Finding a Financial Umbrella: How to Pay for Major Home Repairs as a Landlord

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Covering the cost of a major home repair is one of the great challenges of home ownership — especially if you’re a landlord. Things can go wrong even in newly constructed homes, so it just makes sense to be ready for the unexpected. But there are some repairs, like a new roof or a new HVAC unit, that can be very difficult to pay for at a moment’s notice.

Of course, as the owner of the home, it’s your responsibility to your tenants to maintain a safe and healthy living space. Ideally, you would have the savings in the bank to address an emergency. In reality, 38 percent of people who are unable to cover even a minor repair job ($400 or less) with cash would choose to use plastic and pay off the amount over time, according to the U.S. Federal Reserve. However, since maintaining a strong financial position to a large extent depends on one’s ability to stay out of long-term debt situations, it’s important to find ways to cover the cost of home repairs as they arise.

Here are a few of the more common options for doing just that:

Educate yourself… and your tenants.

The more you and your tenants know about your home’s mechanical systems, the less likely you are to get stuck with an unnecessarily exorbitant repair bill. Read up on repair guides and check out YouTube videos to get a better idea of how things work, what really needs to be repaired, and when. Make a list of tasks you can perform yourself in and around the home. Then, set expectations for your tenants regarding tasks you expect them to take care of, like replacing the air filter or simply calling you as soon as they notice a problem. You may also want to consider hiring a contractor to perform preventative checks on all the systems in the home to catch minor problems and make minor repairs before they turn into expensive disasters.

Homeowners insurance

Homeowners insurance will cover the cost of repairing or rebuilding your house if it’s damaged or destroyed by natural disasters like lightning, fire, hail, or a hurricane. A standard policy generally won’t pay for wear and tear or earthquake damage, but always check the terms of your policy when facing a major home repair. If you have a home warranty policy, it may cover repair or replacement costs for things like major appliances and heating/cooling units. Encourage your tenants to invest in their own renter’s insurance, and protect both parties by explicitly stating what is covered in the event of damage due to a water leak, electrical shortage, or other home disaster in the rental agreement.

Home equity

Homeowners are often able to use the equity they’ve built up in their home to finance repair costs. This is usually done through a home equity line of credit, which is a better way to handle the situation since, in a sense, you’re borrowing from yourself. A home equity loan enables you to draw out money over a period of time, or you could refinance your home loan, which provides a one-time source of cash. Be aware that both options can take time to process and won’t be available if you haven’t owned the home long enough to build up equity. Some property owners choose to maintain an open line of credit at all times on another property specifically for this purpose.

Personal loans

Taking out a personal loan may seem like an undesirable option for someone trying to keep their debt under control, but it may be a good option for first-time landlords with no equity. A personal loan is generally preferable to using credit cards for home repairs, and they can be handled online, with no raised eyebrows or disapproving looks from a guy in a suit. You will need to have good credit because personal loans are generally unsecured (no need to put up collateral). If you’re able to secure a loan at a good interest rate, say 5 percent or lower, this could be your best option.

Repair savings fund

A rainy day fund is the most personally resourceful way to prepare for the unexpected. There are many ways to set aside a savings fund and contribute to it, even if you’re paying multiple mortgages each month, including converting credit card bonuses or reward points into cash, keeping your loose change in a large container, setting aside coupon money, and holding a garage sale. It takes some discipline, but the benefits of saving for an emergency situation are tremendous.

If you’ve ever faced an emergency home repair bill for a property you lease, you’re probably familiar with the fear that comes along with that phone call from your renter. But it doesn’t have to be that way, even if you’re new to being a landlord. Just be proactive. Regular maintenance can prevent major disasters, and having a plan to pay for unexpected expenses will keep your investment working for you, instead of the other way around.