Being a property manager today means daily engagement with rental property owners, vendors, and renters. As you transact with all these parties, you will be exposing your property management business to a variety of risks. In fact, the risks of being a property manager tend to grow as your portfolio grows. Risk leads to financial loss. Therefore, making money as a property manager often comes down to how well you can manage the risks. This makes risk management one of the main concerns of property managers.
There are specific areas of higher risk that property managers must be wary of to protect themselves and their property management business. Property managers must identify where risks are and take steps to manage them. Before we go through the specific risks and ways to reduce them, it’s good that you understand the three-tier risk management strategy.
The Three-Tier Risk Management Strategy
An effective risk management approach should provide solutions for avoidance, transfer, and mitigation. In any risk scenario, they are the three possible strategies. For instance, if you only wait to mitigate, you’ll only be addressing one component (one-third) of the greater risk management strategy.
- Risk avoidance: The best way to manage risk is to prevent it from happening in the first place. This involves not taking part in any risky action.
- Risk transfer: Involves combating potential risk by shifting responsibility for it onto another party like an insurance company or a tenant.
- Risk mitigation: Mitigation involves taking proactive action to minimize risks that can’t be avoided.
To combat risks, property managers may need to use a combination of these strategies. It begins with avoiding as much risk as possible through strategies like tenant screening. You then transfer possible risks through insurance cover. For risks that can’t be avoided, you can mitigate them using a number of strategies.
Below are the different risks of being a property manager and ways on how to reduce them.
1. Administration Risk
Being a property manager can be challenging due to the amount of data you need to handle at any given time, especially when managing multiple rental properties. You will be handling contracts, rent rolls, lists of tenants, maintenance tasks, incidents and claims, etc. Without an effective system, it would be difficult to manage all this information and have easy access to any of it so as to allow timely action. If you are not organized, you may miss an important deadline, lose important documents, or overlook a contract clause. Some of these issues can cost a significant amount of money and legal issues.
To reduce this risk, a property manager should use an efficient property management tool that stores, organizes, and analyzes data. It should be accessible from on-site, encourage collaboration across the firm, and provide reminders and notifications.
2. Physical Damage
The risk of rental property damage is a common risk of being a property manager, regardless of the size of your property portfolio. Furniture may break, exteriors may gradually wear down, paint may get scratched, etc. There’s little a property manager can do to avoid this entirely. Nevertheless, there are a number of risk control options available.
First, you can reduce the risk by conducting regular inspections to identify small physical damages before they become larger. Moreover, make sure that all repairs and maintenance are done by qualified personnel as working with unqualified personnel also creates a risk. The best solution would be to transfer the risk to an insurer. You may want to consider general liability insurance to protect your property management company against property damage and other things.
Transferring the risk to tenants who cause the damage can be done via mandatory renter’s insurance programs. They will cover the costs of damages by the residents, whether intentional or accidental. Given the rising costs of managing rental properties, a renter’s insurance program would be crucial.
3. Liability for Tenant Injuries
Property managers are responsible for the safety of the tenants in their rentals. A tenant injured on the property you are managing may claim negligence and seek legal action. As the property manager, you will be liable for accidents that occur on the rental properties you manage if it can be proved that you were negligent.
Apart from having insurance coverage, you can mitigate such incidents through regular property inspections and maintenance. To avoid charges of negligence, you should take reasonable steps to provide a safe premise. Make sure you hire qualified contractors and keep records as proof that you took necessary action to ensure the tenant’s safety.
4. Tenant Discrimination Liability
There are several ways in which legal risk can arise for property managers. Tenant discrimination is one of the most common legal risks of being a property manager. Possible violations could occur during tenant screenings or in property advertisements. Property managers must comply with the federal laws that prohibit discrimination, which includes the Americans with Disabilities Act and the Fair Housing Act.
Property managers must obey these laws even if the rental property owners instruct them to the contrary. If a property manager violates these laws, a costly and lengthy legal process may result. The penalties for violating these laws may include stiff fines and damages. To minimize this risk, property managers should make sure that they have an experienced legal team that performs all due diligence and advises them accordingly.
Property managers should be careful of what they do and say to tenants all through the leasing process. Any statement or action that could be regarded as discriminatory or misleading must be avoided. Moreover, you should have a rational and objective tenant application review process. If you reject potential tenants during screening, make sure you are doing so for a valid reason and not due to assumptions that are based on someone’s family status, country of origin, race, background, religion, disability or gender. Otherwise, you risk being accused of tenant discrimination. Tenant discrimination insurance can also help to transfer this risk.
5. Tenants Not Paying Rent
Rent collection is a key part of being a property manager. Any delay or nonpayment can severely impact the cash flow needed to run a rental property management business. A property manager may be forced to evict such tenants, which can be a costly and time-consuming process. One way to control this risk is with robust tenant screening. This includes running credit and criminal background checks.
6. Not Being Able to Find Property Management Clients
Making money as a property manager is greatly dependent on your ability to get property management clients. To increase your income and grow your property management career, you should focus on growing your rent roll. You could use a number of property management marketing strategies such as social media marketing, content marketing, paid advertisement, email marketing, and networking.
There are also some property management tools that can boost your lead generation. For instance, Mashboard is a very useful tool for property managers and can help you grow your business. The tool makes it easier to find property owners in the area of your choice. You can then use our algorithms to identify qualified property management leads and match them with the best investment property for them. Alternatively, you can work to find new investment properties for your current clients as a way to ensure more business for yourself. With this tool, you will be able to get more properties under your management in no time.
7. Risk of Vacancy
Being a property manager comes with the responsibility of finding tenants for your clients. It is your job to keep the occupancy rate of your rental properties high and the vacancy rate low. However, there is always the risk of being unable to find tenants. If the rental demand is high, filling up your rental units will be easier. However, the challenge comes when you are competing with other rental properties over a limited tenant pool. To achieve a high occupancy rate in such a real estate market, you need to have an edge over your competition. You can do so by working on your marketing strategy to open up your property management business to a much wider renter base. Some ways you can boost your occupancy rate include having a professional website, social media marketing, and paid advertising.
You should also ensure that your rental rate is reasonable and competitive to attract more tenants. Moreover, to reduce the number of evictions and boost your tenant retention, make sure you have a good tenant screening process. This will help you avoid bad tenants and the need for evictions.
The Bottom Line
Being a property manager, as with any other business, comes with some level of risk. There will be legal risks every step of the way. As a property manager, you have the obligation to protect yourself and owners by reducing risks. Not having an integrated risk management approach could be the biggest risk of all. Through risk prevention, transfer, and control strategies, property managers will be able to be effective in their work, stay competitive, and boost their property management career. Most risks can be managed through careful processes and insurance.