How to Mitigate Risk as a Landlord or Airbnb Host

Landlords face a variety of potential downsides – receiving unexpected insurance claims, getting stuck with a big repair bill or, in the worst-case scenario, finding themselves saddled with a large legal judgment after an injury or accidental death.

But perhaps the toughest lesson for rookie landlords to learn is how to not be burned by tenants who can’t pay the rent or won’t pay on time.

Tips from a Landlording Pro

Veteran landlord David Dweck, head of the Boca Real Estate Investment Club in Coconut Creek, Florida, says he’s adopted an approach that’s polite and professional but also unwavering.

“It’s not a friendship; it’s a business relationship,” Dweck says.

Dweck starts with a thorough screening before he allows a prospective tenant to even tour a property. He wants to see proof of a job and a credit score of at least 640; although, he’ll consider an applicant with a lower score if it’s due to owing money toward student loans or medical bills. He also checks tenants’ personal and professional references.

To further drill down into prospective tenants’ profiles, Dweck uses a rental application that asks several unusual questions: Do you own a vacuum cleaner? Do you rent or own your furniture? The answers help him gauge just how risky a tenant might be.

Dweck also insists on an initial payment of the first month’s rent, the last month’s rent and a security deposit. “I never negotiate that – ever,” he says.

Dweck’s also clear with tenants that he’s strict about late rent payments. He encourages tenants who hit financial turbulence to contact him before they miss a payment rather than avoiding his calls and hoping he doesn’t notice.

If a tenant hasn’t paid their monthly rent by the fifth day of the month and doesn’t respond to his phone calls, Dweck files a notice with the local court system communicating his intent to start eviction proceedings in three days. If the rent still isn’t paid, Dweck turns the matter over to his eviction attorney.

Dweck’s reliance on personal questions and three-day eviction notices to prompt a rent payment may be too heavy-handed for some landlords, but it serves as a reminder that everyone renting out a home needs to do background checks on every prospective tenant and set clear limits with their tenants.

A crucial step for the background check is to ask for a copy of each prospective tenant’s driver’s license or state-issued ID card; some brazen scammers have used other people’s names and Social Security numbers in order to pass a credit and criminal background check for renters.

Limit Landlord Liability

Among his other risk-management strategies, Dweck suggests that a landlord form a limited liability company (LLC) for rental properties, rather than personally owning homes. That move helps protect the landlord from personal liability in the case of a lawsuit. However, you should do this with the help of an attorney, since changing the status of your property could void your title insurance or trigger other consequences you may not anticipate.

Speaking of liability, Dweck advises against renting out homes with swimming pools – the legal risk seems too steep to him. According to data from the Centers for Disease Control and Prevention, more than 3,500 people – on average – unintentionally drown every year. Dweck knows of one landlord who was hit with a multi-million-dollar judgment after a death in a backyard pool.

Dogs are another area of potential risk. Dweck allows most types of dogs and insists on meeting the pet before he approves its (and its owner’s) tenancy.

Less Stress for Airbnb Hosts

If getting paid is the major challenge for landlords, Airbnb hosts say they don’t have to worry about that particular problem. Airbnb stresses that it collects money from guests up front.

“I’m never really concerned about the financial aspect because Airbnb makes sure the guest pays the bill even before they step over the threshold,” says Kevan Full, an Airbnb host in Easton, Maryland.

Full’s Airbnb space is a converted corn crib (a ventilated building for storing ears of corn) on his property on Maryland’s eastern shore. He and his wife, Chris, host guests for $110 – $125 a night.

No Guest Parties Allowed

While the Fulls don’t fret about getting paid, they are careful about who they allow to stay at their home. The risk-management process starts with a property description written to discourage rowdy guests.

“We’ve mitigated risk by being very clear with our description,” Kevan says. “We’re quite clear that it isn’t a place to party.”

The couple also doesn’t allow for automatic reservations on Airbnb. Instead, they require guests to request a stay. That gives them a chance to look at guests’ profiles and weed out people with poor reviews or who seem to enjoy partying.

Kevan says he has never experienced major damage to his property, just the occasional stuff that requires a minor paint job.

“People are typically very kind to the space,” he says.

Airbnb host Cindi Sherman, who rents out the top story of her home in Westminster, Colorado, also takes pains to play down the party possibilities of her place. She forbids smoking and affirms that even though Colorado is a cannabis-friendly state, her home isn’t. Instead, Sherman offers family-friendly features such as baby gates and a playpen.

She requires a hefty security deposit of $325, and her living area is separated from the Airbnb space by a door with a lock. She says her most common loss occurs when hand towels and washcloths are stained by makeup.

Mixed Feelings About Airbnb’s Insurance

In another bit of assurance, Airbnb says it provides each host with $1 million of insurance coverage for property damage.

Former Airbnb landlord Scott Shatford says he had a good experience with the hosting site’s insurance coverage. Shatford was renting an apartment in Santa Monica, California when he got a call from a guest reporting a stolen car and stolen luggage.

“I was like, ‘This has got to be a practical joke,’” Shatford, who now runs AirDNA, a Denver-based short-term rental industry data collection firm, recalls.

It was no joke, but Airbnb cut the guest a check for the full amount, he says. Shatford later determined the theft was perpetrated by a former guest who lived nearby and had copied a key to the unit.

From the experience, Shatford learned two valuable lessons: First, be suspicious of Airbnb guests who live in the same town as your Airbnb rental and who book at the last minute. Second, ditch traditional locks with keys for digital locks that issue a new combination for each guest.

But not everyone is sold on Airbnb’s insurance coverage. Cindi Sherman says after hearing other hosts gripe about the quality of Airbnb insurance, she shopped around for her own coverage.

“The hoops that need to be jumped through to get Airbnb to actually pay out on their coverage are incredible,” Sherman says. “From what I see on social media, hosts trying to get damage covered by the Airbnb insurance have a ton of constraints that can be pretty tough to complete given Airbnb’s timetable for claims.”

She says Airbnb requires hosts to provide photos of the damage, original receipts for any damaged goods and repair or replacement estimates 14 days before the next guests check in for their stay.

“Some hosts have same-day turnarounds, so the ‘before the next guests check in’ clause would cause them to have to cancel that next booking, which reflects poorly on their ratings and causes lost income,” she says, adding that incidents like this create a Catch-22 situation.

Sherman also says it was difficult finding home insurance coverage that accommodated short-term rentals.

“We were almost canceled for having an Airbnb property because traditional insurers didn’t want the risk.”

Hosting Guests Takes Work

Kevan says his biggest surprise to date as an Airbnb host is the time commitment. Crafting a professional property listing with high-quality photographs takes time. So does cleaning the space for new guests, monitoring reservations and cancellations and otherwise communicating with customers. He estimates he spends two – four hours a day on his Airbnb gig.

“It is a lot of work,” he says. “You have to be willing to work on it.”

Are you a landlord? An Airbnb host? What tips do you have for folks considering a similar path? Let us know in the comments!

Veteran business journalist Jeff Ostrowski is a contributor at MoneyGeek.com and has written hundreds of news stories about the housing market, mortgages and other real estate matters. While he enjoys talking to property barons about their experiences, he has studiously avoided becoming a landlord himself.

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