Owning and operating a rental property has many benefits, but it’s not without risks.
As an owner of a rental property with tenants and guests going in and out of the premises, it’s possible for tenants and guests to injure themselves, others, or cause damage to the property itself.
While there is no way to eliminate all liability risk, here are some proven ways to limit your liability risk as an owner.
Limit liability risk by using a good rental agreement
Do not blindly copy and use a template you find online. It will not be ideally suited for your situation in your legal jurisdiction. Many free “templates” do not include all of the available liability limiting clauses that you should use to your advantage.
Work with a local real estate lawyer to draft one that works for your market and that you can use for all your tenants going forward. Or, if you do have a template you are confident with already, at least get a lawyer to review it before you start using it.
This one-time fee, even at a high hourly rate, will be pennies compared to an actual liability incident that could have been avoided or limited with a proper agreement.
Limit liability risk by being selective with your tenants
There’s a reason why you hear landlords say, “a bad tenant costs more than a vacancy.” Because on top of potentially not paying you the rent owed, problematic tenants could cost you much more in time, money, and headaches. Depending on the market, evictions often could cost 1000’s of dollars and the entire process could take many more months of lost rents.
Problematic tenants could also damage your property and require costly repairs before it can be rented again. They could also become a nuisance to others, either driving good tenants away or scaring good tenants from wanting to move in.
Screen for problematic tenants by getting thorough background checks for criminal records, poor credit histories, or lack of a stable income source.
Limit liability risk by keeping a consistent paper trail
Keep excellent records of everything related to you owning and managing your property. That means keeping all receipts, reports, tenant interactions, notices, etc…
Having a paper trail and a demonstrated history of great record keeping will make it harder for any counter-party to challenge the accuracy of your records in court, should you need to use them.
Limit liability risk by doing regular inspections
This meanings scheduling, performing and documenting the property inspections on a regular basis. It’s recommended that you do them at least 1-2 times a year and definitely in between any change of occupancy.
Also, make sure your tenants have an easy way to report any issues on the property.
Limit liability risk by keeping a No Pets Allowed policy
While tenants are usually liable if their pet injures someone on your property, that’s not always the case.
You, the landlord could be held liable if:
- You knew the pet posed a danger due to prior knowledge of aggressive behavior but did not require the pet to be removed. That is, you know it was a danger to others but allowed the pet to stay on the property anyway when you had a legal means to remove the pet.
- If you could not legally remove the pet but did not notify other tenants of the danger. Even if you took the tenant to court to remove the pet and the court sided with the tenant, you should then place easily visible warning signs (e.g. “Beware of Dog”) and notify other tenants.
- If you the landlord cared for or had some control of the pet (e.g. fed or worked or otherwise cared for the pet in any way)
Some landlords have a pet clause in their agreements that at the first sign of aggressive behavior (e.g. biting, lunging, etc…), they have the sole discretion to require the removal of the pet.
If you do allow pets, consider allowing only small pets that have a very low chance of aggressive behavior. For example, you could limit allowed dog breeds only to those up to a certain size as well as breeds known to be docile and friendly.
Limit liability risk by making timely and proper repairs
For any defects or safety issues that have real potential to cause harm, fix them properly as soon as possible. If you make all reasonable efforts to quickly and adequately repair defects on your property, you can limit liability risk due to negligence (i.e., from not repairing/fixing something that led to an injury).
Limit liability risk by having adequate insurance policies
Property & casualty and general liability are typically recommended, but additional coverage is encouraged for things like flood, earthquake, tornado, etc…if those risk factors apply to your property in your market.
Limit liability risk by requiring renter’s insurance
This does create an additional barrier for some prospective tenants, but it’s such an inexpensive requirement that it can also serve as a filter for better tenants who are able and willing to comply with this requirement.
Limit liability risk by owning through a legal entity like an LLC
If you’re going to be investing with any level of seriousness, you may want to consider investing through a legal entity like a Limited Liability Company (LLC). With proper umbrella liability insurance at the entity level, you’ll have another layer to shield your personal assets from liability.
Limit liability risk by only hiring licensed professionals
For any work on the property, use licensed professionals who have their own insurance whenever possible.
They’ll provide an extra layer of protection since they will be responsible for their work product.
Limit liability risk by never break any laws.
Nothing will shield you from liability resulting from fraudulent or criminal activity.