Whenever a business model includes third parties, the risks associated with that business go up. Such is the case with property managers. When you’re managing other people’s properties and some or all of those properties are being occupied by tenants, your business will automatically be exposed to risk in a variety of ways. For instance, there’s a chance a resident’s negligence could cause a fire, or that a renter may skip out on the last few months of their lease, leaving you holding the bag financially.
The good news is, there are measures you can take to provide your business with a safety net, so to speak. The practice of risk management is best applied in three distinct ways: avoidance, transfer and mitigation of risk. Let’s take a look at each of these tiers in greater detail below.
The most favorable way to manage risk is, of course, to avoid it altogether. A great way to do this is through comprehensive tenant screening. Beyond a simple criminal background and credit check, property managers can now use advanced data analytics and sophisticated algorithms to more effectively identify riskier prospects. Some of the ways tenant screening can help include:
What happens when the information on the application doesn’t actually match the person applying? It’s impossible to mitigate risk on someone who is unknown, right? Not necessarily. Thanks to technology, property managers can now more accurately identify instances of application fraud and stop it before it starts.
The best predictor of future behavior is past behavior. With the right analytics technology, property managers can now access key historical data that can aid in better rental decisions. With the right resources available at your disposal beforehand, you can avoid renting to individuals who are more likely to be delinquent and result in bad debt and/or complaints.
The second way for a property manager to control risk is to transfer it to someone else. Traditionally, this is accomplished by mandating that all tenants get renters insurance. That way, should the properties you manage incur a renter-caused loss, your company won’t suffer financially as a result.
In fact, according to research conducted by RealPage, expenses for property managers who require renters insurance are, on average, 45% lower than those that do not mandate that residents carry their own insurance.
Finally, there is the third step in the process, which is to take measures to mitigate any damages that may be incurred at the properties you manage. Traditionally, a security deposit would serve as this mitigation tool, enabling the landlord or property manager to recoup any expenses incurred by a tenant breaking a lease, damaging the property, etc.
Another option that is gaining popularity is security deposit alternatives. These usually involve the use of a surety bond in lieu of a cash security deposit. This ensures that there is always a pool of funds available if need be. As an added bonus, because the upfront cost is much lower, security deposit alternatives are a great tool for increasing lease closings.
Whatever policy you choose, be sure to communicate it clearly with your residents before signing the lease. This promotes trust and transparency, which can go a long way toward tenant retention.
To most effectively manage risk, approach it from a number of different angles. Adopting a three-tiered approach to managing risk like the one listed above can help you stay profitable and competitive.