Risk Management in Property Management: A Complete Guide

Property management is a challenging and multifaceted industry. Managing either residential, commercial or industrial property involves overseeing and managing vast portfolios of real estate. With the potential for a considerably good return for property managers, property management also comes with an extensive list of risks – some within your control but many outside of it. Risk management is crucial to ensure your assets are best protected, tenants are happy and compliant with governing laws and regulations.

In this piece we want to identify the types of risks associated with property management, how to best mitigate these risks and strategies for successfully managing risks long term.

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1. What is Risk Management in Property Management?

The practice of risk management in property management is the identification, evaluation and mitigation of potential risks that can affect the value of your property, property operation and risk affecting stakeholder relationships. Risk management aims to minimize financial loss, liability exposures, disputes, or disruption with operations while maximizing the safety and interest of the tenants residing in the property.

Key goals of effective risk management are:

• Protecting of assets (building, equipment, landscaping)

• Minimizing of risk of financial loss due to tenant default in paying rent or damaging the property

• Ensuring legal compliance

• Protecting the reputation of the property management provider

2. Types of Risk in Property Management

a) Financial Risk

Risk of consistent cash flow, loss or income and unexpected expenses.

• Rent Defaults – When tenants don’t pay rent on time, you have a cash flow risk.

• Unforeseen Expenses: Unforeseen costs such as emergency repairs, natural disasters, or unforeseen maintenance can severely limit budgets.

• Market Changes: Changes in property values, interest rates, and rental demand can impact revenue.

b) Legal and Compliance Risks

Property managers are subject to regulations established at the local, state, and national levels.

• Tenant laws: Tenant rights can have severe ramifications with tenants able to take landlords to court for violation of laws or laws promoting tenants can be used against landlords resulting in penalties.

• Health and safety laws: Fire alarm and extinguishers need regular maintenance, so too do plumbing systems, as well electrical systems. If a fire or a health issue were to arise, they may be grounds for legal actions against property managers and owners.

• Contractual risks: Leases and vendor contracts need to be carefully written, and poor contracts can expose owners or property managers to possibilities of legal exposure.

c) Physical Risks

These risks stem from the property and the environment surrounding it.

• Natural disasters: Property can be severely damaged by acts of nature such floods, earthquakes, storms, and fires.

• Vandalism and theft: Breaches of security and safety can result in loss of property and/or claims against property insurance.

• Negligent maintenance: Not attending to regular maintenance issues, or deferred and neglected maintenance, not only increases liability potential but can also accelerate deterioration of buildings and surrounding areas.

d) Operational Risks

Risks related to operational processes and anyone involved in managing the property or residents.

• Staff error(s): Errors by anyone in the property management group can impact property operations or tenant satisfaction.

• Vendor problems: Contractors who fail to provide quality or timely services would obviously impact operational services.

• Technology problems: Security systems fail, property management software problems or data breaches could severely impact our operational systems.

e) Reputation Risks

•  Negativity reviews, disputes with tenants or incidents regarded as newsworthy can detrimentally impact the reputation of the property, or management company, and inhibit occupancy and income.

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3.Risk Management in Property Management: Assessment Process

The process of risk management starts with a thorough risk assessment:

1.  Risk Identification: Obtain all risks related to finances, operations, legal issues and property assets.

2.  Risk Analysis: Identify the probability and impact of each risk.

3.  Risk Evaluation: Identify those risks with the most impact on operations and finance (high risk).

4.  Create a Risk Mitigation Plan: Develop strategies to minimize or eliminate each risk.

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4. Risk Management Strategies for Property Managers

a) Insurance

•  Property Insurance: Protects against damage done to buildings including, fire, weather events, vandalism.

•  Liability Insurance: Covers legal claims against your company for accident or injury caused to tenants while occupying the premises.

•  Loss of Income Insurance: Protects your business against rent income losses during unforeseen incidents.

b) Legal compliance

•  Keep current on relevant tenant laws, safety regulation, and tax responsibilities.

•  A well drafted and descriptive lease agreement defines tenant responsibilities, payment schedule, and obligations to maintenance.

•  A legal team can assist in disputes and provide opinion on contract types, agreement, and review.

c) Security

•  Use surveillance cameras, key pad systems for access, and alarm systems.

•  Conduct a security audit and checklist to identify security vulnerabilities and opportunities.

•  Use tenant screening as a strategy to minimize the risks associated with tenant issues.

d) Maintenance & Inspection

¡  Set up regular inspections of plumbing, electrical systems, HVAC and structural elements.

¡  Have a preventative maintenance plan in place to lessen repair expenses.

¡  Respond to repair requests quickly in order to prevent further escalation.

e) Financial Management

¡  Have an emergency reserve fund for contingencies and unexpected expenses.

¡  Have a strict rent collection policy and tenant credit checks.

¡  Watch market trends to adjust rental rates appropriately.

f) Staff training

¡  Train property management staff on legal compliance, communication and professionalism with tenants, emergency procedures, and safety procedures.

¡  Have clear policies in regards to property management to help avoid mistakes.

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5.Role of Technology in Risk Management in Property Management

Risk management for property management relies on technology:

¡  Property Management Software- ability to automate rent collection, track maintenance, reporting, etc.

¡  Smart Security Systems- remotely monitor property which deters theft and damage while also allowing for any necessary notifications.

¡  Data and Analytics- ability to foresee any necessary maintenance; foresee tenant turnover; financial risks.

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6.Emergency and Crisis Management in Property Management

An effective risk management plan must include access to emergency procedures:

¡ Obviously, have an evacuation plan for tenants.

¡ Have contact numbers for emergency services, as well as contractors.

¡ Have written procedures for how to manage natural disasters, fire or accidents, etc.

¡ Regularly practice or drill the staff fully knowing their roles within the emergency procedures.

7.Benefits of Risk Management in Property Management

– Costs of loss (either financial or insurance) are reduced.
– Tenants will be more satisfied and remain tenants longer.
– Ensure compliance with laws (e.g. Fire Code, Housing Code, environmental standards, etc.) and laws of Ontario.
– Protect property value and revenue over a significant period of time.
– Better reputation of the management company.

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8.Final Thoughts on Risk Management in Property Management

Risk management is not something you do once and say you are done. It is a process that involves curiosity and planning so you can observe, plan, and innovate. By figuring out what risks matter to your property, implementing best practices or best approaches that are proactive or better yet by using technology when possible, property managers will be able to safeguard their asset, better their return and create a safe and revenue generating experience for their tenants and stakeholders. Comment, if you want more information like this.