What is Risk Management in Property Management?

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Elena

29/01/2023
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In any type of investment, it can be all too easy to focus on the potential profits involved. But not every investment results in a positive gain. There are inherent risks involved with any type of investment, particularly proper management.

But what is risk management in property management? It helps to know what risk is involved in the property management process, what the latter entails, and what can be done to mitigate that risk.

What is the Risk Management Process?

With any investment, there is risk. These are the things that can go wrong. Risk management means not only analyzing the potential points in which things can go wrong but also putting plans into action to combat those situations.

Being able to predict every possible negative outcome is impossible. And even if you think that you have properly planned for those negative outcomes, there can be variations of those situations that throw you for a loop.

The process of risk management is about finding the most effective ways to not only avoid those negative instances, but also to control them and to even transfer risks. Property managers, in particular, use these types of strategies depending on what the situation may be. With the help of careful planning and insurance, most of the risks inherent in property management can be kept to a minimum.

Risk-Management Strategy

There are three tiers to a proper risk management strategy. Part of understanding risk management in property management is about understanding the importance of a proper strategy. Let’s take a closer look at the three tiers.

Resident Screening

Remember that risk management is about taking steps to avoid risk. One of the best ways to do so as a property manager is through resident screening tools. It has developed over time to be about more than the criminal background check and a credit check.

There are now algorithms that can help property management companies become all the more effective at identifying those who may be risky. This works in three ways: fraud prevention, flexibility when it comes to adjusting to the market, and access to historical rent data.

With more and more application fraud, having the right screening tools can make a world of difference. It can help cut down on the number of evictions by stopping that fraud before it even starts.

There is also past behavior to draw on. Being armed with the most knowledge possible about a potential tenant’s past can allow for the best decisions to be made.

Finally, there is the ability and flexibility to be able to adjust to the market. The goal of property management is to always offset incremental risk and maximize revenue. Doing so can be done by taking as much of the guesswork out of some of the manual changes and automatically adjusting. This can help to combat vacancy and to deliver peace of mind, particularly when it comes to staying compliant and avoiding risk.

Renters Insurance

Another way to mitigate risk is by mandating renters insurance. This is a proven method to transfer some of the risk from the property management to resident policies. There are some programs that provide automated communications as well, which drives resident participation, safety from risk, and ongoing compliance.

Make affordable insurance available to your renters. This is a great way to improve profitability through the reduction of claims and resident-caused damage that might not meet insurance deductibles.

Automated and alert systems are also important. Having an alert system for non-compliance will let you know when a renter is not within those guidelines. This can be directly integrated with the software pretty easily.

There is also the matter of saving both time and energy for property management through the automation of communications. All of this is meant to help get those residents back into compliance with their renters’ insurance.

Finally, there is interim coverage. There are tools that offer what is known as “gap protection,” which is the gap between when a policy expires and when the renter manages to get another policy. These are automatic, retroactive, and proactive, which gives renters the chance to become compliant once again.

There are untold thousands of dollars at risk to renters who don’t have an effective renters insurance policy. Don’t leave yourself on the hook for potentially expensive damages.

Security Deposit

One of the traditional means of mitigating risk is the security deposit. This offers a surety bond that helps to increase closings while also reducing the potential exposure to resident loss. It also costs a fraction of what a traditional amount would cost while protecting the property in question.

That said, there are alternative programs that are in place to change those old security deposit procedures. But they are not enough to work alone. No matter what happens, property management can come to a solution by using the right management tools. This way, they can adjust coverage and premiums, whether for the property or the resident, while ensuring that there are pooled funds available every step of the way.

Proper risk management can feel like a big hill to climb. But with a little bit of patience and planning, you can ensure that your property has the right level of coverage to mitigate risk.

Conclusion

Facing risk is a part of investing. No matter what the investment strategy is, there is going to be risk. That is especially true when it comes to real estate and property management. This is where the risk management process comes into play.

Having a proper risk management process can help to mitigate the potential negatives that come from those risks. It may not keep everything from going wrong, but it can be a good way to keep things in front of you and, at the very least, manageable.

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