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10 Tips for Being a Low-Risk Landlord

As with any venture, being a landlord comes with benefits and risks. The chief goal of real estate investing is to generate rental income. Generating passive income can be challenging if a landlord constantly deals with tenant and property management issues, which can raise a landlord's risk profile.

Fortunately, there are ways landlords can minimize their risks. This article explores 10 tips to help landlords lower risk and avoid common landlord mistakes.

Understanding Rental Property Ownership

Understanding rental property ownership can help landlords mitigate risk. Unlike real estate investment trusts (REIT), most landlords are small business owners. In a REIT, multiple real estate investors combine their money to invest in rental properties. This limits the risk to a sole investor, like homeowners who buy small buildings.

Many rental property owners build their inventment portfolio one piece at a time. They often use a realtor who understands their local real estate market and home prices before finding the right lender. If they take out a mortgage, they must ensure the rental property generates enough income to cover mortgage payments. Many rental property owners attempt to increase the property's value through renovations and repairs.

Use a Written Lease Agreement

A written lease agreement is more than a binding legal agreement. Leases protect both the rental property owner and the tenant. They outline the duties and responsibilities of each party. Although oral contracts are legal in many states, they increase a landlord's risk. A written agreement will control the outcome of a dispute between landlord and tenant.

Many landlords are small business owners who may draft their own lease agreements to try to save money, but this often backfires. An experienced local real estate attorney can help them save time and money by drafting a legally sufficient agreement.

Here are a few terms of the lease to include in a strong lease agreement:

  • The amount of the security deposit
  • The amount of the monthly rent and the due date
  • Where to make rent payments
  • Move-in date
  • Deposits and fees (i.e., late fees)
  • Term of the tenancy

Obtain Adequate Insurance

Getting the correct type of insurance on a rental property will ensure coverage for accidents and physical damage. This is one way to protect your investment property.

There are three essential types of insurance for rentals:

  • Personal liability insurance: Covers violations of fair housing laws and injuries caused by conditions on the property, such as slip-and-fall accidents, criminal activity, and hazardous material.
  • Property insurance: Pays for structural and physical damage to the property.
  • Rent insurance: Reimburses the landlord for lost rent when the tenant doesn't pay it.

Avoid Fair Housing Violations

Federal and state laws prevent the use of discriminatory practices in housing when selecting a tenant. State laws vary and may prohibit other types of discrimination. The Fair Housing Act and the Fair Housing Amendments Acts prohibit discrimination based on the following:

  • Race
  • Color
  • National origin
  • Gender
  • Religion
  • Familial status
  • Disability

When selecting a tenant, treating every prospective tenant equally is essential. A landlord should not do any of the following:

  • Deny the availability of an available rental dwelling
  • Include preferences or limitations in an advertisement
  • Create different terms or standards for certain tenants
  • Terminate a tenancy for a discriminatory reason

Anti-discrimination laws apply to anyone dealing with the prospective tenant. This includes owners, real estate agents, landlords, and managers. A prospective tenant can report the violations to the local housing authority or the Department of Housing and Urban Development.

Consistent Tenant Screening Process

To avoid fair housing complaints, a landlord should create a suitable application procedure by:

  • Creating a screening process.
  • Only rejecting tenants based on legitimate reasons such as insufficient income, bad credit history, or a negative reference from a previous landlord.
  • Allowing reasonable accommodations for disabled tenants.
  • Requiring all prospective tenants to undergo the same application process.

Use a Property Management Company

It can be tempting for real estate investors or property owners to manage their rental property, as they can save on repairs and maintenance if they do it themselves. While this approach is reasonable for single-family homes, it can be complex and overwhelming for multifamily properties.

A property management company can help owners manage their properties. An experienced, reputable company can help the property owner with everything from background checks to the rental application. They can take care of all the due diligence needs of your real estate investments.

These companies understand the rental market. They can give the rental property owner advice on issues such as pricing dwelling units. They can also help distinguish between qualified and unqualified tenants.

Accommodate Disabled Tenants

The federal Fair Housing Act requires rental property owners to accommodate disabled tenants.

A landlord must:

  • Make the property accessible for disabled tenants. The leasing office and other public areas must be wheelchair accessible.
  • Accommodate the disabled tenant. Disabled tenants must have an equal opportunity to enjoy the rental unit and common areas. This includes providing an easily accessible parking space.
  • Allow reasonable modifications. A disabled person may modify the rental unit at their own expense if the change is appropriate. Creating a ramp for a wheelchair or lowing cabinets is usually considered suitable.

Make the Property Habitable

Under the implied warranty of habitability read into leases, a landlord must provide the tenant with a rental unit that is fit to live in. During the renter's tenancy, the landlord must follow local building and safety codes.

Typically, a rental unit must have the following:

  • Heating
  • Plumbing
  • Gas
  • Clean water
  • Electricity
  • A structurally safe roof

Fix Dangerous Conditions

A landlord must also regularly inspect the property for hazards. If the landlord cannot immediately fix a dangerous condition, the landlord must warn tenants and visitors of the danger. The rental property owner may incur legal liability for injuries resulting from the following:

  • Recklessness
  • Carelessness
  • A violation of a health or safety code
  • The failure to make certain repairs

Understand Tax Implications

Maintaining organized and accurate records is an integral part of managing rental property. It may be helpful to consult with a certified public accountant or a tax attorney for tax advice on your real estate. Tax and accounting considerations may include the following:

  • Type of business structure
  • Passive income and losses
  • Business deductions, such as payroll and property taxes

Get Help

These tips cannot substitute for the advice of an experienced landlord-tenant attorney. They can help landlords navigate landlord-tenant laws and deal with any problems that you may be having with your renters. If you are a new landlord or have issues with your rental property, speak to an experienced landlord-tenant attorney.

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