I’m convinced that if you questioned anyone who has ever had a rental property, they would tell you that it’s not as profitable or easy as they anticipated it would be. In truth, owning a rental property may be extremely time-consuming and costly.
I don’t mean to be a Debbie Downer, and I understand that if done well, it may be lucrative, but as an insurance agent, I don’t see a lot of people doing it correctly.
“Well, Paul, you’re an insurance agent,” you’re probably thinking. What do you know about real estate or renting out your property? “Why should I listen to your advice?”
I’m not a realtor, and I don’t own a rental property. However, several of my friends/family/clients/coworkers own rentals, and because I insure several of their homes, I have inside knowledge of the process and know what to do and what not to do.
1. Do your due diligence on the rental property
This is without a doubt the most common error I see landlords make. They are in such a hurry to generate money that they neglect the property. I understand your desire to purchase the cheapest property feasible in order to maximize your profit. The issue is that the property is cheap for a reason. It has issues—lots of them.
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.
Be cautious of the “as-is” property as well. Stay away unless you have money to burn. You will nearly always spend more money than you anticipate. The majority of “as-is” properties are either foreclosures or vacant/abandoned properties.
If you’re not sure what to look for in a rental, engage a reputable third-party house inspector to ensure that everything, and I mean everything, checks out. Make certain that no stone is left unturned.
Everything must be up to code before you can rent to a tenant. Period. Bring it up to code if it isn’t already.
Make certain that the wiring, plumbing, heating, and roof are all “problem-free,” and that they have all been upgraded or replaced within the last ten years. I’ve seen more difficulties with those three things than anything else, and if they’re not in good functioning order, you’re putting yourself (and your tenant) at risk.
Also, make certain that there are no mold issues. Don’t simply assume that there isn’t. You must test and document the house. Mold may literally kill.
Of course, you may want to walk away from a property because it may be prohibitively expensive to bring everything up to code, and that is something only you can determine, but before you buy a rental property and find a renter, do your homework.
It is time and work well spent.
2.) Have written contracts in place
Locate a lawyer and pay his or her fee. It’s worth it, believe me. “You break it, you purchase it,” you can’t just tell your tentant. A formal rental contract and lease must be in place.
If at all possible, do not sign a lease for shorter than a year, and ensure that your tenant fully knows the conditions of the contract. Don’t be a slacker and just have them sign it without first explaining everything.
This will save you a lot of time, money, and hassle, plus it will show the tenant that you are serious about holding them accountable for the property.
3.) Thoroughly screen your tenants
I’ve never seen someone screen their tenants (s). Most landlords are so concerned with having someone to pay rent that they fail to screen the people/person.
At the very least, you must ensure that your tenant has their own renters insurance. Inform the tenant that your insurance does not cover them in any way.
What you should really do is check their credit and look for any criminal activity. These are low-cost reports that will give you peace of mind knowing that you have a trustworthy, dependable tenant.
It’s up to you whether you allow pets and/or smoking, but I’d be cautious about both because they could wind up costing you money if you have to repaint, replace carpets, and so on. They may also result in liability exposure due to dog bites and house fires.
4.) Make sure you have rental property insurance
It is critical to get the necessary insurance for your rental property. The issue is that most consumers are unaware that they require a specific type of policy.
Traditional homeowners insurance is not available for rental properties. What you require is a “Dwelling Fire” policy, also known as a “Landlord” policy in some cases.
Keep in mind that underwriting for rental properties is often tighter, and the coverage isn’t as extensive as what you’d find in a standard homeowners insurance. As I previously stated, many people purchase buildings in low-income neighborhoods with the intention of re-painting the walls every five years and earning some rent.
The difficulty is that that is precisely the type of property that insurance companies do not want to take a chance on.
unless you are required to purchase this type of policy for a rental. Regular homeowners insurance is not meant to insure a non-owner-occupied house, and if you have the improper policy, your claim will almost definitely be denied.
Another thing to keep in mind 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 or even eliminated, so if it’s a rental property, don’t leave it vacant for too long.
If you believe it will be vacant for longer than 30-60 days, you must notify your insurance company, as this condition will almost certainly necessitate a different form of Dwelling Fire policy.
5.) Keep tabs on your rental property
I’ve had folks phone me for rental property quotes, and when I start probing them on the building details, they know nothing about the house.
Some people are unsure whether the house is brick or siding, or what material it is built of. They have no idea how old the roof is or when the heating system was last serviced.
Folks, if you own a rental property, you must be aware of all of the following.
I once met someone who had bought a house from a contractor who had flipped it and hadn’t even seen it. He bought it on the contractor’s word and knew nothing about it other than that he intended to rent it out as soon as possible. That is, to say the least, inept. You should not try to buy insurance on a residence you have not yet viewed.
You need to keep tabs on your property.
Keep track of any repairs and make a point of visiting or driving by the property every 3-6 months or so to ensure that everything is in working order. Keep in mind that this is an investment. You must maintain and care for the property as if it were your primary dwelling.
Owning rental properties may be a lucrative company that generates a lot of passive income; however, if you don’t follow these 5 principles, it can be a royal pain and cost you a lot of money.