Insurance and Legal Basics

Landlord Insurance Is Not Homeowner Insurance

This is the first thing every accidental landlord needs to understand. If you are renting out a property and it is still covered by a standard homeowner insurance policy, you are effectively uninsured. Homeowner policies exclude properties used as rentals. If a tenant's guest falls down the stairs and sues you, if a fire damages the building, if a pipe bursts and floods the unit — your homeowner policy will deny the claim because the property was being used for a purpose it does not cover.

A landlord insurance policy (sometimes called a dwelling fire policy or rental property policy) covers the building structure, your liability as the property owner, and lost rental income if the property becomes uninhabitable due to a covered event. Premiums are typically 15 to 25 percent higher than homeowner policies because the risk profile is different when you are not living in the property.

Call your insurance agent immediately if you have not already switched your coverage. This is not something you can delay. Every day your rental property operates under a homeowner policy is a day you are exposed to catastrophic financial risk.

Should You Use an LLC

A limited liability company creates a legal separation between your rental business and your personal assets. If someone is injured on your property and sues, the lawsuit targets the LLC that owns the property, not you personally. Your home, your savings, your retirement accounts, and your other assets are protected.

Setting up an LLC is relatively simple and inexpensive in most states. Filing fees range from $50 to $500 depending on the state. You can often file online. Once the LLC is formed, you transfer ownership of the rental property into the LLC (your attorney can handle the deed transfer) and conduct all rental business through the LLC including its own bank account.

There are some considerations. Transferring a property into an LLC may trigger a due-on-sale clause in your mortgage (though this is rarely enforced for single-property transfers). Some lenders require notification. Some states have annual LLC fees. Talk to a local attorney and your lender before making the move. In most cases the liability protection is worth the cost and effort.

Fair Housing Law

The Fair Housing Act prohibits discrimination in housing based on race, color, national origin, religion, sex, familial status, and disability. Many states and cities add additional protected classes such as sexual orientation, gender identity, source of income, age, and marital status.

As a landlord you must apply the same screening criteria and rental terms to every applicant regardless of any protected class. You cannot advertise preferences based on protected classes. You cannot steer applicants toward or away from properties based on protected classes. You cannot set different terms or conditions based on protected classes.

The best protection against a fair housing complaint is a consistent, documented screening process applied equally to every applicant. Written criteria, standardized applications, and records of every decision and the reasons behind it. If you treat every applicant the same way based on the same objective criteria, you are in a strong position.

Your Lease Agreement

The lease is the legal foundation of your relationship with your tenant. It defines rent amount, payment terms, security deposit, lease duration, maintenance responsibilities, pet policies, noise policies, guest policies, and the process for ending the tenancy. Everything that matters should be in the lease.

Do not use a generic lease template without having it reviewed by a local attorney. Landlord-tenant law varies significantly by state and even by municipality. A clause that is standard in one state may be unenforceable or illegal in another. An attorney who specializes in landlord-tenant law can review your lease for a few hundred dollars and ensure it complies with local requirements while protecting your interests.