As lucrative as investing a rental property can be, there are also many risks associated with real estate investments. For example, your property may be damaged or destroyed by fire, a severe storm or any number of other events. Buying property insurance is one of the best ways to protect yourself against financial loss related to these types of property-related events. There are also tenant-related risks that can cost you a modest fortune, and most tenant issues are not covered by real estate insurance. If you want to mitigate tenant risks, there are a few essential steps that you need to take up-front.
Screen Your Tenants
You may be eager to sign a lease on your property so that you can begin enjoying positive cash flow from your investment again. However, leasing your property to the wrong tenant can cost you much more money than you earn through the investment. For example, making an unwise decision about tenancy can result in substantial property damage, the need to pay legal fees for an eviction and more. A smart step to take is to thoroughly screen a potential tenant. This includes obtaining a copy of the applicant’s credit report and reviewing criminal history. Some real estate investors establish firm requirements regarding both of these areas up-front. When you understand what your personal thresholds are, you can make faster and more intelligent decisions when reviewing applicants. You may also be clear to potential applicants about your qualification requirements so that you and they do not waste time if they know for certain that they cannot meet your requirements.
An important part of the pre-leasing stage is to check the references of all applicants. Ideally, these will be professional references, such as an employer or a previous employer. Personal references may tell you very little about the individual’s character. There are specific questions that you may be able to legally ask as well as questions that you cannot ask, so ensure that you do not cross any lines. If you cannot legally confirm income through an employer verification, you may ask for paystubs or bank statements for the last few months.
Review the Tenant’s Rental History
Property damage and broken leases are two of the most expensive tenant issues that you could face. This is where conducting tenant screening can come in handy. Reviewing the applicant’s rental history for at least the last two years is essential. Inquire about fulfilled lease terms, the condition that the property was left in and if there were any rental payment delays throughout the term of the lease. Again, establish firm thresholds for these factors so that you can quickly make a decision when qualifying applicants.
Be Aware of the Law
All landlords must be aware of applicable real estate laws. For example, you should not discriminate against an applicant based on religion, ethnicity, age or other factors. In some areas of the country, you also may not be able to turn down an applicant based solely on the conviction of some types of crimes. If you have trouble understanding the law or if you are afraid of violating certain aspects of the law, it may be helpful to work with a property manager or real estate agent who is more familiar with leasing strategies, laws and more. A legal violation is another type of tenant risk that may be mitigated with the right leasing strategy.
The various tenant risks that landlords face can potentially eliminate the profitability of your investment. Understanding what these risks are and the legal steps that you can take to mitigate those risks is essential. Remember that you can always seek assistance finding tenants and managing the daily operations of your investment property through the services of a skilled property manager.