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April 16, 2024

Risk Management in Property Management

Daniel Berlind

When you became a property manager, you probably didn’t realize the different types of risk associated with the job. You have risks associated with your tenants, with the physical property, with legal compliance, and more. It can be a daunting task to assess and mitigate all of these risks!

Taking proactive steps to protect yourself, your tenants, and your business can go a long way in reducing losses. In this article, we’ll explore some of the common types of risks faced by property managers and review practical steps on how to avoid and mitigate them.

To best understand the different risks you may encounter as a property manager, we’ve sorted them into a few categories.

Market Risk

Fluctuations in the real estate market can pose a big risk to property managers. When the economy takes a hit, it can be tough to rent out units. This leaves you panicked, struggling to figure out what to do. To make matters worse, advertising spend is often the first thing to get cut during tough times, making it even harder to market your property and attract great tenants.

Luckily, there are things you can do to mitigate this risk. One such tip is to maintain a diverse portfolio. If you manage rental properties, make sure you represent landlords in areas with quality housing. If retail is your preferred avenue, choose recession-proof tenants like a coffee shop or gas station.

Physical Property Risk

No matter what kind of property you manage, physical damage will always be a worry in the back of your mind. Whether your property is in the heart of New York City or in a Northern California suburb, your property is going to experience wear and tear, damage from weather conditions, and the occasional emergency situation.

While you may not be able to prevent these things entirely, you can take precautionary steps. Get insurance, specifically general liability insurance for your building. And while you’re at it, make sure your tenants get insurance, too. With an insurance policy in hand, you can rest a little easier at night knowing that you’ve prepared for the worst and can now hope for the best, and a renter’s insurance requirement for tenants can ensure they aren’t put into financial jeopardy by unforeseen events either.

Annual inspections are another great way to stay informed on your property’s condition. These inspections help you understand what issues should be taken care of immediately and which ones to keep your eye on. You should encourage tenants to submit maintenance requests when they have problems with their units. This can help you deal with issues quickly, before they get worse and become major financial burdens or hazards.

Tenant Risk

Ah, the human factor – arguably the toughest thing to predict. You’re responsible for dozens, if not hundreds, or even thousands of tenants, each presenting potential physical and financial risks. The quest to find a great tenant can be a challenging one. But fear not, we’re here to help. Our pre-screening services can help you identify red flags and ensure you get the best tenants possible.

Each tenant needs to sign an ironclad lease, crafted by experienced attorneys with knowledge in your state’s real estate sector because, let’s face it, accidents happen. If a tenant gets injured on your property, they could pursue legal action against you for negligence. Regular inspections and maintaining detailed records of all contractors who’ve worked on the property are also crucial to mitigating risk.

Another risk tenants pose is nonpayment of rent – every property manager’s worst nightmare. Not only does this lead to you losing valuable income, but it can lead to an eviction if the problem isn’t resolved quickly. The eviction process is a lengthy and costly one, so it’s best to do everything you can to prevent going down this path.

The first step in avoiding an eviction is selecting a good tenant through a detailed screening process. This should include things like a credit and background check, income verification, ID verification, and rental references. But even with these steps in place, bad tenants have found ways to slip through the cracks.

In recent years, document fraud has become more common. What’s document fraud have to do with your building, you ask? Well, tenants have discovered how to alter their bank statements and paystubs–making it appear as though they make well over your income requirements, when they really don’t. Even if they can’t complete this task themselves, there are numerous companies that can do it for them for a low fee.

So what does this mean for you? It means that if undetected, you have a high risk tenant in your unit. Your odds of potential problems and evictions go up. Lucky for you, Snappt has developed a screening platform that can detect these fraudulent documents.

Vacancy Risk

Vacancies pose a significant risk to your property. Your tenants are your primary source of income, so when the number of vacant units goes up, the lower your cash flow will be. Bankruptcy could be just around the corner if that happens. Nobody wants that!

It’s possible to be cash positive with a vacancy rate of 30% in commercial real estate, but savvy owners know that striving for anything below 10% is what’s best. In residential real estate, investors aim to buy multiple doors in one deal to be able to suffer minimal vacancies without drowning. The last thing you want is to manage a singular unit that sits vacant for months on end.

This is why banks and lenders take occupancy rates seriously when lending money—it can be a red flag and risk factor. Often, a financial institution won’t loan you cash for your real estate endeavors unless you can prove occupancy north of 70%.

When doing your due diligence before pulling the trigger on a deal, make sure to have a full understanding of the expected vacancy rate, the cost implications of vacancies, and how long you could withstand your worst case vacancy rate projections—if push came to shove.

Legal Risk

It’s important to remember that as a property manager, you have the responsibility of following all applicable laws and regulations — especially Fair Housing laws. When screening your tenants, it pays to be extra careful so you can remain compliant with their rules. Not paying enough attention during this process could land you in serious hot water – but conversely, getting it right can help ensure that everyone is legally protected.

Denying a rental application must be done for valid reasons, without assumptions, and regardless of the tenant’s race, national origin, sex, or familial status. Make sure to adhere to all federal and local fair housing laws in your decision making process..

We recommend having an official, posted public procedure and criteria for conducting your tenant screening process. It should be transparent and applied fairly for each applicant, without bias. Use the same systemized background and credit check for each application transparently and you’ll have one less thing to worry about.

Administrative Risk

Managing an apartment complex is no easy feat. There are countless documents, bills, forms, and reports that constantly need your attention. It’s challenging to manage all this data, let alone format it correctly and promptly.

Some examples of faulty administrative processes are:

  • Inadequate record keeping, leading to missed payments
  • Lack of proper licensing or permits, resulting in fines or legal issues
  • Poor communication, leading to tenant disputes or contractor dissatisfaction
  • Inefficient processes that cause delays in maintenance, rent collection, or other important tasks

In order to avoid things slipping through the cracks, you must set up effective systems to store, organize, and analyze all this data. Finding the right software will streamline collaboration and help your team grow.

To Sum Up

Managing multifamily properties can be a minefield with all the different kinds of risks one needs to watch out for — physical, administrative, and tenant-related. But with some vigilance and the right tools, you can take steps to preserve your investment and prevent disruption in your operations. Keep a close eye on your leases, documents, relationships and insurance coverage and you’ll be well-prepared to face any risk that comes your way. Make sure to read more of our advice in our essential tips for property managers guide!

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