Owning rental properties can be extremely lucrative, but it’s not entirely without risk. Tenants can and do, bring lawsuits against their landlords. Many times, these lawsuits can be avoided by following some property management best practices. Here are a few tips on how to avoid some of the most common situations that cause tenants to sue their landlords.
Set up an LLC
One way to protect your investment is to set your business up under the protection of a Limited Liability Corporation, or LLC. An LLC will protect any personal assets if a tenant brings a lawsuit against the property. Having a well-drafted rental agreement or lease that dictates how the tenant is expected to treat the property is also essential. It’s recommended that you include a clause that makes it necessary to settle the dispute in arbitration rather than in court. For added protection, you can also get an insurance policy for the property that includes limited liability coverage. This would make it possible for the insurance company to defend you if the lawsuit went to court.
Comply with Local Codes and Conduct Routine Inspections
By complying with all local and building codes, you can avoid the likelihood of premise liability lawsuits. Schedule routine inspections of all the systems on the property, including fire alarms, CO2 alarms, and water heaters. Keep a record of all inspections so you have evidence they’ve been properly maintained, should you have to go to court. If you’re aware of any hazards on the property that haven’t been disclosed to the tenant or resolved, this could be grounds for a lawsuit as well. This includes things like tripping hazards, lead paint, or chemical leaks.
Avoid Discriminatory Practices
Discrimination of any kind is another issue that can lead to lawsuits. This includes discrimination based on race, religion, nationality, gender, or disability. Asking questions about any of these factors is strictly prohibited and may spur an investigation by the U.S. Department of Housing and Urban Development (HUD). Make sure to familiarize yourself with the Fair Housing Act (FHA) to make sure that none of your rental practices or policies are discriminatory.
It’s also important to note that according to the FHA, all multifamily homes built after 1991 must be accessible to all disabilities. All reasonable modification requests must be granted. A reasonable accommodation is a change or adjustment to a rule, policy, practice, or property that allows a person with disabilities to have equal opportunity to enjoy the property. Some examples of reasonable modifications include a change in the “no pets” policy to allow for a guide animal or adding a grab bar to a tenant’s bathroom. Keep a record of all modification requests as well as your response.
Conduct a Walkthrough and Provide an Itemized List
Another common area of dispute between landlords and tenants are security deposits. Most tenants expect to receive their security deposits shortly after they move off the property. If the tenant disputes the amount of the deposit held for repairs or maintenance, it could lead to a lawsuit. To avoid any problems, it’s recommended that you conduct a pre and post rental walkthrough with the tenant present. During the walkthrough, provide them with an itemized list of the repairs that are needed. Having an itemized list in hand will reduce the chances of disputes or litigation. To add further protection, make sure you’re complying with your local laws regarding how you can use the deposit.
Create a Process for Screening Applicants
Busy landlords may decide that their risk of lawsuits is low and decide not to screen applicants. Or, they may worry about being accused of discrimination by a rejected applicant. Tenant screening is necessary to protect your property investment and may even help you avoid discrimination claims. The best practice for tenant screening is to consider all the reasons why you would deny an applicant. Create a checklist of your rental criteria and make sure that it doesn’t include any potential discriminatory practices.
Once you’ve determined how you’ll weed out applicants, use our tenant screening services to conduct a thorough screening. Use your checklist alongside our reports to make your decision. Keep a record of why the applicant was denied so you can point to a specific reason why you chose not to rent to them. If someone tries to sue you for discrimination, you’ll have well-documented proof that it wasn’t based on discriminatory reasons.
With proper precautions, investing in a rental property can be an extremely reliable source of income. By staying up to date on federal laws, property maintenance, and overall good business practices, you should be able to avoid many common issues that often lead to litigation.
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