What’s Better than Passive Income?

It’s a dream for many—achieve a steady stream of money that works for you while you do something else, like travel, work a different job, or stay home with the kids, but tax implications are everywhere and quickly become complex.

There are many things you need to consider when evaluating the right mix between passive and active income.

Passive Stays with Passive
In the eyes of the IRS, passive losses can only come out of passive income, so if you see major losses from rental properties and you net only a small amount of income from those properties, you will feel the negative effects.

We’ll talk about exceptions—there are many—but in general, it’s good to know how the government sees this income at the very highest level.

For most non-professionals or those with small incomes, it’s going to be a challenge to find a way to have income from one stream (passive) offset or benefit you based on income from a different stream (active.)

Evaluating Active Income Mix
No one can tell you the right mix between active and passive income because it’s something only you can determine for yourself.

That aside, there are still factors you need to consider:

  • Appetite for risk. Passive income isn’t inherently riskier, but it’s far more subject to ups and downs than a steady paycheck.
  • Family needs. If you can’t live 100 percent on your passive income, you must balance between the two and pay close attention to the tax implications.

If you are claiming to get a majority of your income from passive means in the rental property business, you are probably well on your way to becoming a true real estate professional.

You will want to thoroughly research all the pros and cons of becoming one in the eyes of tax law.

Passive versus Your Active AGI
Another thing to consider in determining the risk balance of passive versus active income is knowing that you can deduct up to $25,000 worth of passive losses and have it be offset by any ordinary income in a tax year.

But here’s the hook: Once you start looking at the higher income brackets, it starts to phase out—and phase out quickly.

For example, the benefit starts scaling down for married taxpayers starting at $100,000 worth of adjusted gross income (AGI) and is eliminated after $150,000 of AGI.

Should You Become a Professional?
If your property portfolio gets so complex that you are getting dinged at tax time, you might consider becoming a real estate professional.

By doing so, the tax code will treat you differently, and in some cases, better.

Again, as with any tax question, talk to someone who knows what they are doing and weigh the pros and cons carefully.

Rules around passive versus active income can be confusing.

Know Your Exceptions
There are also exceptions to the passive loss/passive income rule when it comes to real estate.

One example of this is if you deal in short-term rentals like a vacation property—having tenants for 7 days or fewer at a time—or if the property is rented for 30 days or fewer and you have a substantial investment in personal services surrounding that property.

There are more exceptions to consider when it comes to passive loss/passive income, so consult someone who is familiar with this area of real estate tax law.

 

Why Some Landlords Choose to Create an LLC or Other Entities

When you first become a landlord, you may not have considered the type of business entity you need for your property management company.

For some landlords, they simply fell into the rental market because they couldn’t sell their house, wanted to move, and needed the rental income.

Others simply aren’t familiar with the benefits that comes from the right business entity, such as liability protection and tax exemptions.

Sole Proprietor
This is a default business entity that you have when you file business taxes but you haven’t established yourself as a LLC or another business structure.

The only thing you need to establish this business structure is to file a DBA with your state.

Landlords who are first starting out and don’t know about the business entities available may file taxes as a sole proprietor prior to restructuring.

The primary reason a sole proprietor is so bad for a landlord is a lack of a corporate veil.

Instead of having protection from business liability, the sole proprietorship does not separate your personal and business assets.

A lack of a corporate veil is bad if something goes wrong at your rental properties and you get sued or incur a liability larger than your insurance company is willing to cover.

Additionally, you do not get any tax benefits or additional ways to reduce your business tax liability, so you generally pay the highest tax rates as a sole proprietor.

When you’re renting out your real estate, you want to position yourself for the best tax advantage, so this business structure is not ideal for landlords.

Limited Partnership
A limited partnership, or LP, is typically used for someone who invests in rental properties but is not an active partner in managing the business.

You act as a passive investor, so this is typically not a business structure used for landlords who are active in your business.

While you do get liability protection so your personal assets are kept separate from your business liabilities, you do not get the same tax benefits as other structures.

While some business tax benefits are realized, you miss out on depreciation because an LP is not supposed to be actively involved in business operations.

Limited Liability Company
A limited liability company, or LLC, is the structure many landlords turn to as their business entity.

While you have to file slightly more paperwork to establish an LLC compared to a sole proprietorship, you get a lot out of the work without an overly complicated business structure.

The LLC gives you limited liability with the protection of the corporate veil, as well as the ability to claim depreciation when filing business taxes.

