First in a series of three articles.
by Robert Locke, RMP, MPM
Every business brings with it a list of risks that the owner needs to manage. Some can be addressed through careful business practices while others need the help of an outside insurance company. Owning a rental property is probably one of the higher liability businesses you can get into, so pay close attention to the risks that come with it. Being a landlord exposes you to lots of risks and careful planning. The right insurance is required to prevent these risks from taking you out.
The first, and cheapest line of defense in protecting yourself from the liabilities of the landlord business is never title your property in your own name. This may surprise some landlords but with county deed records online, any tenant, lawyer, neighbor or in-law can find out who owns a property and who’s name to list as the defendant in a legal action. The public nature of real estate makes it easy to make a claim, file a legal action, and make you prove you don’t owe them something. Suing people has become an American pastime and fortunes have been lost by many because they have left their name on their deed records and made themselves an easy target.
Through the use of LLC’s, Land Trusts, spouse’s maiden name (and other title holding strategies) you can make the question of who owns the property a real challenge, even for the trained hunter. Making it hard to know who to sue is half the battle of protecting yourself against flaky litigation.
The second major strategy you should always use to protect your assets from the risks of owning rentals is to manage them through someone else. By setting up your own management business (preferably an LLC that you own) or hiring a professional property manager, you establish another layer of protection between you and your litigious tenant. You never want to manage a rental property as the owner. Always manage as the property manager for the management company. This creates distance and protections between you and the one who wants what you have (tenants and their lawyers).
After you have structured your title and management strategies properly you should then look to insurances for more protection. There are several levels of insurance to consider.
The next article will cover the most important type “the Landlord casualty insurance policy.”
Second in a series of three articles by Robert Locke, RMP, MPM
In the first article on this topic of "protecting the landlord" we established that the first protection for the owner of a rental property was to get the property out of your name into a trust or LLC. Keeping title in your name paints too big a target on your back and a little effort cam shrink that target substantially.
The second step was to never manage in your own name. Always have a property manager (a business) between you and the tenant, even if it's an LLC you set up to do the managing. This is a critical step in the process of protecting any landlord and should never be ignored.
Note: Over our 30 year history of professionally managing rentals we have managed for over 3,000 owners and have never had one them named in a legal action by a tenant. I have personally owned and managed over 150 houses and have never been named in a legal action. Stop managing rentals in your personal name
After these important steps have been taken look to "knowing the law and practicing good property management" to protect yourself from the big risks of landlording. This may raise some eyebrows but trust me when I say the biggest protection for rental property owners is not insurance because insurance does not protect you from most of the risks of being a landlord, but rather following the laws and intelligent management. Most of the risks (expensive fist fights) come from reckless inexperienced managers that don't know what they are doing. It is never the house fire, burst water heater, missing roofs and burst water pipes that creates the risks in landlording. It's the lost rent of an extended vacancy; the lost rent during a strung out eviction; the inability to collect rent while the tenant plays you in court and the costs of skips or abandonment. The big risks of landlording rests in building your management practices out of the law and having good tenant selection practices, aggressive rent collection policies, consistent maintenance responses, strong leases and the commitment to enforcing them consistently. The days of managing a rental by the seat of your pants, making decisions based on the hairs on the back of your neck, intuition, and rules of thumb are long gone.
The courts are filled with brawls between landlords and their tenants and are, for the most part, the result of owners not knowing what they were doing. It astounds me how many small landlords (and licensed managers) I meet who have never read the laws that govern their business.
Here are just a few to make a study of:
Federal and State Discrimination laws
Refuse to rent to someone for the wrong reason and you could go to jail and not collect $200. These laws apply to every landlord not just licensed agents.
Federal fair credit reporting act
Failing to handle their credit information correctly can get you into real trouble with the FTC. Sending the adverse action letter when you turn someone down is mandatory for anyone using credit to make business judgements, including private and licensed landlords.
Federal red flag rules
These laws regulate how you are to protect the privacy issues of your tenants' credit, employment and other information. Better read it closely before you send your HOA their personal information.
Americans with disabilities act
These laws mandate that you adapt the property when needed to accommodate handicapped people and let them have comfort animals even though you do not allow pets.
State landlord tenant laws
Every state has special laws that require landlords to handle certain management issues by the book and generally carry severe penalties when you don't. They address such things as move in/out inspections, holding of security deposits, maintaining habitability, appliance repairs, evictions and so on. These are the laws your state legislature laid out to limit abuses by rogue landlords who try to take advantage of naive tenants.
Many naive landlords think these laws only govern licensed professional landlords. Not so. They govern anyone managing a rental property no matter the rent, location, size or type.
I think the problem of ignoring the law is exaggerated by the mistake rental property owners make thinking that it's just a rental house and not really a business. You would be wrong. The day you convert home sweet home to a rental you change it into a commercial enterprise and as such you become subject a number of laws that judges will use to access your behavior with the tenant and property. Not embracing this reality can cause you a lot of pain and money.
If you're collecting rent, these laws apply to you. To make this worse, judges think the landlord (not the tenant) should know these laws and follow them. Usually it's not the tenant that is doing the abusing but the landlord. Judges are out to protect tenants against cruel or abusive landlords. Their assumption is that wealthy real estate barrons (your title when you're in court) not the tenant, should know what the laws are and structure and manage the property by them. Landlords are expected to know the laws. Tenants are not a protected class, but in court they are the favored class if landlords are abusing them in the eyes of the judge. Manage by the book and put the law on your side.
