Renting out properties for commercial and residential use can be a profitable, sustainable investment. But anyone who owns a rental property should be familiar with the risks that all building owners face.
We’ll go over five of the biggest risks that come with renting out property and how to minimize your chances of falling prey to them.
1. Going Without Tenants
Finding and keeping good tenants is one of the basic essentials of successfully operating a rental property business. If you’re unable to find tenants for even one month, you lose out on the total cost of rent they would be paying.
When screening tenant applications, it’s recommended that you ask for references from previous landlords, current employers, and possibly even personal references to give you a better picture of your potential tenant. You may also want to perform a background and credit check.
Once you’ve found good tenants, ensure you’re doing everything possible to keep them by promptly responding to maintenance requests, communicating openly about anything they need to know concerning the property, and generally keeping a friendly relationship.
2. Property Damage
Damages to property can come from a variety of sources, including careless tenants (another reason why it’s so crucial to find good tenants!), malfunctions like burst pipes, and natural disasters like fires, floods, or earthquakes, among other causes. Although general property upkeep and policies will help mitigate some of these risks, others (like earthquakes) are simply out of your control or ability to predict.
When it comes to unforeseeable and unpreventable damages, building owners’ insurance can make up the difference in mitigating these risks. General liability and property insurance can insure your property against many types of damages and disasters. And specific coverage for areas at risk of flooding, earthquakes, or other damages can be added to an insurance policy as well.
Insurance policies are not (and should not be) a one-size-fits-all solution, so it is essential to invest in insurance customized for the needs and risks of your property.
3. Unpaid Rent
No matter how well you screen your tenants, there may come a time when your tenants simply do not pay their rent. Bad tenants who refuse to pay for whatever reason can cost you significantly in both time and money, as you may have to go through an eviction process or even settle the dispute in court.
To limit your losses in such a situation, rent insurance policies can cover unpaid rent for landlords. Loss of rent consists of more than half of all landlord insurance claims, making rent insurance one of the most essential policies for building owners.
4. Lawsuits
Lawsuits present both financial and reputational risk to landlords. Whether you’re pulled into a contract lawsuit or blamed for an injury that occurred on the property, getting entangled in a lawsuit can become an expensive and time-consuming endeavor.
To limit your risk of lawsuits, make sure that your contract is clear and thorough and that tenants understand your rules and policies, especially those that may be out of the norm. You’ll also want to make sure you have strong general liability insurance, as it will protect you by covering the cost of these types of suits.
5. Hiring the Wrong Help
Building owners often find that properties are easier to manage with hired help, whether that’s a property management company or just a part-time employee. One of the most important professional relationships you will have as a landlord is with your property manager, since they represent you when communicating with your tenants.
Unfortunately, dishonest or ineffective property managers can not only be a waste of your money, but they can cause your property’s reputation to plummet and make good tenants steer clear. If you’re hiring help, it’s essential to hire friendly, trustworthy, hardworking individuals or companies who will help tenants have a positive experience with your property.
Owning and renting a property is a considerable investment, which is why property owners should take care in protecting this asset by mitigating risks as much as possible. Tenant and employee screening, clear contracts and policies, and comprehensive commercial property insurance can help landlords protect their properties against common risks.
