Purchasing a rental property can be a great way to diversify your investments while still building wealth. Most people who go this route choose to buy a rental home or a multifamily duplex, quadplex or apartment building, all of which have the potential to be extremely profitable down the road.
However, owning multiple properties and entering into a tenant—landlord agreement can open you up to all sorts of financial problems down the road. Because of this, it is important to take steps towards protecting both yourself and your new investment property. Keep reading for tips on how to keep yourself safe.
1. Double Check Your Liability Insurance Limits
As your net worth increases so does your potential for liability. In addition to protecting your investment property, you will want to make sure that you protect your growing wealth.
While everyone hopes that they will not run into legal trouble, you will want to make sure all of your assets are protected in the unfortunate event that someone files a lawsuit against you. Make sure that you have an umbrella liability policy that is at least equal to your growing net worth (your net worth being the sum of all of your assets, both liquid and illiquid.) An umbrella liability policy is typically not very expensive, but it can save you from massive bills down the road, making it well worth the small initial investment.
2. Consider Forming an LLC or Corporation
If you have a significant amount of money in an investment property or properties, consider forming an LLC or corporation that can take ownership of the property/properties for you. This can help to protect your personal assets in case an unhappy renter decides to enter into a lawsuit with you. They will be able to sue the LLC, but not you personally. This can be a good way to protect your investment properties as well as yourself from financial damages.
3. Hire a Property Manager
If you lead a busy lifestyle, you might not have time to actively manage your investment properties. If that is the case, it is usually a good idea to hire a property manager to oversee your rental properties. The property manager will charge a fee for their services, usually a percentage of the rent, but their services are worth it.
Your property manager can help with the day-to-day management of the property, including collecting rent, overseeing repairs and finding new tenants. Their active involvement can help to keep tenants happy, which will help you keep the property occupied and minimize the damages caused by disgruntled renters.
If you are considering purchasing an investment property, keep these 3 tips in mind before, during and after you make your purchase. They can help to protect both your property and your bank account