Real estate is one of the smartest investments you can make. Considering that rates of renting are increasing every year – thanks to Millennials and Gen Z, who have largely refuted traditional home ownership paths – and that rent has increased in almost all cities across the U.S., becoming a landlord could be the financial boost you always wanted.
However, real estate is also risky. Property is not inexpensive; even after you have paid off your mortgage, you can expect the costs of regular maintenance to add up. Plus, every renter threatens your investment due to the possibility of negligence or direct damage to the property.
Yet, you absolutely should invest in real estate and become a landlord – but you should be smart about protecting your investment as thoroughly as you can. Here are a few ways you can mitigate the financial risks of real estate and flourish as a landlord.
Get the Right Insurance
Typical homeowner’s insurance won’t cover anything in an investment property. That’s because the insurance you seek to protect your primary residence assumes that you will be on-hand to perform maintenance and preserve your investment; in a rental property, not only will you be absent nearly all of the time, but the people who are living on the property have little to no incentive to keep it safe and secure.
Thus, your first step to protect your investment should be procuring the correct insurance for your property: landlord insurance. While on the surface these policies look identical to typical homeowner’s insurance, they do more to safeguard your investment from careless renters. For example, in the event you cannot rent your property due to previous damage, your insurance will cover that loss of income while you rebuild.
Remember Home Warranties
Unlike insurance, home warranties do not differ between primary and investment properties. Whenever you purchase a home, you should acquire a home warranty to ensure the proper function of its various systems, regardless of whether you plan to live there or rent the space to tenants. A home warranty will help you avoid the excessive costs of replacing old appliances, HVAC units, electrical and plumbing and more. A renter cannot buy a home warranty because they do not own the property, so it is up to you to protect your investment in this way.
Consider Forming an LLC
If you plan to buy several rental properties and make landlording a significant source of income, you should strongly consider forming an LLC to protect your personal assets. If you purchase all your properties under your name, you assume the liability of their debts, so your real estate investments can force you into bankruptcy – and worse. Conversely, an LLC would assume those debts for you, keeping your personal finances safe.
Creating an LLC is easier than you might imagine, but the precise process does vary from state to state. Usually, all it requires is a business name, an operating agreement, a bit of paperwork and a filing fee of between $100 and $800. Then, you can enjoy financial security alongside the lucrative gains of rental properties.
Rely on a Property Manager
As handy as you might believe yourself to be, you probably don’t want to wait hand and foot on your tenants. Disasters can strike at the most inconvenient times – in the middle of the night, just before your long-awaited vacation, on the day before Thanksgiving – and you shouldn’t have to drop everything to replace a broken window or diagnose a problem with the refrigerator. That’s why you need a property manager.
In truth, property management firms do much more than handle maintenance requests from tenants. They can also manage monthly rent payments, perform tenant searches, handle evictions and more. If you prefer to enjoy the fruits of property ownership without the headaches, the minor costs of property management are well worthwhile.
Write the Right Tenant Agreements
The time has long passed when handshakes were an acceptable beginning, middle and end to agreements. You should know that you need a written and signed contract from your tenant to ensure your agreement is enforceable under the law. However, you should also be certain that your rental agreements say what you need them to, so your properties stay safe. At the bare minimum, your contract should state:
- The names of your tenants
- The limits on occupancy of your property
- The term of the tenancy
- The mandatory rent payment
- Any deposits and fees required
- Responsibilities for various repairs and maintenance
- Restrictions on illegal activity
- Rules regarding pet ownership
You could take a risk and skip protecting your property – and you might still profit for a time. However, sooner or later, a tenant will make you wish you had taken action to keep your investment safe. Thus, it is smarter to make moves first, and thus avoid regrets, with these six simple steps that will continue to protect your real estate.
