Policy Reviews
Similar to property inspections to ensure the physical property is kept in good condition, business policy reviews are essential to ensure legal compliances, business protection insurances, risk reduction measures, and property management standards provide best practices coverages to protect the landlord’s business entity and rental operations.
Legal Compliances
Landlords conduct business under multiple levels of governmental agencies’ regulations. Federal, state, and local laws, statutes, and ordinances regulate business ownership and business operations. Legal compliance requires timely attention to new and pending legislation at all levels of governance for ownership and operations.
Business Entity
The type of business entity that the landlord chooses for his business model – e.g., sole owner, partnership, corporation, or limited liability company, regulates his business reporting requirements for federal, state, and local agencies. While the focus of attention is often given to the property management compliances, the landlord is first a business owner with requisite responsibility for entity, tax reporting, registrations, licensure, employment and labor, and code compliances.
Landlord-Tenant
The landlord provides a business service of rental housing regulated under federal, state, and local laws regarding fair housing rights, landlord-tenant rights and responsibilities, and consumer protections.
The location of the rental property determines the governing landlord-tenant statutes and local ordinances.
State landlord-tenant statutes address multiple issues of the landlord-tenant relationship including landlord and tenant obligations and duties. In the last several years, local city and county governments have taken a more active interest in rental housing issues which has added another level of due diligence requirements.
The influences of state laws and local ordinances have directly impacted rental operations in many rental markets. In some regions the rental market has become more favorable to tenants by placing restrictions on tenant screening and selection policies.
It is imperative that a landlord fully understands legal requirements and how his rental policies and procedures must be developed to the appropriate level of compliance for rental policy enforcement and business protection. A landlord is required to comply with the legal standard that provides the greatest level of protection, i.e. most stringent, for fair housing rights and consumer protections.
Insurance Coverages
Landlord Business Insurance
Business insurance coverages help protect a landlord from financial losses resulting from unexpected events – e.g., accidents, natural disasters, and liability claims. While landlords are obligated to take reasonable measures to protect tenants and tenant property against known risks or potential threats to health and safety, there are events, natural and manmade, that cannot be directly controlled by a landlord. Business insurance policies for buildings, contents, and liability issues are important measures to reduce loss from damage or to reimburse the landlord for loss of rental income from unexpected events.
Renters Insurance
As permissible by landlord-tenant statutes, landlords can further protect themselves by requiring tenants to purchase renters insurance as a condition for tenancy.
A landlord’s insurance coverage does not protect a tenant against liability claims related to a rental or cover the tenant’s personal possessions. It is the tenant’s responsibility to obtain his own insurance coverage for financial protection against loss or destruction of personal possessions and as protection against liability claims of injury to other persons or property damage.
Risk Reduction Policies
Managing risks related to income property can be complex and time consuming, involving multiple levels of regulatory requirements in addition to business operation requirements. Some risks may be found at both regulatory and operational levels, while certain other risks may be more significant at one level than the other. A unique characteristic of the business of landlording is the interrelationship of landlord-tenant rights and obligations during tenancy. The landlord retains ownership of the property but the tenant has the right of occupancy of the property. The potential for conflict creates potential risk.
While every business should be prepared for some risk, e.g., a natural disaster recovery plan, a risk management policy can provide better long-term protections in safeguarding business assets by incorporating proactive defenses into routine operations.
A risk management policy is more than a theoretical analysis of hypothetical events. If risk cannot be avoided, then risk reduction policies must be in place. Risk reduction is developing legal, reasonable, sound business policies, rental qualification standards, and non-discriminatory practices to limit business exposure to known risks. Adequate risk reduction policies can help protect the business from high risk tenant behaviors such as non-payment of rent, nuisance disturbances, property damage, or direct threats to the safety and welfare of others.
Risk management measures can include:
Avoiding Risks
Certain types of risks may be avoided completely by eliminating potential sources of a particular risk. As an example, landlords must avoid the unnecessary risk of filling a vacancy with an unqualified tenant.
Controlling Risks
Many risks, while not always avoidable, can be minimized by taking preventative actions. If exposure to risk cannot be completely avoided, landlords will need to find ways to minimize the risk. As an example, landlords can control some of the business risks by making sure they are in compliance with all applicable business and landlord-tenant laws.
Transferring Risks
Managing exposure to loss can include transferring risk to others. Transferring risk is most commonly done through the purchase of insurance which transfers some or all of the risk to the insurance company. As an example, landlords purchase liability insurance coverage to help protect against lawsuits, settlements, and judgments and casualty insurance to help protect the property from physical losses or damage from a number of potential sources.
Retaining Risk
If a landlord cannot avoid risk, cannot effectively minimize risk, and/or does not transfer risk, the landlord may choose to retain risk. As an example, a landlord may decide he can afford to absorb some loss, either because the frequency and probability of those losses are very low and/or because the maximum dollar value of the potential loss is manageable.
Property Management
Property management requires significantly different knowledge and skills than investing in income property. Good property management is active property management with a hands-on involvement in all phases of the rental operations for people, property, and policies.
Good management can often make a bad property tolerable while bad management is almost certain to bring down a good property. Bad management can result in loss of rents, increased operating expenses, legal actions, and devaluation of the rental investment.
No property will manage itself. Different types of properties may require different investment of resources, but all types of income property require some management. No manager ever knows everything there is to know. Smart managers understand there is always more to learn. The key to efficiently and profitably managing properties with a minimum of stress is to develop procedures and to consistently follow them.
Employing a property management company does not eliminate owner liabilities for rental operations. The property management company becomes the owner’s legal agent who essentially controls the rental investment through their representation with tenants and governmental agencies, enforcement of rental policies, and handling of rents and deposits. The owner remains liable for all acts performed by the owner’s agent in exercise of the authority given the agent by the owner.