Rental property headaches and home runs

Owning property is often considered the perfect example of living the American dream. Whether a home is purchased as a primary residence or an investment, real estate has been a valuable decision for many. As life changes, your real estate decisions can present a variety of options.

Perhaps you're planning a move, but instead of selling your current home, you're now considering keeping it as a rental property. Maybe you've inherited a home and are intrigued by the idea of earning "mailbox money," or passive income, from rent payments. Maybe you're considering staying in your current home and using equity or other assets to buy a rental property.

Whatever your situation or motivation, do your research to learn how to protect your property and understand the potential headaches and home runs of owning a rental property before you step up to the plate.

Pros and cons of owning rental property

As rewarding as owning a residential rental property can be, keeping it rented, repaired, profitable and protected can be stressful. Here are some of the potential benefits and risks to consider.

Pros of owning rental property

Deciding to become a landlord can have its benefits.

• Possible increased cash flow. When rental payments exceed your expenses, you're turning a profit.
• Potential tax benefits. There are many tax deductions and other helpful actions for managing the tax impact that your rental property brings Opens in New Window.‍ ‍ ^{See note 1}
• Appreciation. You reap the benefits of your property increasing in value while someone else offsets your mortgage costs.
• Flexibility. You have the option to keep your mailbox money coming in while the rental market is hot — or sell when the price and profit hit a level that's too good to pass up.

Cons of owning rental property

As with any financial commitment, there are also risks to being a landlord.

• Maintenance and repair expenses. It's your responsibility to keep the property maintained in a reasonable state for your tenants. And when something breaks, you must fix it and foot the bill.
• Time commitment. The income stream may be passive, but your job as a landlord is not. You must be available 24/7 to handle all issues related to your property or your tenants.
• Out-of-pocket costs. While there are obvious expenses associated with marketing the property and screening tenants, costs associated with unexpected vacancies, enforcing the terms of the lease or evictions, can add up quickly.
• Liability. You're responsible for liabilities related to the property. This is why you may want to consider increasing your liability coverage by adding an umbrella policy.

How can I help minimize the risks of owning rental property?

First and foremost, it's critical to make sure you have the appropriate insurance policy to help protect your rental property — and your hard-earned cash — from whatever Mother Nature or a nightmare tenant might throw at you.

While your homeowners policy may be adequate for your primary residence, your rental property needs an added level of protection provided by rental property insurance.

What's the difference between landlord insurance and a homeowners policy?

Rental property insurance, also called landlord insurance, offers protection that a homeowners policy may not provide. For instance, an RPI policy from USAA also includes:

• Income replacement. While your rental property is being repaired following a covered claim, you'll get reimbursed for lost rental income.
• Personal liability coverage. Legal fees and medical expenses may be covered for an injury or loss for property damage on your rental property.
• Home-sharing coverage. If you rent out a room or your entire house, we offer coverage you'll need as a home-sharing host to help protect you and your home.‍ ‍ ^{See note 2}

Steps to help avoid nightmare tenants

One of the best ways to avoid nightmare tenants, and attract and keep dream tenants, is to be a responsible, diligent landlord and property owner. The following steps provide good rules to follow to promote a positive rental situation.

1. Screen a tenant, no exceptions.

We've all been in situations when a friend, friend of a friend, family member, coworker or other acquaintance needs to make a quick move and is looking for a place to rent. No matter how well you think you know them, how long you've known them, or even if they share your DNA, you need to put them through tenant screening. You don't want to find out the hard way that the skeletons in their closet are now renting yours.

2. Check rental history or request a co-signer.

In addition to the background checks and credit checks performed during the tenant screening process, be sure to get their rental history and prior landlord's contact information. It's worth the time to verify the accuracy of their rental history — and ask if they were responsible tenants.

For those starting out and new to renting, or who have a "lean" rental history, asking them to provide a qualified co-signer, often a parent, may be helpful. The tenant will start to build a good rental history, and you'll benefit from having a qualified co-signer as a guarantor that the terms of the lease are met.

3. Require that your tenants have renters insurance.

While it isn't a state law, many landlords will require prospective tenants to show proof of renters insurance.

So, who pays for renters insurance and why is it important? The tenant is responsible for buying a renters insurance policy. While landlord insurance covers your rental property, a renters policy helps protect your tenant's personal property in the event of theft or damage. It also may help protect you from liability claims if their possessions get damaged.

4. Get a signed lease and deposit before turning over the keys.

This sounds like a no-brainer, but you'd be surprised at how many times well-intentioned landlords have allowed a tenant to gain access to the property before the i's have been dotted and t's crossed. If the tenant doesn't follow through with the deposit and rent, this can result in legal costs if you start eviction proceedings. Of course, there's rental income potentially lost during that time, and while you're searching for a new tenant.

5. Get familiar with the Fair Housing Act.

Enacted by Congress in 1968, the Fair Housing Act makes it illegal for landlords, real estate agencies and other companies and institutions to discriminate and deny housing to a person based on race or color, religion, sex, national origin, familial status or disability. Not only does the Fair Housing Act protect tenants, but it gives landlords clear guidance on what they can and can't do.

6. Consider enlisting a property management company.

A reputable property management company may be worth the cost to save you countless headaches. Think of the management company as the team manager. Typically, the management company will help you determine the rental amount based on your area, list your property and screen prospective tenants. The company will also field calls about leaking pipes and broken appliances, coordinate repairs and maintenance, collect timely rent, deal with late-payers and initiate evictions for any nightmare tenants who may have slipped through the door.