Risk Management for Landlords
Owning an investment property can be a lucrative and profitable experience, but it comes with risks, and how you as a landlord manage those risks can determine the ultimate success of your investment. There is a lot of information to cover on this topic, so we’re splitting the blog into four parts. Today, we’ll talk about insurance, then tenant safety, federal laws and not renting to the wrong people.
It’s critical to understand the role that insurance has in managing your risk as a landlord. Experienced landlords understand that when you become a landlord, you increase your liability profile. New and inexperienced landlords are often shocked to learn that people view them as wealthy or as potential deep pockets for civil suits. We live in a litigious society and we would never consider driving a car without liability insurance for bodily injury and property damage. The same concern should be transferred to your rental property, where landlords are often subject to claims from their tenants and others. In this situation, liability insurance provides a legal defense against that claim and if necessary, they will pay to settle the claim. Effectively, liability insurance is a way for the landlord to transfer the risk from themselves onto an insurance carrier.
There are three areas that require the right insurance.
Have a good general liability policy in place. It’s inexpensive to add this coverage to an existing hazard policy. If you want to purchase a good commercial general liability policy, that’s also affordable. You’ll pay $500 or $600 per year for a million dollars of coverage. You want to make sure you have enough liability coverage to cover your net worth. Occasionally, landlords will come to us and not want to spend the money, especially if their unit is in an Association that already has liability coverage. It’s important to understand that the Association’s insurance protects the Association and not you. If there were to be an incident on your property, you wouldn’t have any coverage. You need your own general liability policy.
Vendors are the people coming to your property like your landscape team, your A/C vendor, plumbers and handymen. Make sure they have their own liability policies in place, worker’s comp or a worker’s comp waiver and commercial auto insurance. Imagine what would happen if a tree vendor were to chop a limb onto your tenant’s brand new SUV. Or worse, what if your tenant was in the car at the time? Your painter could fall off a ladder while painting the property and injure his back. He can’t work and he has medical bills. That painter could decide to come after you for the medical expenses and lost income. Your insurance company may not provide coverage for you if you don’t make sure the vendors you invite on to your property are properly insured.
Property Manager Insurance
If you hire a property manager, you’re taking an important step in lowering your risk. You’re effectively putting a layer of protection between you and your tenant. Property managers need the proper insurance too. A good commercial liability policy and a professional liability policy which is often called an Errors & Omissions policy are necessary. Make sure they have fair housing insurance and if they use lockboxes, make sure they have insurance for those. You also want to see commercial auto and worker’s compensation insurance. These days, you have to also make sure they have cyber liability insurance.
The first thing you need to do when managing your risk as a landlord is to make sure you have enough insurance in place. If you have any questions about this, please contact us at Hoffman Realty.
How Not to Lose Your Shirt – Risk Management for Landlords
Part 1: Insurance Requirements
Part 2: Inspections
Part 3: Fair Housing Act
Part 4: Renting to Unqualified Tenants