Do you dream of being a landlord and collecting a paycheck every month, basically making money while you sleep? Sounds like a great way to get paid. However, being a landlord can also bring a lot of liability issues, but taking the right precautions may keep you out of the courtroom.

"It's a higher risk to own a tenant-occupied property," says Mary Eblen, owner of Allstate Insurance Company in Encintas, Calif.

Often neither the landlord nor the tenant is carrying the right amount of insurance. According to a survey by Agents and & Brokers of America, nearly two-thirds of those living in United States rental properties do not have renter's insurance.

Eblen says when you become a landlord taking vital precautions are a must. Top of her list is to make sure that as a rental property owner, you have a landlord policy rather than a homeowner's policy for your rental.

"The landlord's policy really protects you for issues such as, let's say, there were a fire. If there were a fire the tenant obviously couldn't live there any more and couldn't pay rent, so the landlord's policy would pay fair loss of rent. In other words, if it took six months for the home to be fixed due to the fire, the policy would pay six month's rent until the tenant could get back in," explains Eblen.

The landlord policy package covers not only the dwelling but also things such as if the tenant sues the landlord and loss of rent for certain incidents, such as the example just mentioned.

When you're a property rental owner it's not just the tenant that poses a liability to you. Landlords face liability risks from several other factors such as uninsured or under-insured repairmen working on the property, aggressive animals and occurrences from slip and fall accidents to the tenant or guests.

Eblen says landlords "need to make sure they have the adequate liability limits ... .They're not there everyday and the odds of something happening at the property are higher [than if they were]."

Here are five pointers to consider if you're going to be a landlord:

1. Have a property management firm screen your tenants

Hiring an expert can be less time consuming and very helpful. Property management firms have a working daily knowledge of running credit reports and background checks on tenants.

2. Require that your tenants have renter's insurance

Only less than a quarter of renters actually have renters' insurance. Eblen says if that number were higher there might be fewer problems. She points to a case where the landlord was sued because of the tenant's aggressive dog.

"A delivery man dropped off a package and was bitten by the tenant's dog. The tenant had no money and no assets and the tenant did not have renter's insurance. So the delivery person had to sue the owner for his injuries due to the dog bite," says Eblen.

3. Make sure your property is protected for vandalism due to the tenant not taking care of the rental correctly

4. Make sure you have insurance that covers you for fair rental loss

5. Make sure you have adequate limits of liability

It's critical to protect not only the rental, but also other assets, "because a tenant or a tenant's guests, if they were to trip and fall or anything like that, they may come after not only that property but also may come after the rest of the assets that the owner may have," says Eblen.

When looking for insurance keep in mind that policy terms need to be carefully examined and compared as coverage and eligibility requirements vary. Eblen suggests carrying coverage for: general liability, property and excess or "umbrella" excess liability protections.

Being a landlord can provide a lucrative income, but just like with any job, knowledge and protection keep you in business.

Published: July 18, 2005