It seems like a great idea at first.Your home value has tanked and since selling isn’t an option in this anemic housing market, you slather a new coat of paint in the basement and stick a Room For Rent sign in the front window.
With so many cash-strapped consumers scrambling to scoop up rentals these days, why wouldn’t taking on a tenant or two be an easy way to bring in extra income?
If only it were that simple.
The problem facing these so-called “Accidental Landlords” is that they suddenly find themselves liable for the actions of near strangers, putting the value of their home and finances at risk. And they have no idea how to handle it.
Your Money tapped Ed Charlebois, VP of personal insurance for travellers.com, for tips on how landlords can protect themselves against everything from biblical floods to pyromaniacs.
Get insurance. Whether you’ve converted your family home into a full-on boarding house or are renting out the basement, you’ll need to convert your homeowners’ insurance to one for landlords. Sometimes this is referred to as a “Dwelling Fire Policy,” but it protects you from far more than a lazy bum who falls asleep with a lit cigarette.
Write it off. If you’re bristling at the thought of another monthly insurance bill, just know that certain expenses associated with rental properties are tax deductible, including insurance. “When you think about the exposure (landlords have to lawsuits), umbrella policies don’t cost all that much money and it would give you peace of mind,” Charlebois says.
Now make your tenants get insurance. “A lot of times, tenants won’t carry renters’ insurance because they think the landlord is responsible for their belongings and that just isn’t true,” Charlebois says. If they know what’s good for them, they’ll get it on their own, but you can always write the requirement into their lease. (See 9 ways to renovate without ticking your landlord off.)
Vet your tenants. Ask for a credit report, references from past landlords and proof they’re holding a steady job. (See how to deal with a hoarder tenant.)
Finesse your lease. Anyone can download a generic lease agreement from the Internet, but it’s important to add a few tweaks if, for example, you don’t allow smoking or want to mandate that tenants maintain smoke detectors. “Working smoke detectors are just so important for everybody,” Charlebois says. “Those are the types of things you’d want to put in the lease.”
Find a handy man or DIY. You always want to make sure someone has the responsibility of checking that property frequently to be sure its being taken care of. Come up with a list of preferred handymen if you’re not so good with a plunger. Also, will you require tenants to mow the lawn or shovel the driveway in winter? Those are the details you’ll want to hash out before anyone signs anything.
Don’t undervalue your home. When you’re signing up for coverage, don’t just factor in the nuts of bolts of rebuilding costs in the event of a fire or natural disaster. Tally up your furniture, appliances and other big ticket items that will be covered under your policy when calculating your total home value.
Take out a separate flood insurance policy. This probably won’t apply if you’re renting a place in Arizona, but landlords should definitely consider flood insurance. It’s a separate policy from dwelling insurance.