You can lower your overall tax liability with these advantages, as well as the ability to be taxed as a sole proprietor, S-corp or C-corp.

A C-corp tax structure can be particularly advantageous for a landlord, as you don’t get taxed at commercial tax rates but pass through the income to your personal return.

Since you’re paying yourself a salary and covering payroll taxes, you avoid a 15 percent dividends tax and the 14 percent self-employment tax, resulting in a lower overall rate.

An LLC is also remarkably flexible, giving you a strong foundation to build your property management business on.

The operating agreement allows you to establish the business structure in the way that works best for you, and you also don’t need to sit through annual meetings with everyone involved in the business unless you want to.

All of these advantages add up to making the LLC the best business structure for your property management activities.

S- and C-Corporations
S- and C-corporations are not commonly used by many landlords, as an LLC is a less rigid business structure that can configure itself in a way to be taxed as an S-corp or a C-corp.

The primary problems with these business entities are the required paperwork and activities associated with running the business.

The filing fees required for establishing and maintaining a corporation are also expensive.

You have to adhere to required corporate duties, such as conducting an annual meeting, and other responsibilities.

The tax requirements for S-corps and C-corps are also quite complex compared to other entities, so unless you have a good reason to want to incorporate, it’s better to pass up these options.

What Causes Personal Liability?
Even with a business entity in place, it’s important to follow the laws and regulations revolving around keeping your corporate veil intact.

One of the most common mistakes for landlords, especially when you’re starting out, is to mix business and personal funds.

It’s essential to keep business income separate from your personal accounts, or else you could run the risk of personal liability.

It’s also important to properly follow any requirements in your operating agreement or the rules of a S- or C-corp so you are legally in compliance.

A business entity offers you the benefits of personal liability protection as well as many tax advantages.

While several options are available, an LLC gives you the most flexibility and least hassle out of all available business entities for landlords.

 

Can You Deny Prospective Tenants Based on Their Jobs?

Landlords can reject applications for all kinds of reasons.

At the same time, they are not allowed to discriminate based on certain criteria.

These two statements leave a lot of gray area for landlords when it comes time to review the applications of prospective tenants.

Requiring an Applicant to Have a Job
A landlord can require tenants to have jobs and to disclose their employment information.

You are allowed to ensure that the people you rent to can afford to make the monthly rent payments and pay for utilities.

In addition, you can require a minimum income to ensure that your tenants have sufficient funds for renting the apartment.

While a landlord can set the rules, the general rule of thumb is that the rent payment should be no more than one-third of the tenant’s monthly income.

While this isn’t technically the same as turning down an applicant because of their job, it does impact the kind of jobs a tenant can have.

For instance, a landlord who charges $1,000 a month in rent for an apartment wouldn’t accept a person making only $900 per month unless he or she would have a roommate.

This is just common business sense, and won’t get you in trouble.

Another issue that goes back to affordability is job stability.

If the job is seasonal or the person switches jobs often, you may not feel that they are a good risk as a tenant, and you would be within your rights to turn him or her down.

Other Reasons Not to Rent to a Tenant Because of a Job
Other than a lack of sufficient income, you may have other reasons you don’t want to rent to someone because of his or her job.

For example, you may not want the unit to be unoccupied because someone travels for work a lot.

Maybe he or she works odd hours and would disrupt the rest of your tenants when returning home.

Whatever reason you have for not wanting to rent to a tenant because of his or her job must be applied to all applicants. In basic terms, landlords have the right to refuse to rent to anyone as long as they don’t discriminate against someone because of a protected class.

A job doesn’t technically fall into that category, but you have to be careful in case it can be linked to one of those protected criteria.

If you were to turn down an applicant because of his or her job and it had anything to do with their age, color, race, religion, or other protected criteria, the applicant could claim discrimination.

A simple example would be to reject the application of a preacher, priest, or rabbi.

The key to protecting yourself and your property when screening applicants is to set your requirements in writing.

Follow those standards when interviewing all applicants, so that you may be fair in your reasons for rejecting applications. It is also a good idea to show your stated minimum requirements to an attorney who specializes in this area to ensure that you are not breaking any state or federal laws.

Landlords have the right to feel good about the people they rent to.

And they shouldn’t have to worry about their tenants being able to afford the rent.

At the same time, they want to make sure they aren’t breaking any laws and practicing illegal discrimination in rejecting an applicant based on his or her job.

 

Legal Documents to Update Every Year

Renting property is a great way to make money, but there are plenty of legalities that landlords must follow.

