Buy & Hold

Managing Risk in a Buy-and-Hold Strategy

• by Laura Niecikowski
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Do Things Right to Make Your Long-Term Strategy a Successful One By Laura Niecikowski Congratulations — you have decided to hold onto your last renovation project and become a landlord. It’s a big step for any real estate investor but especially so for someone accustomed to turning fix and flips. There is a different set of risks and liabilities associated with properties you hold, so how you manage this new type of investment and the insurance coverage you decideon should adjust to fit a long-term strategy. Finding the Right Tenant First, run a background check. Leasing to the wrong tenant can result in late rent or non-payment of rent, damage to your unit, and expensive and time-consuming eviction costs. It is important to run a background check every time for every tenant to minimize costs and help give you peace of mind. A tenant background check will generally show criminal history, rental history, and credit history and payment ability. If you are looking at a potential renter’s credit report, don’t just look at the credit score, as that may not tell the full story. Instead, look at the number of addresses on file over the last 5-10 years and the payment history for rent and credit cards to determine if they would be a stable, long-term tenant. You will also want to verify income for all signers on the lease — using either paystubs for the last month or other official documentation. A phone call, in this instance, might not work. For example, your prospective tenant told you she works at a retail store and gives you the cell phone number for her boss…. who isn’t really her boss at all but a girlfriend ready to say whatever is needed so the prospective tenant gets the apartment. State and federal law limit what can be reported on a background check, but most do provide information on criminal convictions, any pending criminal cases, and any history of incarceration as an adult. In the end, background checks provide you with a more level playing field when deciding who to choose as a tenant. Before Move In You found the perfect tenant. Before they move in, we recommend a walk through that includes photos that are dated. Pictures should verify current condition of the unit, both interior and exterior, if appropriate. It is often a good idea to include language in the lease that outlines to the lessor that condition of the unit was agreed upon and verified with photos and a physical inspection. Next, you should require a certificate of renters insurance with you named as additional insured — for every tenant, every time. By requiring a certificate of insurance, particularly for multi-family buildings, you provide your tenants with the assurance that you want responsible people in the buildings you rent. Renter’s insurance is important to protect the personal property of the renter in addition to being an extra layer of protection for you. If one of your tenant’s guests falls in the tenant’s bathroom and sustains injuries, whose insurance coverage kicks in? Their renter’s liability, then possibly yours, which means in this instance, there might not be a claim against your policy — which can save you time and money. New tenant have a pet? Almost 70% of US households do, so it might keep your units filled if you allow them. But if you do, you should also understand the risks and require renters to add on pet liability coverage just in case. Be aware also that some breeds of dogs carry more risk of bites than others and may not be covered. We also strongly encourage you to have signed leases for all tenants — even if they are a friend or relative. Signed leases are legal documents and outline the responsibilities of both parties in clear language, so if something occurs, there is no he-said-she-said battle, and everything falls back to what is in the written, signed document. Types of Coverage for Landlords So, you found the perfect tenant, they signed a lease and scheduled a move-in date. Now you need to make sure you have the right types and amounts of insurance coverage because the wrong decisions on insurance could mean the success or failure of your real estate investment business. Do not skimp on liability coverage thinking you can get by without it for a while. Accidents happen and people sue — and you need to be ready and covered. General liability covers accidents that happen on your property and covers things like bodily injury, property loss or damage, and advertising injury, so it is a must. Many new landlords skip over obtaining sewer and water line backup coverage and flood. Skipping flood insurance might be possible if you are not in a flood zone. But sewer and water line backup is an add-on that makes sense in most cases, because this coverage generally includes backup fromthe main sewer line into anywhere in the house — like the bathtub. While you may have redone the pipes in the house, it is unlikely you redid the line running to the house and that could be clogged with tree roots and cause problems down the road. Rent default is additional coverage if your tenant can no longer pay the rent but loss of rental income is related to a property that is no longer habitable – both risks but very different. Running background checks helps mitigate the first risk but there isn’t much you can do to stop a tornado from ripping a roof off. If that happens, you will need Loss of Rental Income coverage to ensure cash flow while the repairs are done. And, add on an Umbrella Policy. This coverage does exactly what it says — provides an overall layer of protection in case your other coverage is just not enough. Property Maintenance Because you have decided to hold for the long-term, maintenance comes into play. As a landlord, you have a responsibility to