"Our approach is conservative," said Art Swanson, chief of operations for Lightner Property Group, a San Francisco-based property management and real estate development company. "My job as a property manager is to protect the property owner and not give cause for people to sue them."
He recommends the first step a homeowner should take is talk to their homeowners insurance broker to learn what is covered by their policy -- and what isn't -- based on the type of rental they envision. According to Loretta Worters, vice president of Insurance Information Institute, a number of things aren't covered when renting out the driveway or garage, backyard or other areas of the property.
Worters also advises homeowners to consider a personal umbrella policy. These policies are designed to provide liability protection beyond the limits of homeowners, automobile and watercraft personal insurance policies, she explained.
"With an umbrella policy, depending on the insurance company, the policyholder can add an additional $1 million to $5 million in liability protection. This protection is designed to 'kick-in' when the underlying liability on other current policies has been exhausted," Worters said in an email interview. "This would be useful if you have someone on your property, as you could be exposed to liability."
Unfortunately for homeowners who are looking to generate income from their properties, the amount of revenue they can expect to bring in may not be enough to offset the costs of the added insurance. Landlord's insurance, for example, can cost about 25% more than a regular homeowners policy, she notes. Factoring that added cost into the rent could be an option, providing the homeowner can do that and still offer a competitive price.
Rent Control Traps and Background Checks
Homeowners may also want to talk to a real estate attorney, depending on whether the rental income will be substantial or is expected to be an ongoing revenue source, Swanson says.
One of the first things a homeowner should consider is whether they live in an area that has rent control -- even if they're only renting out their garden or driveway, he advises. Real estate attorneys can draw up contracts designed to protect homeowners' financial interests, but even their hands can be tied when it comes to dealing with rent control ordinances.
"There are some nuances of the law that won't let a homeowner take back what they're renting. For example, if you live in San Francisco, there are some circumstances where you can't ask the person to leave, even if you want to live in the place yourself," Swanson says. "Rent control situations can and do cover non-inhabitable situations like storage, where you just can't take it away."
And on a personal safety note, Swanson stresses homeowners should go to great lengths to learn more about anyone they're considering renting to. In other words, do extensive background checks.
"You should be asking who am I renting to?" Swanson says. "What is their history? Are they a sex offender or drug addict? Although they want to rent my backyard for gardening, which is nice, will they be growing poppy plants [used for making heroin] behind the corn stalks that I'll see? If they are, you don't want the government coming in and seizing your property. You have to be careful. You are responsible for their actions."
Don't let the allure of that potential added income cause you to ignore the question of who will be paying it to you. Says Swanson: "You may make an extra $100 a month, but at the end of the day you'll be renting to a horrible person."