As the laws change, you may need to update your documents.

Make sure you check for updates on these four types of documents.

If you don’t, you could unintentionally break the law or give up some of your rights.

Rental Lease Applications
As your business grows, you may want to make changes to your rental lease agreement application.

Doing so can help you choose tenants who match the evolving needs of your business.

It is also possible that changes to the Fair Housing Act could affect the questions that you ask on the application.

It is currently a violation of civil rights, for instance, to deny an application because of race, national origin, disabilities, familial status, and several other factors.

Avoiding questions about these and related issues could help protect you from discrimination charges.

If you do not update your application, you could be asking questions that are no longer appropriate.

Tenant Consent to Background and Reference Checks
Most landlords use background and reference check forms so they are authorized to gather information about the criminal and credit histories of potential tenants.

Since you cannot get this information without the applicant’s permission, it is an essential step to protect yourself legally.

While it is unlikely that your state’s form will change very often, governments do make occasional changes that require your attention.

For instance, residents of California, Minnesota, and Oklahoma can request copies of their background check reports.

Any state could make this or a similar change at any time.

If you do not have the most recent version, you may not have legal permission to access an applicant’s information.

Tax Forms
Tax forms change from year to year, so it is important to make sure you are using the latest version.

The specific tax forms that you use will likely depend on how you organize your business.

Most landlords will need IRS Form 88225, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.

This form makes it simple to list your expenses and gross rents.

If you have an old version, you probably will not meet current laws.

Eviction Notifications
Although you own your properties and can generally do what you want with them, your tenants have rights that prevent you from terminating their leases under some circumstances.

For instance, you must give tenants plenty of warning before evicting them, even if you need them to move because they haven’t paid rent.

Tenants usually have anywhere from a week to one month to move out of the property.

If you already have some experience as a landlord, then you probably already know some of the basic requirements for evicting tenants.

Those requirements, however, are subject to change at any time.

Updating them at least once a year will help ensure that you follow the law so you can remove unwanted tenants as quickly as possible.

Eviction laws and tenant rights also vary from state to state.

This makes it important for you to get updated forms for every state where you have rental properties.

Updating your documents may seem like a hassle, but using the most current versions will help protect your rights as a landlord.

If you aren’t using the most recent updates, you may open yourself up to lawsuits or fines.

 

Landlords and Real Estate Licenses

Should Landlords Take the Plunge and Get a Real Estate License?

As a landlord, you’ve probably heard whispers about the tax advantages and other benefits of getting your real estate license.

What you’ve heard is true: the tax advantages alone can justify becoming a real estate professional.

However, if you have a full-time job or only own a couple of rental properties, the advantages are less clear cut.

Potential Benefits of Being a Real Estate Professional
Let’s first examine the upsides of getting your real estate license.

If you qualify as a real estate professional, you can deduct any losses you suffer from your rental properties annually.

As a real estate professional, you’re allowed to calculate this loss independently from your other income.

If you’re only a landlord, you cannot make these deductions each year due to the passive income restrictions of the Internal Revenue Service.

Instead you can only deduct your losses after you sell the rental property.

As a real estate professional, you’ll also avoid paying the 3.8% Net Investment Income tax that the IRS instituted in 2013.

This tax applies to single people with a gross income that exceeds $200,000 per year and couples that make $250,000 per year.

Even if you exclude the tax savings, many landlords find that they save money by acting on their own behalf during real estate transactions.

If you want to add properties to your rental portfolio, having your real estate license will allow you to quickly view properties that meet your criteria.

Also, when you buy property, you’ll save part of the cost of the commission.

Qualifying As a Real Estate Professional
For tax purposes, you must meet the following criteria as a landlord and real estate professional.

  • As a real estate professional, you cannot have a full-time job outside of real estate.
  • As a real estate professional, you must devote over half of all of your working time to working on real estate business.
  • As a real estate professional, you must work at least 750 hours per year in the real estate business.
  • As a landlord, you must devote 500 hours per year to actively working as a landlord or find another legally acceptable way to demonstrate that you are an integral part of your rental business.

If you cannot meet these qualifications, there is a loophole.

If your spouse can qualify as a real estate professional, you can share in the tax advantages if you file a joint return.

Getting Your Real Estate License
Once you’ve decided to get your real estate license, research your state’s licensing requirements.

Taking dozens of hours of classes and passing a real estate exam are standard requirements.

