Renting seems like the perfect way to mitigate the costs of an extra home that won't sell; the intended course of action when a property was purchased for an unbelievable price, or many of the other reasons that people become landlords. Although it seems like a fail-proof plan on the surface, becoming a landlord can be a financially and mentally rewarding experience, or it could be the source of a large-scale loss of time and money.

TUTORIAL: Exploring Real Estate

Like all investments, renting comes with risk, and that risk is only worth your time if the rewards are greater. Experienced landlords know that the way to mitigate the risks involved in renting, is to protect themselves against loss. This is called hedging in the investment world. Here are five ways to hedge the investment risks involved with renting your property.

You hedge the financial risks associated with crashing your car, or injuring others, by purchasing car insurance, and as a landlord, you should do the same thing. If you are renting a single-family home, traditional homeowners insurance doesn't fully protect you against the potential losses that come with renting your home to someone else.

You need an insurance policy that not only protects the property from a large scale event, but if a tenant were to injure themselves, as a result of a problem with your property, you could face civil litigation and possibly a large payout. An insurance policy tailored for rental property has provisions insuring a landlord against these types of events. (Use these simple ideas to save money and get better coverage for your house, see Insurance Tips For Homeowners, and 7 Homeowner Costs Renters Don't Pay.)

Rental Contract
Most states allow contracts to be oral or written, but in the case of renting a written contract is essentially required. With friends or family, a written contract might seem awkward, but it is very important. States have differing laws pertaining to the rights of a tenant and a landlord. Florida, for example, requires that any notice to and from a landlord be in written form.

The written agreement should contain the rental rate, the length of the agreement, how the utility payments are split up and the many other complexities that come with renting. The more detailed you are in the agreement, the more protected you are in the event that eviction proceedings take place.

Security Deposit
Most states allow for collection of certain deposits as long as they are contained in the agreement and each party agrees. One of those deposits should be the security deposit. This money is collected to give you leverage in case the tenant decides to abruptly leave, or doesn't want to repair damage, beyond normal wear and tear, at the end of their lease. (Besides creating ongoing income and capital appreciation, real estate provides deductions that can reduce the income tax on your profits, check out Tax Deductions For Rental Property Owners.)

At the end of the leasing term, state law gives you, the landlord, only a certain amount of time to examine the property before you have to return the deposit. As soon as the tenants vacate the property, inspect for any damage and immediately notify the ex-tenant in writing via certified mail. Then, follow the appropriate laws in your state regarding any disputes that may arise.

Before a tenant moves in, document in detail the condition of the property. Using a video camera, high quality still pictures and a witness, document every part of the property including the walls, windows, appliances, floors, doors and everything else. Also, make sure that these files are in a format that allows for a time and date stamp.

For added protection, send the files to a friend or relative so you have an electronic trail proving that these files were created prior to the move-in date. If you have to go to court, there is no such thing as too much documentation.

Walk Through
You, as the landlord, have the right to do a walk through of your property; providing you give the tenant at least 24 hours notice. If you request a walk through twice throughout the rental term, tenants will usually make sure to keep the home in good repair. Most tenants want their security deposit returned to them, so it is in their best interest to keep your property well maintained. A walk through not only lets the tenant know that you're watching, and if there is a problem, you can address it before they move out and possibly become hard to find. (Find out what factors you should weigh when searching for income-producing real estate, read Top 10 Features Of A Profitable Rental Property.)

The Bottom Line
Renting is often rewarding, but it does come with risk. As any investor knows, risk is never removed. Instead, it can only be managed, and the best investors learn how to manage risk in a cost effective way.

Related Articles
  1. Insurance

    Umbrella Insurance: You May Need It, Too

    If you have assets to protect – or just run a business from home – you could be unpleasantly surprised at how much you need umbrella insurance.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  4. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  5. Home & Auto

    4 Areas to Consider Roofing Material Types

    Roofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
  6. Investing Basics

    Find Income-Generating Properties Online

    Discover the best websites for finding valuable properties that can earn you income.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares US Real Estate

    Learn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
  8. Entrepreneurship

    Top 5 Real Estate Crowdfunding Companies

    It’s estimated that crowdfunding investors will be putting $2.5 billion into the U.S. real estate market in 2015. As an investor, crowdfunding opens up investment opportunities that might have ...
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Global ex-US Real Estate

    Take an in-depth look at the Vanguard Global ex-U.S. Real Estate ETF, an international property fund tilted toward Asian markets.
  10. Professionals

    Are Hedge Fund ETFs Suitable for Your Portfolio?

    Are hedge fund ETFs right for you? Here's what investors need to consider.
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  3. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the ...
  4. Comprehensive Glass Policy

    An insurance policy that covers glass that has been broken or ...
  5. Turnkey Property

    A fully renovated home or apartment building that an investor ...
  6. Ginnie Mae Pass Through

    A type of investment issued by the Government National Mortgage ...
  1. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  2. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  3. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  4. How are American Depository Receipts (ADRs) exchanged?

    American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
  5. What is the difference between adjusted and regular funds from operations?

    While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>
  6. What are the main factors that impact share prices in the insurance sector?

    The main factors that impact share prices in the insurance sector are interest rates, earnings and actuarial risk. In the ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!