Along with the financial benefits of owning and managing buildings, property management carries its share of challenges. Property managers need to be on guard against many potential problems, from financial losses to tenant-related issues.
Armed with a comprehensive property management risk assessment, you can identify these issues and mitigate risk altogether. This article is an excellent starting point for your own risk assessment strategy.
Your Guide to Property Management Risk Assessment
This guide outlines primary risk areas, strategies for reducing exposure, and cutting-edge tools for protecting rental properties and real estate businesses.
Market Risk
Economic factors have a direct impact on rental properties’ performance. When financial times are tough, many tenants have less disposable income and might need to downsize.
Inflation and rising interest rates create even more problems for property values and rental demand.
Conducting detailed market studies and forecasting alternative financial scenarios are critical steps toward ensuring stability.
These assessments provide the necessary information to match investment strategies with long-term objectives.
Physical Property Risk
Wear and tear, natural disasters, and unexpected emergencies are threats to any physical property—and any property manager’s finances.
For landlords, one of the most valuable defences against these threats is general liability and tenant insurance.
Frequent property inspections and ongoing maintenance further limit the possibility of costly repairs or legal challenges.
Tenant Risk
Careful tenant selection eases many of the challenges property managers face.
Screening processes that include background checks, credit evaluations, and rental history reviews are proven ways to bypass problems like nonpayment or property damage.
Download our “How to Avoid Bad Tenants: 11 Pro Tips for Landlords” infographic here for actionable strategies to help you find the best tenants for your properties.
Clear lease agreements outlining tenant responsibilities and payment expectations protect property managers from misunderstandings.
Diligent record-keeping of tenant communications, payments, and maintenance requests ensures any disputes can be resolved efficiently.
When eviction is your only reasonable path forward, having a well-documented history will support any legal actions you need to take.
Vacancy Risk
Vacancies pose a direct threat to cash flow and financial health. Fortunately, vacancy rates in Canadian rentals remain relatively low. However, rental supply is increasing, which means competition among landlords will too.
Property managers should aim to maintain occupancy levels that meet or exceed lender thresholds, often requiring a minimum percentage to maintain favourable financing terms.
Thorough research into market demand, rental trends, and associated costs before acquiring a property effectively prevents prolonged vacancies.
Legal Risk
Noncompliance with housing regulations or screening procedures exposes property managers to legal risks.
Your tenant application processes should be neutral and well-documented to avoid accusations of discrimination.
Due diligence in property transactions ensures no hidden ownership issues or legal encumbrances exist.
Administrative Risk
The more properties you manage, the more challenging it becomes to keep up with administrative tasks. Often, overwhelmed property managers end up missing deadlines, not collecting payments, or missing maintenance requests.
Property management software allows you to automate the organization and monitoring of documentation, payment schedules, and maintenance records.
Think of how much time back this gives you!
Risk Management Strategies for Property Managers
Successful risk management in property management frequently necessitates a combination of strategies designed to address the unique difficulties they face.
Avoidance
Avoidance involves declining high-risk decisions or investments. Properties with features such as pools or outdated infrastructure often require additional resources to manage safely.
Steering clear of these properties reduces exposure to liability and maintenance costs.
An avoidance strategy proves useful in tenant selection. For example, you might exclude applicants with incomplete references or poor rental histories right off the bat to minimize the likelihood of future disputes.
Control
Control strategies are those that involve taking proactive measures to reduce risks.
For instance, installing smoke detectors and maintaining proper lighting in common areas reduces safety risks.
Draft detailed lease agreements that include maintenance protocols, tenant responsibilities, and dispute resolution processes to further enhance operational control.
Reserve funds serve as a financial buffer for addressing unexpected repairs or temporary vacancies.
Transfer
Transferring risk to third parties, such as insurance providers, protects property managers from financial losses.
Some of the most useful insurance policies for landlords include:
- General Liability Insurance
- Property Insurance
- Tenant Insurance
- Business Interruption Insurance
- Errors and Omissions Insurance
Another way to “outsource” or transfer risk is with structured contracts with third-party service providers.
Alternative Rental Deposit Solutions
We can’t discuss risk mitigation for property managers without including rental deposit alternatives.
Demanding rental deposits from tenants can actually work against property managers in several ways.
Alternative rental deposit solutions complement traditional risk management strategies by addressing specific financial and operational challenges.
Offering prospective tenants rental deposit alternatives accomplishes several goals, and below, you’ll learn about four of the most impressive.
Improved ROI and Asset Performance
Rental deposit alternatives directly influence the financial health of property management operations. These alternatives can transfer tenant default risk to an A+-rated insurer, easing the burden on property managers.
This shift protects property managers from financial losses from risks like unpaid rent or property damages. The result? A more predictable and stable income stream.
Increased Tenant Accessibility
Struggling to attract prospective tenants? High upfront deposits often deter potential tenants and could be at fault.
Alternative deposit solutions lower financial barriers, making properties more accessible to a broader range of renters.
Rental deposit alternatives can boost your occupancy rates and also benefit tenant retention, too.
Streamlined Administration
Traditional rental deposits require extensive administrative effort, from handling cheques to maintaining trust accounts.
Automated digital solutions eliminate these burdens. As a bonus, streamlined processes also facilitate faster unit turnovers.
Loss Protection
Property managers can sleep soundly at night knowing they will get paid for unpaid rent or any property damage without dealing with the usual delays common with traditional deposit claims.
Learn more about why you should consider deposit alternatives for rentals here.
Want to keep learning about the benefits of rental deposit alternatives for mitigating property management risk?
Here are three more articles to read next:
- Innovative Deposit Solutions for Property Managers
- How Deposit Alternatives Make Renting Easier in Canada
- Cutting Costs: Top Deposit Alternatives for Landlords