Some states require background checks or 120 or more hours of classroom time.

You should also expect to pay a fee to take the real estate qualification examination and pay several hundred dollars to get your license each year.

To decide if you should get your real estate license, take a look at your past income tax returns.

Then calculate exactly how much money you could have saved if you were a real estate professional.

But before you sign up for some real estate classes, carefully consider what your time is worth.

If you intend to buy a new rental property each year and would like to work at least part-time as a real estate professional, getting licensed may be a good idea.

However, if you’re like many part-time landlords, the time investment may not be worth the financial savings.

How To Repair a Leaking Garbage Disposal

A garbage disposal is an extremely useful kitchen appliance.

It can also cause a lot of damage to your undersink cabinet when it decides to leak.

The good news is that most leaks are very easy to fix and you may not even need any tools to get the job done.

Here’s how to repair a leaking garbage disposal.

1. Check For a Secure Fit.

Garbage disposals tend to vibrate as they operate.

This can help them shake loose a bit and break the drainage seal.

A simple turn of the appliance can quickly fix this type of leak.

Just get underneath the sink, unplug the unit, tighten it, and then plug it back in and the repair will be done.

2. There’s Something Stuck In The Rotators.

Most garbage disposals slice up food products with a high speed rotation mechanism.

It floats above the mechanisms that spin the rotors, so sometimes food particles can get stuck in there.

Bone chips, dried rice, and mashed potatoes tend to be the worst offenders for this.

You’ll need to remove the food that has gotten stuck.

If you can see it, then a table knife can often do the trick.

If not, you’ll need to remove the unit and unscrew the rotor to complete the repair.

3. The Emergency Reset Needs To Be Pushed.

Sometimes the reason why the garbage disposal is leaking is because it has stopped working.

There’s an emergency reset button to push somewhere underneath the unit.

Press it and this should solve the problem.

4. There’s a Plumbing Issue.

Sticky foods and cooking oils can clog up the plumbing underneath the sink, but after the garbage disposal.

This makes it seem like the appliance is leaking.

You’ll need to unscrew the PVC trap and physically remove the clog.

Remember: never send down drain cleaner through your garbage disposal.

Knowing how to repair a leaking garbage disposal can help you stop more water damage from happening.

Follow these steps and you’ll be able to complete most repairs in under 60 minutes.

Avoiding Discrimination as a Landlord

How to Gather Information When Screening Rental Applicants Without Appearing to Discriminate

Landlords are not allowed to discriminate against applicants based on gender, age, race, religion, and other criteria.

You are also not allowed to ask questions about those subjects.

A seemingly harmless “How old are you?” could be taken the wrong way and land you in trouble.

Many landlords fear that the appearance of discrimination may prevent them from getting enough information in the screening process to ensure a good tenant.

While you must be careful about the questions you ask, you can find ways to ensure you have everything you need to make a solid decision.

Be Detailed in the Application
First, start with the application.

Create a written application if you don’t already have one, and ask plenty of detailed questions about the applicant’s employment and previous living history.

Ask for references and other information that you will need in the screening process.

When you use a standard written application that you present to every applicant, you are not being discriminatory.

You should also let an attorney look at it if you are concerned about any of the questions.

You should also include any other forms and a document that details the process for any applicants.

For example, you would include a form requesting permission for a credit check that all applicants must sign.

Pre-screen Over the Phone
Let any prospective tenants know your requirements during the first phone call.

If they don’t meet the criteria, it saves you time and research determining if they qualify.

You can also ask open-ended questions, such as “How did you hear about this unit?” and “What are you looking for?” to allow the person to begin talking.

Have your requirements in front of you when speaking to potential applicants.

This allows them to eliminate themselves if they don’t qualify.

For instance, if you have a maximum number of people allowed because of the number of bedrooms, state that upfront.

Review Essential Information
When going over the application, begin verifying or reviewing the basic information.

If someone does not meet your minimum income requirement, this is a legitimate reason to disqualify him or her.

Go over the credit and background checks to see if the person continues to qualify.

Make sure that if you deny someone based on a criminal record or credit history, that you follow that same standard for all applicants.

For example, you can determine not to rent to someone with a felony in the past five years, but you cannot make an exception without appearing to discriminate.

Check References
To ensure that you get the most accurate information, ask for specific references.

Otherwise, you will end up talking to Aunt Mary or someone’s best friend, and you’ll learn very little information of value.

Instead, request employment references or previous landlords’ contact information.

