10 Steps Toward Low-Risk Landlording
Learn how to protect your rental property from common mishaps and risky situations.
Most rental property owners worry about protecting their investment. From physical damage to the property to insurance claims to lawsuits brought by tenants, there are myriad ways that you can lose money. Fortunately, minimizing risks in a rental business doesn't require a ton of money or a staff of experts. All you need to do is learn where you're vulnerable and then take commonsense steps to minimize that vulnerability.
Here are ten steps you can take to protect yourself against liability as a landlord. By acting now, you'll enjoy a big payoff: reduced likelihood of lawsuits, harm to tenants and guests, damage to your property, and financial distress to your business.
Step #1: Get the Right Insurance for Your Property and Business
Don't wait until a loss occurs before you determine whether you have the right insurance for your business and property. Review your current policy with your agent or broker, then discuss coverage options that fit your needs.
Step #2: Make Your Property Physically Sound
Keep your property safe so that people don't get hurt. To do this, learn the basic legal requirements for repairing and maintaining your property, and then follow them.
Implied warranty of habitability. Virtually every landlord must comply with a legal rule known as the "implied warranty of habitability." This means you must make sure your rentals are in a "fit" and "habitable" condition when tenants move in, and you must maintain this condition throughout the tenancy. Get familiar with your state and local health, building, and safety codes, and strive to keep your property compliant. (To learn how to find the laws that apply to your rental property, see Nolo's Legal Research area.)
Take steps to prevent injuries and losses. In addition, take other reasonable steps to prevent injuries and other losses. For example, take all tenants' repair requests seriously and fix problems promptly. Inspect your property yourself for hazards. If you can't address a hazardous situation immediately, warn tenants and visitors about the danger. (For example, put traffic cones around a pothole, or post signs and safety tape near a spill on the floor.)
Step #3: Make Your Rental Property Accessible to Disabled Tenants
Make your property accessible to tenants with mobility impairments and other disabilities. Check whether structures on your property must follow the Fair Housing Act's "design and construction" requirements. (Generally, multifamily buildings that were designed and constructed for first occupancy after March 13, 1991 must comply.)
Regardless of when your buildings were constructed, seriously consider all requests from a disabled prospect or tenant to modify your building in order to meet that person's needs. Review each request on a case-by-case basis and grant it if it's reasonable. For example, a prospect's request to install grab bars in the bathroom or lower kitchen cabinets is probably a reasonable modification request.
Step #4: Remove Environmental Hazards from Your Property
Removing environmental hazards is often trickier than removing other physical hazards. Environmental hazards often can't be seen, and they may not become apparent until they cause injury or property damage. For example, a landlord might not learn of lead paint dust on her property until a family gets their child's blood test results showing elevated levels of lead. What's more, in some cases environmental hazards remain invisible even once they've caused damage, as in the case of carbon monoxide or radon.
Do your best to address environmental hazards before they cause serious damage. Here are some ways to do so:
- Require tenants to report all leaks and flooding to you promptly so that you can take quick action to prevent mold.
- Maintain your heating systems and appliances, and install carbon monoxide detectors in order to prevent carbon monoxide build-up.
- Comply with federal testing requirements when employees or contractors work on asbestos-containing building materials, such as sprayed-on ceilings. These tests will reveal to workers what's in your building, and you can use this knowledge to protect your tenants, too.
Step #5: Prepare for and Handle Disasters and Emergencies
Take steps to safeguard your business and protect your property, tenants, and employees in an emergency. For example:
- Back up your computer files and keep important documents (such as a mortgage, note, and management contract) in a secure and fire-proof off-site storage facility.
- Report suspicious objects, activities, and mail to the police, and take bomb threats seriously.
- Document the location of utility shut-off valves, a step that can save lives and minimize damage if a fire or other disaster occurs.
- Create an emergency procedures manual with an evacuation plan that's tailored to your property.
Step #6: Lower the Risk of Crime at Your Property
In recent years, courts have increasingly found landlords partially responsible for crimes on their properties because they didn't provide adequate security.
To prevent problems and keep your property and tenants safe, comply with state and local laws concerning security measures on rental properties. Screen your applicants and employees carefully don't just look for experience and know-how when it comes to filling a position on your staff. Adopt a smart key policy so that keys don't fall into the wrong hands, and make sure your intercom system doesn't link tenants to their apartment numbers. Answer prospects' questions about security candidly, and deliver on any promise you make to increase security.
Step #7: Avoid Fair Housing Complaints When Choosing Tenants
If a prospective tenant believes you violated her civil rights, she may take legal action against you. Even if you win, defending yourself takes time, money, and energy.
To avoid problems, learn the basics of fair housing laws. The key to compliance is treating everyone the same. Some ways to do this include:
- putting your screening criteria into a written tenant selection plan and giving a copy to applicants
- rejecting applicants for legitimate business reasons, such as poor credit or negative references from prior landlords, and letting applicants know your reasons for rejecting them, and
- keeping an updated log of apartment availability, and granting prospects' requests for reasonable accommodations. For example, if you have a "no pets" policy and a prospect needs a guide dog to accommodate his disability, let him keep the dog as an accommodation.
Step #8: Adopt Careful and Consistent Business Practices
Many landlords create risks just by the way they go about their business. Be a careful and consistent landlord by using a written lease or rental agreement with tenants and by enforcing lease clauses consistently. Create house rules for tenants to follow (for example, regarding pets or children's health and safety) and enforce them. Don't let a friendship with a tenant interfere with your professional relationship. Also, to prevent identity theft, don't use tenants' Social Security numbers any more than needed.
Step #9: Avoid Problems When Hiring Help
Hiring help brings the promise of efficiency, savings, peace of mind, and profitability to your business but it also brings risk. To lower your risk, determine whether you must classify a helper as an employee or an independent contractor.
For employees, be sure to withhold the appropriate payroll taxes and create a zero-tolerance policy against sexual harassment. (To learn more about your duties as an employer, see Nolo's Human Resources area.)
When using contractors, make sure they have insurance and sign a written contract with you. (To learn more, see Nolo's Using Independent Contractors & Freelancers area.)
If you're considering hiring a management company or need to hire a lawyer, ask questions until you're satisfied you're choosing the right one.
Step #10: Taxes: Stay on Good Terms with Uncle Sam
Take steps to avoid a tax audit and to maximize your deductions. For example,
- Establish a recordkeeping system for your business so that you keep track of every document that will substantiate your claimed income and expenses.
- Understand how your choice of business structure and tax year affect your taxes.
- Find out what deductions you're entitled to claim, and then claim them. (See Nolo's article Top Ten Tax Deductions for Landlords.)
- Finally, hire the right type of tax pro for your business, and review your past returns for evidence of trends or problems.
More Information
For more in-depth information on the steps outlined above, plus practical advice to help landlords and property managers, see Every Landlord's Property Protection Guide: 10 Ways to Cut Your Risk Now, by Ron Leshnower (Nolo).