective and current tenant’s 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: Document Property Condition

Before a new tenant moves in, document the condition of your property in pictures. Provide the tenant with a move-in inspection list (in some states, this is required by law). Go over the list with the tenant. When a tenant moves out, perform another inspection and document the condition of the property again.

#9: Reduce Crime Risk

Failing to provide adequate security against crime may result in you being responsible for crimes on 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 Hiring Missteps

If you’re going to use workers to help you with your rental property business, be sure you’re going about it the right way. Using employees and contractors can be a big benefit -- or bring a big legal hassle.

  • Avoid misclassifying employees. It’s critical that you correctly determine if you have an employee or an independent contractor working for you. The IRS has some rules to help you find out if your worker is an employee or contractor.
  • Be sure to withhold the appropriate payroll taxes for employees. Learn and comply with federal and local employment laws.
  • Institute a zero-tolerance and drug screening process for prospective and current employees.
  • Be sure all independent contractors have insurance and a written contract.

#11: 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 you’re 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.

 

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