These are objective people who know what information they can provide and are more apt to be honest.

It is also important to know what questions you can and cannot ask of the references.

For example, you can ask if a person is employed or when he or she was hired.

You can’t ask if he or she shows up on time or how often he or she is absent from work.

What you can do is ask if there is any other information the person can provide.

If you create a formal application packet that you provide to all applicants, you can get the information you need without worrying about being accused of discrimination if you reject an application.

How to Lower the Cost of Managing Your Rentals

Using a LandlordStation Membership to Ease the Burden and Cost of Managing Your Properties

 

No matter how many rental properties you own, managing your houses and apartments can take a lot of work and money.

Using a LandlordStation membership, however, can ease the burden and cost of managing your properties.

If you would like to make your job easier, here’s how membership makes a difference.

Screen Tenants Easily
You invest a lot of money in your rental properties, so you want to make sure you avoid tenants who might cause damage or attract unwanted activities.

Screening tenants is one of the best ways to learn about criminal backgrounds and financial problems.

When you have this information, you can avoid applicants who have problems paying their debts and staying on the right side of the law.

Screening tenants is a sound way to avoid problems, but it’s also a somewhat difficult for process, especially for new landlords who don’t have much experience in this area.

A LandlordStation membership gives you access to comprehensive reports that include:

  • Credit scores
  • Criminal records
  • Bankruptcies
  • Foreclosures
  • Employment history
  • Past addresses
  • Eviction records

A Tenant Screening Report will even list an applicant’s known aliases.

Without this service, you never know who you’re letting into your property.

It could easily be someone who will not pay rent on time.

Even worse, it could be someone who will conduct illegal activities on your property.

Always Have Access to Your Documents
A LandlordStation membership includes online storage where you can keep your important documents and photos.

This will make it easier for you to access the information you need no matter where you are.

If you’re meeting with a tenant outside of your office, you can just use your smartphone to access the necessary documents and answer any questions.

LandlordStation has three membership options that give you different amounts of storage space.

The Pay As You Go membership includes 5 GB of space.

The Starter membership includes 10 GB.

If you choose an Unlimited membership, then you get unlimited space for all of your images and documents.

Sign Documents Online
Your LandlordStation membership also makes it quick and easy to sign documents electronically without worrying about any security issues.

This will help you fill your empty properties and ensure that you have a steady flow of income.

E-signatures can also make it easier for you to manage properties outside of your area.

It’s a great option for landlords who own properties in several cities or states.

Simplify Rent Collection
Ideally, collecting rent shouldn’t take much time.

The reality, though, is that rent collection takes up a lot of time.

It’s difficult to keep track of who sends in their payments on time and who pays late.

You also have to consider how much time you spend taking depositing checks to the bank and keeping tax records.

It doesn’t take many tenants before rent collection becomes more complicated than you once thought.

LandlordStation simplifies the process by putting everything online.

The system accepts online payments that you can electronically deposit in the bank.

It also sends your tenants email reminders, notifies you when rent has been paid, and documents everything so you can complete your taxes without worry.

You can also use the system to collect other payments like late fees, application fees, security deposits and pet fees.

Landlords and property managers will always face challenges.

That’s part of the job.

With a LandlordStation membership, though, managing your properties becomes easier and more affordable.

 

Your Guide to Landlord Insurance

Are you a small-scale property manager or “accidental landlord,” trying to learn the ropes of renting out property so you can develop a more professional business model?

Many people who fit this description are not familiar with landlord insurance, and may be relying on homeowner’s insurance to protect them against property damage or liability.

Perhaps you own a vacation home and plan to rent it out for four years to help cover your child’s college expenses.

Maybe you have an aging relative who has moved into long term care, and your family is not quite ready to sell the house.

Or, you might be a real estate broker with a few vacant properties that could be bringing in income.

Whatever circumstances have led you to becoming a landlord, buying landlord insurance should probably go on your short list of tasks.

This guide will introduce you to everything you need to know about landlord insurance: whether you need it, what it covers, how to buy it, and a handful of other crucial considerations.

Do you need landlord insurance?
The answer is: Probably.

It’s not legally required, but carrying the right insurance is a basic element of protecting your investment.

Landlord insurance covers areas of risk that regular homeowners don’t have to worry about, such as legal costs in case your tenant sues you.

Landlord insurance also offers special options like rental income replacement and emergency appliance repair cost coverage.

