I’m pretty confident that if you asked anyone who has ever owned a rental property you would get an overwhelming response that it’s not as lucrative or easy as they thought it would be. In fact, owning a rental property can be a major pain, and end up costing you a ton of money!
I certainly don’t want burst your bubble, because I know that if it’s done right it can be lucrative. But from an insurance agent’s perspective, I have seen people doing it right and people doing it wrong.
I have owned a couple rental properties and made many mistakes. I also have several of my friends/family/clients/co-workers own rentals, and because I insure a bunch of their properties, I’ve had a first hand account of the process, and I’ve learned what to do, and what not to do.
1.) Do your due diligence on the rental property
This is undoubtedly the biggest mistake I see landlords make. They are in such a rush to make money, they don’t pay enough attention to the property. I get it–you want to buy the cheapest property possible so you can turn the biggest profit. The problem with that is, the property is cheap for a reason. It has problems–lots of problems.
Many people buy low cost properties with hopes of re-painting the walls every 5 years and making some rent money. The problem is, that’s the exact type of property that insurance companies don’t want to take a risk on.
Be very careful with the “as-is” property too. Unless you have money to burn, know that house inside and out before you make an offer. You are almost always going to spend more money than you think. Most “as-is” properties are either forecloser’s or properties that have been vacant/abandoned.
If you don’t know what to look for in a rental, hire a trusted 3rd party home inspector and make sure everything, and I mean everything checks out. Don’t leave any stone unturned.
In particular, you need to make sure the wiring, plumbing, heating, and roof are all “problem-free”, and that they’ve been upgraded or updated within the past 10 years. If not, have the money in your budget to update them or walk away from the property. I’ve seen more problems with those three things than anything else.
And whatever you do, make sure there are no mold problems. Don’t just assume there isn’t. You need to test the house, and document it. Mold can kill–literally.
Of course, you may want to walk away from a property because it might be cost-prohibitive to bring everything up to decent living conditions, and that’s something that only you can decide, but before you buy a rental property and get a tenant, do your due diligence on the home.
It’s worth the time and effort.
2.) Have written contracts in place
There are many owners of rental homes that do not use. contracts. However, all corporately owned apartment buildings use them. Why? Because, it sets the ground rules and gives you leverage. If you stick to the terms.
Specifically, I’m referring to the rent payments clause. There should be a due date established in the contract, along with a late penalty after so many days, usually 5 – 10 days. If your tenant pays after the due date, you must charge them the penalty. If not, you are giving them the impression the contract is meaningless.
If at all possible, don’t sign less than a 12 month lease, and make sure your tenant thoroughly understands the terms of the contract. Don’t be lazy and just have them sign it without explaining everything first.
You can save yourself a lot of time, money, and hassle if you do this, and it will show the tenant that you are serious, and that they will be held accountable for the property.
3.) Thoroughly screen your tenants
Many times I have seen someone not screen their tenant(s). Most landlords are so worried about getting someone in the property to pay rent, that they fail to check the people/person out.
Really what you should be doing is checking their references and also checking for any criminal activity. These are reports that cost very little up front, and will give you great piece of mind knowing that you have a trustworthy, reliable tenant.
Whether you allow pets and/or smoking is up to you, but I’d be careful with both, because in the end, they could cost you money if you have to repaint, replace carpeting, etc. They could also potentially result in liability exposure with dog bites, and house fires.
Also consider requiring your tenant to carry their own renters insurance (HO4 policy). Again, this is another requirement that large apartment complexes require. Let the tenant know that your insurance doesn’t cover them or their stuff.
4.) Make sure you have a Dwelling Fire insurance policy
Having the correct type of insurance for your rental property is paramount. The problem is, most people don’t know that they need a certain type of policy.
You can not buy traditional homeowners insurance for a rental property. What you need is called a “Dwelling Fire” policy, or sometimes it’s referred to is a “Landlord” policy.
Keep in mind that the underwriting for rental properties is generally a little tighter, and the coverage isn’t as broad as what you would find in a traditional homeowners policy. As I mentioned before, many people buy properties in low income areas, with hopes of re-painting the walls every 5 years and making some rent money.
The problem is, that’s the exact type of property that insurance companies don’t want to take a risk on.
A common mistake I see is someone moves into a new home and keeps the same insurance policy on their old house. Then, they either rent out their old home or let another family member live in it (i.e. their kids or other relative). You still must buy Dwelling Fire policy for for this situation. A regular homeowners insurance is not designed to insure a non-owner-occupied home, and your claim would almost certainly be denied if you had the wrong policy.
Another thing you need to be aware of, is that most Dwelling Fire/Landlord policies state that if a property is vacant/un-rented for more than 30 consecutive days (with some companies it’s 60 days), coverage can be severely reduced and even eliminated, so make sure if it’s a rental property, don’t let it sit vacant too long.
If you think it will be vacant for more than 30-60 days, you need to let your insurance carrier know that, because that situation would most likely call for a different type of Dwelling Fire policy.
5.) Keep tabs on your rental property
Keep records of all repairs, and make sure you physically visit or at least drive by the property every 3-6 months or so to make sure everything is in good working order. This includes inspecting the inside of the home. You must give the tenant the legal advance notice required by your state. Remember, this is an investment. You need to maintain and take care of the property just as if it was your primary residence.
Owning a rental properties can be a lucrative business that can generate a lot of passive income. However, if you don’t abide by these 5 rules, it could end up being a royal pain, and cost you a lot of money in the process.
About Richie Buchanan
Richie Buchanan is owner of ISU Insurance and Investment Group where "We stop insurance confusion".
Married to Susan and father of Jackson (3) and Evie (1), most free time is spent with them.
Focused on innovation. It is a key for small business to compete in today's "Amazon World".