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How to Protect Your Rental Property Investment

There are many pros and cons to owning a rental property. If you’ve considered renting out your property, there are ways you can minimize your risk and protect your investment. You can protect yourself -- and your property -- from physical damage, lawsuits, and insurance claims, even if you’re a first time landlord.

What sorts of risks are you facing when you become a landlord? First, there are inside risks: those produced by the property itself. An example of this is a tenant who is injured on the property. As a landlord, the law tends to hold you responsible for the safety of your tenants. You’re generally held responsible for anyone injured on your property, regardless of who’s at fault.

Another risk you may face is an outside risk presented by other activities that could threaten equity in your property. This could be a business dealing that leads to lawsuit which could threaten your real estate investments.

Get the Right Insurance for Your Rental Property

When your home becomes a business, it needs a little more than homeowners’ insurance to properly protect your investment. Homeowners’ policies are meant to cover owner-occupied properties, not non-owned or vacation rental properties.

Rental property insurance is tailored to address the specific risks you face as a landlord, offering protection for the property, your financial investment, income, and business.

Learn Fair Housing Laws

Avoid fair housing complaints and treat all prospective tenants equally to avoid civil rights legal actions. Learn and comply with Fair Housing Laws, including:

Have a written tenant selection policy and give a copy to applicants.

Grant prospect requests for reasonable accommodations.

Avoid rejecting applicants for reasons other than legitimate business reasons such as poor credit scores, disqualifying income, or negative references from prior landlords.

Screen residents thoroughly

Every owner fears the resident that pays late or not at all, is constantly asking for fixes around the property and causes disturbances in the neighborhood. Finding the right tenant is not rocket science, but a thorough vetting and a consistent process can help property owners avoid the nightmare tenant.

Almost every property owner has at least one nightmare resident story.

Consider an LLC to protect personal assets

While LLCs offer many benefits to owners, they are not necessarily the best approach in every case.

The primary benefit of forming an LLC (a limited liability company) for real estate investors is that if something goes wrong at a rental property — such as a resident or a visitor getting hurt or injured — members of an LLC are not liable. The members’ personal assets, including their homes, cars, bank accounts and investments, are protected from an injured party that intends to sue. Nor are the members personally liable for the LLC’s debts.

If an investor owns one or two properties, an umbrella insurance policy, or extra liability coverage, will protect an owner’s assets in most cases. But once a property owner’s assets exceed the amount of liability insurance she is carrying, an LLC will offer an additional layer of protection. For instance, if an owner has $5 million worth of properties in multiple homes and only $2 million in liability insurance, she should consider setting up an LLC.

Prioritize home safety features

Owners must take steps to provide their residents a secure and safe home, protected from dangerous conditions inside, and from intruders outside. While codes and regulations vary from state to state, property owners are required to take measures to protect residents from mishaps like fire, falls and carbon monoxide poisoning.

Employing simple electronic devices, proper landscaping, sufficient lighting, and modern lock systems, real estate investors have many ways to protect their properties — and their residents’ possessions — against prying eyes and sticky fingers.

Motion detector lights can cover parking areas, driveways, backyards, or other approaches to a home intruders can try. Properly maintained landscaping — cutting back overgrown trees and shrubs, keeping outside windows clear of plant cover — not only improves curb appeal, but also deprives would-be thieves of hiding places.

Avoid Tax Issues

Many landlords choose to rent their property for the tax benefits of owning a rental property. But with extra tax benefits comes extra tax responsibilities.

Establish a recordkeeping system that tracks your business claimed income and expenses.

Talk to a tax and/ or legal professional to understand how your business structure will impact your taxes.

If you’re preparing your own taxes, be sure you know what deductions you’re entitled to.

If you’re rentals earn a profit for the year, prepay those taxes by making estimated quarterly payments.

Consult with a tax pro. If you’re new to the landlord thing, be sure you talk to someone with experience who can help you maximize your deductions and minimize your chances of an audit.

If you run your rental property like a business, you’re sure to avoid many of the risks and pitfalls that can come with property ownership. Like any other business, good risk management practices can help you see potential liabilities before they strike and give you the tools to mitigate lawsuits, claims, and unexpected surprises if they happen to you.

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