Landlord insurance is most likely not necessary if your rental situation resembles one of the following scenarios:

  • You leave your home and rent it out for one weekend each year when a big local festival happens.
  • You rent out the basement of your home to a local college student.
  • You have a vacation cabin that you let your friends use for three weeks each summer.

In these examples, you’re either renting out property for a very short term (less than 4 weeks) or a tenant is sharing the home you live in.

Homeowner’s policies assume you’re living in the dwelling that you’re insuring — although they do offer additional coverage or a second policy to cover vacation homes.

While your homeowner’s insurance is probably sufficient in the situations listed above, it’s necessary to talk to your insurance agent and make sure.

Insurance companies may legally refuse to pay claims if they discover the existence of a landlord-tenant relationship that they didn’t know about.

Differences between homeowner’s insurance and landlord insurance:

  • Different pricing structure: Landlord insurance will probably cost you 12 percent to 25 percent more than homeowner’s insurance, but it provides wider coverage.
  • Different risks: Landlord insurance takes into account the extra risks you face from everything that can happen at a property that’s not your own home. These risks may include your tenants vandalizing or accidentally breaking your property, suing you for some rental policy they disagree with, or not reporting a problem to you until it becomes a crisis. For example, even the nicest tenants can be confused about what’s going on with the washing machine, and they may ignore all the warning signs of a blocked outlet pipe until the machine overflows and floods half the downstairs.
  • Rental income: Landlord insurance may pay you the rental income you were counting on if the dwelling is rendered uninhabitable during repairs (only if those repairs are covered, though).

What landlord insurance covers
The main coverage areas of landlord insurance are property, liability, and rental income replacement, in addition to extra options.

Each of these coverage types is discussed below:

Property Coverage
Landlord property coverage is offered in three different tiers: DP-1, DP-2 and DP-3 (DP stands for Dwelling Protection).

  • DP-1: The lowest coverage level, this tier only covers basics like fire and vandalism. If the dwelling is a complete loss, DP-1 policies pay the depreciated cash value of the home at the time it was lost, rather than the actual cost of replacement.
  • DP-2: This tier adds more coverage with a list of specific covered events. These typically include such things as tenant damage, windstorm, hail, and even collision (if a car crashes into your property and damages it). If a damaging event is not named on the DP-2 list, it is not covered.
  • DP-3: Called an “open-peril” policy, this tier covers all instances of damage unless they are specifically excluded. Also, DP-3 policies pay actual replacement cost if a dwelling is lost. This type of policy is usually the best choice, unless you’re already partially covered for losses by a condo association.

Insurance policies generally don’t cover flood damage.

Flood insurance is sold by the federal National Flood Insurance Program (NFIP).

Your agent should be able to sell you one of these policies, but the amounts and premiums are set by the government.

The insurance company may offer its own excess flood insurance if the NFIP amount available to you isn’t sufficient.

Landlord insurance can be written to include any items you own that are kept on the premises, including appliances, tools you keep on site and other structures (e.g. sheds) on the property.

Liability
Landlord insurance takes into account the additional risks you acquire when you put property into a tenant’s hands:

  • Personal injury coverage: Tenants or their visitors may file a liability claim against you for their medical costs if they get hurt due to an unsafe condition they feel is your fault. Additionally, if they suffer property damage as a result of something you did not repair, they may sue you for replacement costs. Finally, you are also legally liable for issues entirely unrelated to the physical state of the dwelling. For example, your tenant may make a legal claim against you for wrongful entry, illegal eviction, invasion of privacy, or disputes over deposits.
  • Legal counsel: As you can see, the numerous kinds of liabilities you encounter as a landlord make access to legal counsel an essential part of your financial security.

Loss of Rental Income
This category of insurance protects you against losing rental income if the unit becomes uninhabitable.

It is important to be aware that this insurance does not cover you if you simply lose rent because of eviction or vacancy; you must have actual physical damage that is covered by your insurance and be losing rent while it’s being repaired.

Optional Coverage
Creative insurance underwriters have come up with a whole toolkit of optional extras that they feel will benefit landlords.

