Although investment properties often yield a predictable cash flow and healthy margins, they can also open you to substantial levels of risk. Those risks are significant enough that some people just avoid this form of investment.
But if you know how to handle risk, you can systematically limit your liabilities and ensure a greater chance of enjoying the positives of owning rental properties.
Six Tips for Limiting Liability
When you’re a landlord, you don’t enjoy the luxury of assuming everyone has your best interests in mind. You also can’t afford to regard your investments through rose-colored glasses.
An optimistic outlook is good, but you also have to be somewhat realistic. We live in a litigious society, where people will file a lawsuit on almost any pretext. If you do not grasp this, you could find yourself in the middle of a situation that could tarnish your reputation and threaten your finances.
But you don’t have to hang in the region of legal crosshairs and hope everything works out for the best. If you put some smart strategies in place, you can reduce your liability and breathe a little easier. Here’s how.
Get Property Inspections
Liability reduction can begin on the front end. When you purchase a new rental unit, you have to obtain a thorough property inspection from a licensed and qualified professional.
A solid inspection does more than analyze the surface details and basic components of a house. It should dig deep and look proactively at potential problem areas that could lead to worrisome issues later on (such as the foundation, roof, electrical systems, and plumbing systems).
By identifying any possible problems comfortably before the purchase, you can either get them fixed or cross this investment off your list and search for another property. With either course, you’ll be better off.
Buy What You Can Afford
Another point when you’re seeking a good investment: Don’t buy more house than you can afford. A couple of things are apt to happen if you spend too much:
- A larger percentage of your tenant’s rent payment will go toward principal and interest and leave you with less income from your investment.
- It’s never a good idea to tie up a large chunk of your capital into a single asset. If you invest beyond your means, you could end up in a precarious situation where the vagaries of the real estate market dictate your financial condition.
- When your budget gets stretched and most of your rent checks go to paying down the loan, you could be tempted to skimp on repairs and preventive maintenance that should be addressed to keep your property and tenants safe.
Fortunately, you don’t have to spend a ton of money to locate profitable investment properties. Unless you’re located in an extreme bubble market — such as San Francisco or Manhattan — viable investments can be found at nearly every price point. There’s no sense in going beyond your level of affordability.
Obtain the Right Insurance Policies
At a minimum, every landlord should carry the following four types of insurance coverage to protect against lawsuits and uncontrollable factors:
- General liability insurance. This third-party coverage reimburses you if you end up in a situation where you’re held personally responsible to compensate someone else for their loss. It won’t cover intentional acts of wrongdoing, of course — like assault — but it will typically cover general liability situations and negligence.
- Umbrella insurance. It’s usually a good idea to lay an umbrella policy over general liability to provide additional coverage that will go beyond the limits of the latter. One hopes you’ll never experience the need for an umbrella policy, but it’ll ensure peace of mind.
- Property and casualty insurance. This type of policy covers you from damage that results from fires, storms, and other catastrophic events that may cause extensive damage and/or render your rental property uninhabitable.
- Flood insurance. Property insurance won’t cover damage from floods, though. If you’re in a region that’s prone to flooding — or has witnessed a flood in the past — it’s worth obtaining a flood insurance policy to protect against water damage from natural disasters.
You can get dozens of specialized insurance policies to protect you against this and that, but the above four will cover almost anything that might happen. They also tend to be affordable, which you really have no excuse to not obtain them.
Carefully Screen Tenants
You can eliminate a long list of headaches by avoiding problematic tenants and signing lease agreements with honest, disciplined renters who take care of your property, pay on time, and follow your rules.
Tenant screening is one part science and one part intuition. You need a system that enables you to vet prospective tenants efficiently and in an objective manner. Refine this system constantly as you see fit.
Hire Licensed Professionals
When your properties need maintenance and repair work done, you should be smart about the people you hire. Work only with licensed professionals and contractors who have their proper certifications and insurance coverage. Not only will this protect you if workers get hurt, but it will also increase the likelihood that these companies perform quality work.
Have a Real Estate Attorney on Speed Dial
You don’t necessarily have to keep a lawyer on retainer, but you will inevitably encounter situations where you need a real estate attorney to help you sort through the issues or at least answer your questions. Admittedly, the advice will cost you, it will be far less expensive to get sound advice in the present than to clean up mistakes later.
Hire Green Residential Today
If this sounds like a hefty to-do list, you’re not wrong. Limiting liability demands a lot of discipline and effort … particularly on the front end of an investment. However, this isn’t something you have to tackle on your own.
The number-one way to reduce liability is to hire a professional property management company to do the heavy lifting for you. At Green Residential, we work with Houston-area landlords to provide comprehensive property management services that are designed to lighten burdens, lower risk, and maximize profits — all while delivering a positive experience to tenants and landlords alike.
From property marketing and tenant screening to rent collection and maintenance requests, we handle it all. For more information on our services — and to obtain a free Houston property management analysis — please give us a call today!