The Risks associated with owning a Rental property


The Risks associated with owning a Rental property:

As a rental property owner, this is a topic that hits close to home.

Before purchasing my first rental property, I was concerned about the risks associated with owning a rental property (outside the obvious risk of vacancy or default by renter).

The risks vary by property type, location, and use of the rental property (Vacation rental, multi family, residential, Commercial, etc.),  so keep in mind the information below will vary based upon your own characteristics of the rental property.  For landlords and property owners, it is very important to understand your risks.

This applies to AirBnb owners, their vacation rentals, and land lords with year round residential rentals.  See our article on the risks to AirBnB owners that are different than below. 

These are some of the risks I’ve found, and the insurance solutions associated:

Property damage

    • Wind damage, Hail, lightning, falling tree, Fire, etc.  All of these perils will cause damage to your property, costs associated with repair, and depending on the damage – rental income loss.
    • If you have a single family rental property, your homeowners policy or landlord policy would be a great way to protect from these perils. (see our top 10 questions about homeowners insurance)
    • If you have an apartment or condo rental property, your condo owners or landlord policy also would apply to these perils.
    • Any property damage caused by your tenants should be your tenants responsibility and is an area that should be also included in your lease.  Make sure you have buying renters insurance as a requirement in your lease as well as providing proof prior to turning over the keys.

 

Personal injury to guest

  • If you’re showing your property to potential tenants and someone gets injured, if the mailman or delivery man gets injured due to a faulty step, or a guest of yours has an injury at the rental property  –  you will be at risk of 3rd party litigation.  Another example, is a dog bite of a guest to the property by a tenants pet.
  • Depending on the property type, your homeowners or landlord policy will cover this risk.  Make sure you also purchase an Umbrella policy and add your landlord policy to the list of underlying policies….as this will provide peace of mind.
  • While your property is occupied, make sure the lease defines who is responsible for the guest.  In the dog bite example above, the contract must clearly example the tenant is responsible – even in the event of guests or trespassers you should transfer dog bite liability back to the tenant or not allow dogs as a term of the lease.

 

Personal injury to trespassers

  • It is difficult to maintain a property as a landlord, depending on property type yourself, property manager, or tenant may be involved in the maintenance of the property.
  • You have a responsibility to maintain the property for trespassers as well as guests.
  • Again see the landlord or homeowners owners policy wording for 3rd party liability coverage.

 

Weather damage

  • Hurricane, Earthquake, Tornado – are all risks to the property.  Believe it or not, Earthquake is risk wherever you live.
  • If you experience building damage – again you will risk property damage, rental income loss, etc.

 

Flood / water damage

  • Depending on where your property is located, you may risk Flood.  Flood is excluded from most homeowners and landlord policies.
  • You should purchase a separate Flood policy to protect from this risk.
  • Your tenants property or limit associated with personal property is important although your tenants should be covered in their own renters policy.  Again you must insist via contract and discussion with the tenant to buy renters insurance.
  • In regards to water damage, an appliance leak or pipe burst in the winter – are perils to be concerned with.  Spend time educating your tenant about these risks and ask to be notified immediately of any damage.  These slow leaks could cause major damage over time if not addressed early.

 

Rent default or late payments

  • The worst nightmare for landlords.  A tenant who cannot pay or withholds rent.
  • Recommend a strong lease contract and background check prior to handing over the keys.
  • There are new products out in the market and called “Rent Guarantee Insurance”.  This product allows landlords to transfer tenant default risk to a trusted third party. Property owners are thus able to rent to more candidates and keep more profit.  We will write more about this product and trusted companies that offer under future posts.

 

Vacancy

  • The other worst nightmare for landlords.   A vacant property.
  • The vacant property can be insured, and their are separate insurance policies for the loss of rental income.
  • No longer is the risk uninsurable.

 

Mechanical breakdown, extra maintenance

  • Breakdown of a hot-water heater, dishwasher, clothes washer or dryer.
  • There are appliance insurance, warranties, etc.
  • This is a risk that I think most landlords retain – and don’t insure.
  • Maintenance of a rental property may be deductible expense depending on your situation.  See an accounting professional or Turbo Tax for more information.


Other un-insurable Building repairs or damage

  • This category is similar to the one above – including repainting the apartment or house, installing new carpet, replacing other miscellaneous property due to damage.
  • We are unaware of insurance for this type of damage, it’s important to decide how you would like to fund for these types of risk.
  • When retaining risk, such as these, its important to decide how to finance the risk – Pre or Post loss funding.  

 

Thoughts

Before purchasing your first rental property, evaluate the risks associated with owning a rental property – specifically the one you are considering purchasing.

Again the risks vary by property type, location, and use of the rental property (Vacation rental, multi family, residential, Commercial, etc.)  so keep in mind the information above will vary based upon your own characteristics of the rental property – make sure you discuss with your experts – realtors, accountants, lawyers, and insurance broker or agent.

 

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