You don’t have to purchase all of them:

  • Emergency lock replacement
  • Emergency repair service: for furnaces, hot water heaters, air conditioners, and other crucial appliances. This is generally accompanied by a network of preferred contractors whom you can contact for repairs.
  • Personal property (contents) coverage: This expands your property coverage to include all furnishings within the dwelling that belong to you, including carpets, curtains, and contents of outbuildings. Contents coverage is essential if you’re renting a furnished home, but you may also want to consider it if you have high-value appliances or personal tools at the rented dwelling. Your policy will not cover the possessions of your tenants, so it’s advisable to ask that they carry their own renters insurance.
  • Mold coverage: Juries have awarded substantial damages to tenants who have been exposed to toxic mold, because it’s not always visible and it can cause serious health problems. For this reason, some landlord insurance companies specifically exclude mold coverage. To guard against future mold problems, it’s important that you impress upon your tenants their responsibility to report any type of leak to you immediately.
  • Online policy management
  • Coverage for specific acts of nature: you will certainly want some of these, but the needs vary from region to region. It’s helpful to discuss coverage specifics with your insurance agent in order to make appropriate choices. For example, hurricane insurance in Florida can be so expensive that rebuilding your dwelling may cost less than insuring it against hurricanes.

What to look for in a landlord insurance policy

  • Customization: The policy you end up with should be tailored to your specific needs, because each landlord’s situation is very different. For example, if your rental units come with a swimming pool, you will probably want to increase your liability coverage.
  • Flood insurance: The federal government offers flood insurance through a designated set of insurance agencies. If you live in a flood-prone region, you should make sure your insurer participates in this program. The price for flood insurance is set by the government, and its cost depends on the level of risk in your region. (Flood insurance refers only to weather-related flooding. Water damage due to burst pipes or other accidental causes is already covered in your regular policy.)
  • Guaranteed replacement costs: Some low-cost landlord insurance policies pay you the “cash value” of covered items. While this phrase may sound good, it’s actually something to avoid. “Cash value” refers to depreciated cost: If a storm damages your ten-year-old roof, for example, a cash value policy will be based on how much you paid for that roof ten years ago, and will then decrease that value for each year you’ve had the roof. Your insurance company may end up paying you only a fraction of what it costs you to replace the roof in today’s marketplace. Better-quality policies guarantee that payouts will cover your actual replacement costs.
  • Inflation protection: The cost of professional home repair continues to rise, so it’s helpful to have a policy that automatically adjusts its coverage level to keep pace with inflation.

How to keep rates low
Make your coverage decisions carefully, depending on your particular situation.

Don’t buy every possible type of coverage automatically, just because it’s available; there’s a certain point at which additional insurance simply becomes an unnecessary expense.

For example, if you purchased a condo unit to rent out, the condo association may already cover certain building-related costs.

If you happen to have your own personal homeowner or auto insurance through a company that also sells landlord insurance, you are likely to qualify for a discount through that company.

Like any insurance policy, you’ll pay lower premiums if you are willing to bear the risk of a higher deductible.

Take all your tax deductions
Being a landlord means running your own business, and landlord insurance premiums can be deducted as a business expense.

Also, if you experience financial loss due to property damage that’s not fully covered by your insurance, you can often count that “casualty loss” as a tax deduction as well. (While you’re thinking about taxes, don’t forget all the other deductions you can take as a landlord. These include depreciation on the cost of your rental property as well as repair costs, accountant fees, mortgage interest and more.)

Lower your risk
Insurance agents will offer you better rates on your landlord policy if you have certain safety measures in place.

All of the following can potentially lower the cost of your policy by decreasing your risk:

  • Sprinkler system
  • Burglar alarms
  • Gated or locked access
  • Absence of known risks in the area
  • Current electrical inspection
  • Mold inspection
  • Requirement that tenants be non-smokers
  • Requirement that tenants purchase renters insurance
  • A clean bill of health on the dwelling’s CLUE report. CLUE stands for Comprehensive Loss Underwriting Exchange, and it is a report on any insurance claims made on a property for the past seven years. This report is generated by LexisNexis, a consumer reporting agency. If the dwelling’s CLUE report shows previous claims, the insurer will charge more to cover it. Only owners and insurance companies can request these reports, but the Fair Credit Act made these reports free to the owner.

The importance of maintenance
A well-maintained property will result in fewer headaches overall, and will also contribute to lowering your landlord insurance premiums.

Over time, the CLUE report on a well-maintained property will reflect fewer insurance claims, because you’re less likely to experience damage related to faulty household systems.

When you maintain your property well, it’s much easier to track how well your tenants are performing the upkeep that you require of them.

You will also be in a position to effectively defend yourself against any claims by your tenant that they suffered damage due to your neglect.

Renters insurance
Renters insurance is not required by law, but you can write your lease to require tenants to carry their own insurance.

