Administration and risk management are vital aspects of real estate management. Intuitively, we understand that real estate investing wouldn’t be as profitable without risk. So when facing these risks, a strategic approach, or risk management, is essential to ensure that the risk component is taken into account and the proper controls are set up to mitigate it. What does risk management mean as it applies to property management? Let’s take a closer look.
Most reasonable risks are manageable with the right strategy. A huge contributor to real estate becoming one of the largest alternative investment classes with over $3.1 trillion assets under management (AUM).
A proper real estate risk management plan should be based on three major strategies:
- Controlling risk
- Avoiding risk
- Transferring risk.
Most professionals tend to confuse risk management with risk mitigation. This blog will help you understand what risk management means as it applies to property management.
Types of Risks in the Real Estate Sector
Generally, risks in real estate can be classified into:
- Risks for realtors and brokers
- Risks for real estate managers and owners
- Risks for real estate investors.
Risk for Realtors and Brokers
A National Association of Realtors® (NAR) 2020 Member Safety Report estimates that 23% of realtors have encountered circumstances that have caused them to worry about their personal safety or the security of their personal information. One-third say they feel insecure at open houses, while 58% have a mobile safety app to monitor whereabouts and notify coworkers of emergencies.
Their daily professional interactions and businesses can expose real estate agents and brokers experience to various risks such as:
- Potential lawsuits and claims.
- Competitive and reputational risks
- Market uncertainties. Regardless role in property management, market fluctuations are inevitable risks linked with the industry.
- Climate risks, which could potentially drastically lower annual returns by as much as 40% toward the end of the decade
Risks for Real Estate Managers and Owners
Real estate owners and property managers also have to manage unique sets of risks. The more property there is to be managed, the more the risks. Fortunately, data driven property management, has facilitated improved real estate market analysis. Which also means a shot at optimized risk management, smarter investment decision-making, better tenant selection, and more effective targeted marketing.
Risks that real estate managers and owners are likely to experience include:
- Physical property risk
- Tenants risk (taking on tenants)
- Continuity / operations risk
Risks for Real Estate Investors
Just like a real estate agent or broker, an investor is also concerned with the market certainty before making major changes. Prominent risks that real estate investors face include:
- Market risks
- Pricing risk and investment risk
- Liquidity risks.
- Legal issues
- Leverage risk as a general rule, it is advisable not to exceed 75% leverage
Risk Management Vs. Property Management
Risks generally balance the scale with reward. For instance, a property management professional or company shouldn’t strictly see any significant moves–such as a tenant moving in–as a reward. Frankly, there are possible risks that the property manager should anticipate and, if possible, find management solutions.
As previously mentioned, avoidance, control, and risk transfer are the major ways that property managers should identify and address potential risks. Risk avoidance entails a complete risk elimination and the removal of its possible effects.
Under risk control, the property managers ought to find ways to make the risks more feasible and logical. Here, the property managers gain and maintain the upper hand in case any risks were to happen. On the other hand, risk transfer entails the property manager discovering the most prevalent ways of handling risks with minimal impact from them. This means transferring risk from the property management team to another party, for example, an insurance company.
Key Takeaways
Property management can be very rewarding as an essential aspect of the real estate industry. However, successful property management requires property managers to acknowledge and understand the existence of risks, just as they do with rewards.
In addition, while most property management risks are manageable (avoidable), others tend to be inevitable, and no level of property management expertise can help manage such. On the bright side, having a streamlined risk management strategy can keep a property management business on its toes and ready to tackle the worst of adversities.
As a reliable property management company, we implement ways to discover and address various risks to ensure a relatively smooth business interaction with every party. Contact us to learn more about our property management services.