Protecting your self as a rental property owner is a layering process. Like asset protection it's a lot of little steps you take to build that all important fortress of protection between you and the litigation that comes with owing this type of asset. In the next article we address how insurance can be used to help build this fortress
Third in a series of three articles by Robert Locke, RMP, MPM
In the first two articles we suggested that the big picture in protecting yourself as a landlord is a layering process you accomplish over time, not something you do today. It starts with “getting title out of your name” to create anonymity and become harder to identify as the owner. Next we said to “manage through an entity (preferably an LLC) instead of managing in your name.” This adds another layer to protecting your personal assets from the liabilities of owning a rental. Lastly we suggested “manage your properties by-the-book” as it relates to the laws that govern the landlord/tenant business so you’re on good ground when things go badly. Follow these simple rules and you’re over half way to having the best model to protect yourself as a landlord.
By following these guidelines we have managed 7,000 tenants over 30 years and have only had five law suits, none of which cost over $5,000 to settle and none got in front of a judge. This last article addresses the insurance you should set up to protect yourself, and your personal assets, from the liabilities of being a rental property owner.
The first, and cheapest, insurance defense is a good Landlord Policy. Landlord policies (like home owner policies) cover property damage as well as liability risks. Many insurance companies have gotten out of the landlord business because of their heavy losses and you may not be able to get one from your current carrier. Many companies require you have your auto and home with them before they will issue a landlord policy. Securing a good landlord policy is getting harder every year as companies are more timid than ever regarding properties held in LLC’s, Land Trusts, Corporations and other slippery title holding strategies. Some have limits on how many they will insure while others require you have a professional manager in place before they insure the property.
Here are some things to consider when you buy a landlord policy:
Make sure your policy has an All Risks Provision.
Basic landlord policies only cover natural disasters (fire, windstorms, tornadoes, and floods). This may not be sufficient coverage. A policy with an All Risks Provision expands basic coverage to include such things as theft, vandalism, and malicious mischief. If you have this coverage it will pay for the damages caused by an angry teenager spray-painting the kitchen black to get back at his parents (malicious mischief), or the cost of a tenant taking your refrigerator when they move out (theft) or when it’s broken into while vacant (vandalism) . It’s often part of the policy, or can be added through a cheap rider, but it’s a must. Make sure your policy has an All Risks Coverage.
Many landlord policies reduce (or cancel) coverage if the property is vacant more than 30 days.
Make sure you know what the premium changes to (or what the coverage reduces to) during a vacancy. They won’t call you and ask if it’s vacant, they’ll just deny coverage when it burns down during a vacancy. You can buy “vacant property insurance” but it’s pricey. You can pay by the month or by the quarter and get a refund when it becomes occupied. Read the fine print carefully because insurance sales agents don’t always know what the vacancy terms are.
Make sure your policy has a Loss of Rents Provision.
A Loss of Rents Provision means if the house burns down, the insurance company will continue paying you rent until the house is back in rent-ready condition. Without this provision you will be carrying your own mortgage during the restoration period.
Increase your liability coverage limits.
Basic liability coverage on a landlord policy is typically $300,000. In today’s litigious world you need a lot more than that. Most companies offer $500,000 or $1,000,000 for pennies in additional premium. Typically it costs $20 to $30 per year to raise your coverage to $500,000. This is too cheap to pass up.
Make sure your property manager is covered.
Most management agreements require the manager’s name be added as an “additional insured” for the purpose of liability. If a house burns down and a lawsuit develops over wrongful death, your insurance carrier will cover you and your property manager. In most cases it costs nothing to add them to the policy. You can add your manager through an endorsement if the language in the policy does not automatically cover them. Bottom line is: make sure your property manager is covered. It’s a standard practice in the industry and generally costs you nothing.
Shop around for good coverage.
Like any other insurance there is good coverage, and not so good coverage. Our experience shows that companies change their policies on a regular basis and what was good three years ago isn’t necessarily good today. It’s a moving target so keep on eye on it.
Consider a Personal Umbrella Liability policy.
You should always carry a Personal Umbrella Liability policy whether you own rentals or not. Consider at least $1,000,000 policy because the premiums are cheap. It covers your home, your car, your boat, your RV, your big wheel and your iPod. It is inexpensive (under $300 a year) and the day may come when you wish you had it. Personal Umbrella Liability policies are generally good until you reach three or four rentals, then they cut out and your coverage is zero.
Consider a Commercial Umbrella Liability policy.
Here is the problem. After you buy your fourth or fifth rental property your personal umbrella policy becomes void as to your rentals. The company just stops covering you the day you buy your next property (every company has their own formula). They won’t call you and ask “how many do you have?” they just deny coverage when there’s a claim. The Personal Umbrella Policy has low limits of coverage for rental houses so read the fine print and keep a good count on how many you have.
A Commercial Umbrella Policy is not expensive and covers everything you own without limits. When you buy such a policy you get to list everything you want covered so there is no mistake as to claims. It’s called a “schedule of coverage” and it’s your way of identifying all you have and make sure it’s all covered under the policy including your 20 rentals. At every renewal date you get to review the schedule and make sure you add whatever you bought (or sold) in the past year.
For the ambitious investor with 20 or 100 rentals there are companies that will insure them all under one policy and give you the opportunity to add and drop properties as you go. Generally they are economical but don’t offer extended coverages (All Risk Provisions) or high liability coverages, so keep that Commercial Umbrella Policy in place.
Protecting yourself (and your personal assets) from the risks of being a landlord is not difficult but it does take some forethought and purposeful planning. Don’t just get some insurance and think you’re on safe ground. The more properties you own, and the longer you’re a landlord, the greater the chances that you’ll become involved in some kind of litigation with a tenant and you’ll be glad you had a plan. You’re only one law suit away from loosing it all because the landlord/tenant business is unforgiving and can snatch everything you own if you’re not careful to protect yourself.