This reduces your liability in cases where a tenant’s possessions are stolen or someone is injured due to the tenants not maintaining the property in a safe condition.

While renters insurance certainly offers you some protections, it doesn’t substitute for your own landlord insurance.

Specifically, renters insurance won’t cover damage to tenant’s possessions that results from your lack of maintenance.

For example, if tenants lose expensive musical instruments to a fire that started from faulty house wiring, renters insurance won’t cover their loss.

Likewise, if a tenant’s visitor slips and falls on icy steps because the tenant neglected to clear the snow away, renters insurance will cover the claim.

However, if the visitor falls because one of the steps isn’t nailed down properly, then you’ll be liable for the cost of the claim.

Umbrella policies: sometimes a good option
If you’re renting multiple units, your potential liability may be high enough that your insurance agent will recommend an umbrella policy.

This protects your personal assets in case your liability exceeds the levels of your landlord insurance policy.

It also ensures that you’ll be able to recover your investment in the case of catastrophic damage, and may be required by your mortgage lender.

What to do if your insurer drops you

  • Check your CLUE report: You’re entitled to a new copy every time you are turned down for insurance coverage.
  • Contact other insurance companies: If they turn you down, find out why. See if it’s something you have control over.
  • Get in touch with your state’s insurance commissioner: Their office may have a pool of insurers who cover higher-risk insurance needs.
  • File a complaint: If you feel you were unfairly denied insurance, you can complain to your state’s insurance commissioner, the FTC, or the insurance company itself.

How to Buy Landlord Insurance
The first step is always to speak with an agent in person and see if you feel comfortable talking with them.

In addition to your sense of personal trust, consider the following points before agreeing to buy:

  • Check the quality rating the company has been given by the rating agencies (Moody’s, Standard & Poor’s, A.M. Best, and Fitch). The Insurance Information Institute provides some background on how these agencies work, as well as extensive unbiased information on all insurance-related topics.
  • Check for any unpaid claims or complaints against the company with your state’s insurance commissioner.
  • Does the company (or your agent) specialize in landlord insurance?
  • Do they offer adequate coverage?
  • Are their premium and deductible amounts competitive?
  • Do they offer discounts for bundling several insurance products together?
  • Is their office nearby and/or easy to access by phone?
  • What is their claims paying process?

When you become a landlord, there’s suddenly a lot you have to learn.

You’re responsible for the welfare of people whom you can’t directly supervise, and this makes you subject to a whole new set of legal liabilities.

Purchasing a good landlord insurance policy will protect your real estate investment, give you peace of mind, and help you conduct your rental business in a professional and profitable manner.

 

Photo source may be found here.

How To Patch a Large Hole In Drywall

If you’ve got a large hole in your drywall, then patching this issue can be a bit tricky.

A standard repair won’t provide the wall with enough strength.

You still have some options for a quick repair, but not as many if the repair issue was a small hole.

Here is what you’re going to need to do.

1. Look For a Metal Plate Patch.

You’ll need something with strength in order to repair a large hole.

That means your best option is a metal plate patch.

You can find these at most hardware stores and major retailers.

The largest size of this patch tends to be 4×4 inches.

Some patches offer a textural repair component, but the strongest patches just have a drywall tape attachment to them.

2. Install The Patch.

Place the patch over your large hole that needs to be repaired.

If the hole is too large for the patch, you’ll need to cut out the hole so that you have two studs exposed for a drywall patch instead.

If you must take the latter option, then expose 50% of the stud and cut your drywall patch to size.

Use drywall tape to help seal your new seams.

3. Coat With Joint Compound.

You’ll need to cover your patch with joint compound for the repair to look seamless if it is a metal patch.

If it is a large drywall patch instead, then just use the joint compound along the seams to cover the tape.

Allow the joint compound to dry completely.

4. Sand Down The Rough Edges.

You want to have a smooth surface on your wall at the repair site.

Use a drywall sander to remove the rough edges from your joint compound patch.

5. Apply Texture.

You can either manually add texture to your wall or you can use a spray texture for an easier solution.

Start from just outside of your repair area and work your way in for a seamless aesthetic.

Allow to dry.

6. Paint To Match.

Now all you need to do is make sure your wall looks fantastic.

Paint the repair area to match the surrounding wall.

If your surrounding paint has faded for some reason, then you may need to repaint the entire room.

Knowing how to patch a large hole in drywall can save you a lot of time and money.

Follow these steps and you’ll be able to complete this repair over the course of a single afternoon.