‘Risk management’ — the term brings up different ideas in different people.
But no matter who you are or what you do, effective risk management consists of two primary activities. You look forward with an eye toward what unforeseen events can do to your business, and you do what you can to mitigate the effects of those events before they occur. Property managers’ risk management efforts start with identifying both generic and property-specific risks.
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!
There a million things that can befall a property. Some of the most common are:
- Termite/insect damage
- Pest infestation
- Severe weather
But of course that’s just the things that can happen to the structure and contents — hardly the entire spectrum of risk that a property manager exposes themselves to. You also have those risks that affect you as a business, like:
- Lawsuits (Fair Housing, wrongful eviction, etc.)
- Damage to a tenant’s belongings during repairs
- Contractual errors or disputes with tenants or contractors
These are obviously abbreviated lists — just to give you a small example of the kinds of dangers that a forward-thinking property manager should be looking to manage.
There are four essential ways to mitigate risk:
1. Removing the risk by taking away or replacing the element causing the risk. This can be as straightforward as taking old junk out of the yard of a rental before you rent it out to as complex as hiring a crew to cut the dead limbs off of nearby trees before they become truly hazardous. Obviously the most permanent solution, simply removing a risk is unfortunately often impossible.
2. Reducing the risk by proactively ensuring that vital systems remain functional for as long as possible. Having all of your annual inspections done — inspections of roofing, HVAC, kitchen appliances, and so on — is the primary was of reducing risks. You can also reduce the risk of vandalism and theft by proactively keeping the property clean and well lit, for example.
3. Controlling the risk by ensuring that if a catastrophe does occur, the damage is minimized. If you live in Tornado Alley, for example, putting storm windows on your home, giving your tenants emergency plans each year at the start off tornado season, and reinforcing the roofs of your properties is excellent risk control.
4. Insuring against the risk is in many ways the least desirable and yet the most necessary of risk management techniques. It’s the least desirable because it means that the risk happened and was genuinely damaging even despite your other efforts — but that really does happen, which is why it’s also the most necessary.
If you’re not going to (or are for any reason unable to) acquire an actual insurance policy against a particular risk, it’s up to you to ‘self-insure’: to have enough money in the bank to handle a worst-case scenario.
The essence of risk management is acknowledging that bad things happen, and planning accordingly. A property manager with poor risk management skills is essentially purchasing a negative lottery ticket every day, and the chances that they’ll win a huge pile of anti-dollars grows with each passing season.
Have you ever had a disaster related to poor risk management?
Be sure to leave your comments below!