Renting out a property that you own is one of the best ways to earn passive income. Apart from lining your pockets with extra money each month, it can also help you pay for a property that you will eventually fully own in the future (if the mortgage is not paid in full yet).
However, being a landlord is not as easy as simply collecting rent from your tenants each month. In fact, landlords face many financial risks in the business, including having the property vacant for a long time, paying for damages, and losing profit to maintenance.
Nevertheless, there are many ways you can protect yourself from financial losses if you rent out your property. Here are some of the best ones that you should keep in mind:
Consider getting additional insurance for your property
For a regular homeowner, a standard homeowner’s insurance policy is often enough to cover losses and damages to their home and assets within. But if you rent out your property, it is highly advisable to obtain additional coverage such as landlord insurance, which would provide personal property coverage and liability coverage. You do not always need both, but if you have personal belongings in the property, you want to have homeowners’ insurance on top of a landlord policy.
Furthermore, it is important to ensure that your property or space is eligible as a rental. If you are unsure, consult your insurance company and see if your policy will cover your property as a rental.
Require renter’s insurance
Renter’s insurance is not mandatory, but you can legally require your tenants to obtain renter’s insurance as part of your lease agreement. Such a policy is beneficial for both yourself and the tenant as it protects the tenant’s personal belongings and provides liability coverage (in case someone is injured on the property).
The good news is that renter’s insurance is relatively affordable, with the average cost only being $180 a year, according to the National Association of Insurance Commissioners (NAIC). Hence, the ideal tenant won’t have much trouble paying that amount for the sake of covering their belongings.
Prepare for vacancies
In an ideal world, your property will remain occupied, keeping your rental income continuous. However, this is not always the case, even for rental properties in highly populated areas. Vacancies will happen, be it due to a tenant breaking the lease or an emergency repair forcing the tenant to vacate the property—whatever the reason may be, vacancies will affect your cash flow.
If the property is already fully paid and you are just renting it out for additional income, you won’t have vacancies. But if you are still paying the mortgage and/or rely on rental income to fund your needs, then vacancies can pose a huge threat to your financial stability.
That said, it is essential to prepare for vacancies, no matter how unlikely they are to happen. Ensure that you have a personal emergency fund and a landlord emergency fund if your rental is vacant for longer than expected. This way, you can still pay for the mortgage, maintenance, utilities, and your personal needs while you look for a new tenant.
Ensure proper maintenance
“An ounce of prevention is worth a pound of cure.” Preventive maintenance is just as important for rental properties as regular ones, sometimes even more so. Ensuring that your rental property receives regular inspections, maintenance, and repairs reduces the risk of problems for both you and your tenant, which may involve bigger repair bills.
If you have the right tools and skills, you can even perform most of the maintenance yourself to further save money.
Choose the right tenant
The “right” tenant is the applicant that is least likely to cause damage to your home, mistreat your belongings within (if there are any), pay late, and violate other terms on your lease agreement. Even though you can’t predict the future, you can use several resources to determine if an applicant would make a suitable tenant.
For example, it is standard practice to perform a credit check on all applicants to determine their financial situation and how likely they will pay rent on time. You can also check with applicants’ old landlords, employers, and criminal histories to verify their suitability.
Renting out your property may be a great way to generate passive income, but being a landlord can often feel like a full-time job. Nevertheless, applying these strategies can help you protect your finances and ensure a good relationship with your existing and future tenants.