Operating a property management company comes with a multitude of risks. Between physical property, operational performance, administration, and legal conflicts, risk quickly piles up leaving unprotected assets vulnerable to financial loss. Savvy operators understand that protecting their assets begins with a future-proof risk mitigation strategy—one that relies on data and smart technology solutions to accurately predict risk and protect against loss.
In particular, a recent trend toward smarter loss protection shows more and more operators are realizing the importance of having sophisticated risk management tools that not only protect their assets during economic uncertainty, but also unlock revenue and asset value across their entire portfolio regardless of market conditions.
So, what steps are required to execute an effective risk management strategy in rental housing, and what does it look like in practice? Check out the infographic to learn about key steps involved in the multifamily risk management process:
Every successful risk management strategy starts with identifying potential risks. Property management companies are subject to various types of risk from before the lease is signed until after lease termination (e.g., delinquency, vacancy loss, lawsuits, administrative costs, etc.). The purpose of the risk identification stage is to characterize all potential sources of risk that may prevent a property from achieving particular objectives.
This entails taking note of the conditions under which potential risk events may occur, and the classification of risks (e.g., macroeconomic, legal, financial, operational, etc.) so that the operator can determine their likelihood and impact on the organization.
Risk Identification in Action
A property management company identifies various external and internal risks. Macroeconomic conditions are considered external risks, whereas administration processes are internal risks.
For example, an operator identifies an economic downturn (external risk) with the potential to lead to low demand and high vacancy rates. In an attempt to bolster physical occupancy rates, its apartment communities offer lease concessions (internal risk) which may attract residents with inadequate funds. In addition, its properties suffer from inefficient accounting processes (internal risk) and regulatory compliance issues with local deposit laws across different jurisdictions (external risk) that could lead to high administrative costs, lawsuits, and high account balances—all of which contribute to low economic occupancy.
Next, operators need to determine the probability and potential consequences of the identified risks. How exposed is the business to a particular risk? What’s the cost of a risk becoming reality?
Risk assessment reveals the likelihood, frequency, and impact of a risk, allowing teams to prioritize their resources. During this stage, organizations can use a heatmap to visualize the probability and severity of risks, as well as perform a qualitative analysis to assign ratings to each risk event.
Risk Analysis in Action
Below are scenarios detailing varying levels of risk based on the likelihood and impact. Each scenario is assigned a number rating to indicate the priority to the operator based on its objectives and resources across its portfolio.
After the risk assessment stage, operators need to define a response plan to reduce the negative impact of risks throughout the leasing lifecycle. The main methods of response planning include accepting, avoiding, controlling, and transferring risk. Through a combination of these strategies, paired with the right solutions, operators can form an effective risk management plan.
Risk Response Planning in Action
An operator accepts the risk that a segment of its properties are located in a market vulnerable to high vacancy rates, but determines its properties cannot rely on lease concessions to attract trusted renters and boost physical occupancy without proper guardrails to protect economic occupancy.
To avoid financial loss, the operator plans to offer flexible rent payments (Flex or Till) to attract trusted and financially savvy renters, as well as utilize a rent payment reporting tool (CredHub) to reward residents. To control financial risk, the operator implements lease insurance (LeaseLock) to accelerate move-ins, predict the risk of rent loss and damages, and provide optimal coverage against potential loss. As an added protection measure, the operator requires renters insurance to transfer the risk of financial loss due to resident caused damage and uses an alert system for noncompliance (from an insurer that integrates with the operator’s PMS) if there’s a lapse in coverage.
Here, each solution plays a role in the operator’s objectives to increase occupancy, improve resident satisfaction, and generate income.
Once an operator devises a response plan, the next step is to act on it. The property management company should be able to avoid as much risk as possible assuming it has access to the right data and resources. The remaining risk can then be reduced within appropriate, manageable levels through risk transfer and mitigation, and these controls should be tested to ensure they are operating effectively and sustainably.
Risk Mitigation in Action
An operator will often have multiple solutions that mitigate risk. For instance, ID verification, resident screening, flexible rent payments, and rent payment reporting help lower the chance of defaults and evictions. If defaults or evictions do occur, lease insurance optimizes coverage against rent loss to minimize financial loss while also mitigating operational and regulatory risks associated with deposits.
The combination of these risk mitigation tools allows property teams to reduce the likelihood of defaults and evictions as well as lessen their impact if they do happen.
Lastly, monitoring for risks throughout the leasing lifecycle allows operators to account for variability in occurrence likelihood and impact over time. Monitoring procedures should factor in changing variables to regular risk assessments to ensure the firm is anticipating and staving off risk before it has an adverse impact. Ongoing monitoring is critical to ensuring firms track, identify, and manage both existing and new risks as needed.
Risk Mitigation in Action
To monitor risk continuously, operators need solutions that flag particularly risky deviations, such as rent payment fraud, pet incidents, or rent defaults.
Through the five stages of risk management, firms can understand the business threats in their operating environment and prevent uncertainties from becoming realities. However, a comprehensive risk management strategy in today’s environment requires solutions that are informed by data and powered by smart technology. Only then can operators achieve peak financial performance by unlocking revenue and asset value across their entire portfolio.