How to Minimize Risk When Renting Out Investment Property
Choosing good tenants, using a legal lease, and taking care of maintenance and repairs can help minimize risk when you purchase investment property.
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You have purchased a real estate investment property, and you have obtained insurance for it, but you are still concerned about the risks involved in renting it out. Here are some additional steps you can take to protect yourself and your investment property.
Choose Tenants Wisely
One of the best ways to avoid problems is to do a thorough check on all potential tenants, to weed out those who may cause property damage to your rental. When it comes to residential rentals, it's always a good idea to run a tenant's credit report to see if there is any history of eviction for property damage. And checking references from previous landlords is a crucial way to find out how a tenant took care of previous rentals (residential or commercial).
Provide Working Detectors and Fire Extinguishers.
State and local laws vary, but it never hurts to provide carbon monoxide (CO) detectors on every floor of a rental property. Do the same with fire extinguishers. You may not be legally required to provide fire extinguishers in single-family-house rentals, but the low cost (approximate $20) of purchasing one is a wise investment. The tenant will appreciate the courtesy and will likely be more conscientious about taking care of the property as a result.
For commercial rental units, there will be stricter guidelines on the devices you need to provide. State regulations may also stipulate that a professional company perform annual inspections of your fire protection equipment.
Check with local housing authority and fire departments regarding equipment you must provide in commercial and residential rentals, and also ask your insurance broker for advice on the subject.
Inspect the Property Personally
Periodically check on the property to ensure it is being maintained in the manner you wish. Even if the tenant-landlord relationship is going well, it’s a good idea to get eyes on the inside of the property a couple times a year.
If a tenant (in a residential rental) isn’t going to be home during your inspection, be sure to provide the required amount of notice (typically 24 or 48 hours) before entering. For your state rules, see the Nolo chart, State Laws on Landlord's Access to Rental Property.
Follow a Maintenance Checklist
Even if you are managing only one investment property, it’s easy to forget when was the last time you had the furnace serviced, or the chimney inspected. Managing your day job and regular life makes this inevitable.
Keep a record of all the recurring items you can think of and get them on a schedule: biannual septic pumping, annual sprinkler system inspections, annual furnace maintenance, and so on. Make note of the non-recurring items as well, such as roofing or plumbing repairs. The contractor whi comes to handle a repair will inevitably ask when the item was installed or last worked on (and by whom), and having clear records will come in very handy.
Being organized and following service recommendations will help protect the property, and also provide insurance companies no excuses to refuse your claims for reasons of negligence, should significant damage actually occur.
Advise Tenants of Safety Concerns or Problems
You need to get in front of and communicate issues immediately before they create non-reversible damage. Make sure tenants know your rules and regulations, and best practices, when it comes to things like overloading circuits or toilets. With residential rentals, you can do this as part of your lease or rental agreement, or in a separate move-in letter.
If you notice unsafe practices, such as a tenant keeping a space heater running 24/7, with clothes stacked on top of the heater, act right away. Let the tenant know that this is a fire hazard and an unacceptable violation of the lease agreement. Don’t be shy about recommending proper home care practices to your tenants on relevant security and safety topics. Tenants who see you care about the property will be more likely to maintain it to your standards, thus protecting your investment.
Get Tenant Improvement and Repair Requests in Writing
Your lease or rental agreement should clearly specify tenant repair and maintenance responsibilities, require the tenant to notify you of dangerous or defective conditions on the property, and seek your consent for repairs or alterations.
Providing casual approval of minor repairs and home improvements that tenants want to make is typically fine, because it usually has to do with the tenant wanting to paint a room a different color. But every now and then you get the Mr./Ms. Fix-It tenant that thinks they know how to wire electricity or do their own plumbing, despite never having worked professionally as either. At the first hint of this tenant type, make clear that all and any kind of home improvement the tenant wishes to make needs to be formally written and submitted to you. This will give the tenant pause over any projects he or she anticipated taking on and give you the ability to better control what happens in the rental unit. Having a say in when a tenant needs to hire a professional before taking on a project will save you from finding out the bad news that the tenant blew out half the electricity in the unit, or worse.
Use Legal Leases
If you purchased a property with a tenant already in it, ensure the current lease is appropriate and in keeping with state legal requirements. During the purchase process you should be given ample opportunity to review the existing lease(s) and at that time you can make a determination, with the assistance of your attorney, if they are adequate or should be written anew. You do not want a lease in place that has articles considered illegal by the state! Nolo leases and rental agreements are legally accurate and effective.
Know Your State Rules for Terminating a Tenancy
Should your tenant fall behind on rent or commit another breach of your lease or rental agreement, be sure to send proper notification to the tenant of the breach as soon as it has been committed. If the breach results in a lengthy court dispute, you will want to save yourself as much time as possible so that you can get back to renting it out again to a new tenant. Starting the process early means ending it earlier.
Nolo publishes many articles on tenant terminations, including state rules and notice requirements for terminating a tenancy for nonpayment of rent or for a lease violation. See the Evicting a Tenant or Ending a Lease section of the Nolo site for details.