Many people are motivated by the desire to be a landlord. The promise of steady cash flow and growing equity is quite appealing. However, there are risks associated with being a landlord, just as there are risks in any business venture. Don’t be deterred by the risk, though; being a landlord is a profitable and rewarding experience, and you can minimize the risks by being prepared. In this two part series, we will discuss how you can lower your risks as a landlord.
#1 – Purchase Sufficient Insurance
Insurance plays an important role in minimizing the risks associated with being a landlord, because if you have the right coverage, expenses due to damage or accidents will be covered. There are three types of insurance that cover rental properties.
Personal Liability Insurance: A personal liability insurance policy protects the landlord from lawsuits. This type of policy covers you if you are sued for a violation of the Fair Housing Act. It also provides protection in the event that a tenant is injured on the premises of your rental property or if there is an injury as the result of hazardous conditions or criminal activity.
Property Insurance: A property insurance policy covers damage to the structure of the property itself.
Rent Insurance: Rent insurance protects the landlord by reimbursing her for lost rent in the event that the property cannot be inhabited due to damage caused by a tenant or a natural disaster.
Landlords should also strongly encourage or require their tenants to purchase renter’s insurance. Property insurance covers the structure of the home, but does not cover the tenant’s personal belongings. Renter’s insurance protects the tenant by reimbursing him for damage to his belongings in the event of a fire or other damage.
#2 – Get to Know Fair Housing Laws
The Federal Fair Housing Act prohibits landlords from discriminating against tenants based on their race, skin color, gender, religion, national origin, disability, or family status. There are additional fair housing regulations that vary by state. The important thing to remember is that you must treat every tenant or rental applicant equally. Never indicate a preference for a particular type of tenant in your advertisements for a rental. Landlords also cannot deny availability of rental or create different rental terms for particular tenants. All lease agreements and lease terminations must be based on business reasons, not personal reasons. Any employee or agent acting on behalf of the landlord must also comply with fair housing regulations in their dealings with prospective or current tenants.
#3 – Develop a Consistent Screening Process
One of the ways that landlords can avoid violating the Fair Housing Act is by developing a consistent screening process for rental applicants. Use a standard application, and require every prospective tenant to go through the exact same screening process. If you require a credit check for one applicant, you must require a credit check for every applicant. In addition, be sure that you are only rejecting tenants for legitimate reasons. Acceptable reasons for rejection include poor credit history, insufficient income, and unfavorable references from previous landlords. You should also make reasonable accommodations for disabled tenants.
To learn more about how you can lower your risks as a landlord, check out part two of this series.
If you own a rental property in Phoenix and Scottsdale or are considering purchasing one, contact McMath Realty. We provide investment consulting, property management, rental management, property inspections, and home maintenance. We make it easy for you to own a rental property, so give us a call to learn more about our services today.