Risks Facing Residential Landlords:

If you’re a landlord, whether you have one rental unit or 500, you probably perform some type of tenant screening in an effort to protect your finances and your property. Some landlords perform credit checks, and some simply “go with their gut” when choosing a tenant. However, statistical information suggests that landlords aren’t doing enough to prevent rent default action, nor are they taking the steps to help protect them in the event a default does occur. Landlords who aren’t performing adequate tenant screenings are likely unaware of the sheer number of default actions that take place every year. Landlords frequently enter into transactions while doing little to no due diligence.

A recent My REI Advisor webcast discussion with industry experts illustrated how rent default actions can impact a landlord’s time, resources, andfinances.* According to Bagrat Bayburtian, Vice President of Product Solutions for Core Logic, there are approximately 2.2 million landlord-tenant court cases filed every year (this does not include those disputes that were negotiated by the landlord and tenant outside of court). With an estimated 40 million rental units across the United States, it’s apparent that at least 5.5% of all rental units in the U.S. go through a landlord-tenant court action every year.

Landlords should know how much risk they are assuming with their tenants, and they can by using screening technologies that utilize statistical models that measure applicants on a scale predicting their likelihood to default on their rent. Information collected on an individual applicant’s alternative credit record, sub-prime history, collection records, and court records gives landlords a “risk-score”. This risk score provides landlords with reliable information on the likelihood a tenant will default.

5.5% may sound like a reasonable risk to assume, until you consider that a typical residential lease represents anywhere from $10,000 to $20,000 in financial transactions. The national average monthly rent is $800, totaling roughly $10,000 per year. The metropolitan average monthly rent is $1,600, a near $20,000 annual commitment ? a sizeable financial transaction to say the least.* Furthermore, consider that many landlords are actively paying a mortgage on their rental properties, exposing them to increased financial hazards. With eviction processes taking anywhere from a few weeks to several months, reasonable risk can quickly evolve into a financial disaster, leaving a landlord having to pay for mortgage, legal expenses, and in some cases, damage to their rental property.

Along with performing adequate screenings on potential tenants, insurance is another key tool landlords can utilize to help protect against financial loss as a result of default. According to Bryan Kinsey, Account Executive with Aon Rent Protect, default situations may occur regardless of how stringent your screening policies are. In an unpredictable economy, even reliable tenants lose their jobs and struggle with financial hardships, leaving the landlord to pick up the pieces after a rent default occurs.

Residential rental default insurance has been used overseas by landlords for many years to help protect landlords against the risks associated with tenant rent default and related court costs, and operates as a cash flow safety net if the worst should happen. The insurance offers reimbursement to landlords for unpaid rent in the event of a default, as well as up to $1,000 in certain legal costs reimbursement if eviction becomes necessary. Learn more about rent protection insurance at www.aonrentprotect.com/BiggerPockets

Measuring tenant risk differs from measuring financial risk. While it’s apparent that tenant screening is vital to both small and large landlords, so is protecting your cash flow. Rent protection insurance is a valuable, inexpensive (premiums average $21 a month**) tool to help you achieve this safety net. In conjunction with risk scoring and other screening methods, landlords can not only protect their financial investment, but can also utilize these tools to grow a more profitable business.

For more information please visit www.aonrentprotect.com/BiggerPockets

* The My REI Advisor webcast, titled “Risks Facing Residential Landlords: How a rent default action can impact a landlords time, resources, and finances” can be accessed here:http://www.myreiadvisor.com/teleclass-76-bryan-kinsey-risks-facing-residential-landlords.html. ** Aon Rent Protect premiums vary based on monthly rent.