Reducing Real Estate Risk

a building with a door and windows

Now is a good time to consider becoming a landlord or a property manager. Only two years ago, Richard Florida at CityLab drew attention to the steady rise of renting in the US. He highlighted extensive data suggesting that the trend would only escalate as time went on. According to him, “cities and metros with more renters have proven better able to cope with the transformation from an industrial to a knowledge economy.” At the time, some found his arguments compelling while others remained skeptical.

A year later came the report published by experts at Pew Research Center, which declared that more US households were renting than at any point in 50 years. That was big news because the conclusions were drawn from an analysis of US Census Bureau housing data. The data was clearly promising for those in real estate. Though renting property to others could be extremely lucrative, you should remember that some risks are involved. For instance, aspiring landlords or property managers should recognize that most renters revealed their desire to buy a home at some point. While that doesn’t necessarily mean they will, it does mean that they could be open to the possibility of relocating elsewhere.

The best landlords and property managers are those who see the potential and realize it without incurring excess risk. James Kimmons at The Balance described introducing risk management in the context of real estate. He explains why it matters so much. According to him, “in most states, by far the greatest number of consumer complaints, commission penalties, and license suspensions/revocations, are related to property management.” Those are consequences everyone wants to avoid and, fortunately, doing so can be fairly easy with the right mindset.

Drew Sygit at BiggerPockets compiled a comprehensive risk management guide for property managers. He reminds landlords and property managers that any number of things can befall a property. That’s why prudent planning is one of the most effective countermeasures. Drew introduces the four main ways of mitigating risk: removal, reduction, control, and insurance. Landlords and property managers are responsible for determining which approach is appropriate for their own situation.

Seasoned professionals more often than not rely on prevention. Waiting until issues have to be addressed is usually a recipe for disaster. It isn’t difficult to find relevant guidance on the subject. For example, staff writers at the American Apartment Owners Association outlined eight tips for brand new landlords. The suggestions could equally apply to deputized property managers. Many of the takeaways proposed in the article would be considered proactive instead of reactive. He emphasized making rent a priority to offset fixed costs and conducting thorough due diligence to remain legally compliant. That could mean incentivizing online payments and producing a monthly tenant screening report. The more that can be reliably automated, the easier it will be to elude costly mistakes.

Forbes contributor Sarnen Steinbarth detailed even more practical tips for new landlords to reflect upon before committing to action. He immediately stressed the importance of documentation and supplied readers with a few illustrative examples. Finding ways to become more efficient is his second recommendation. Utilizing software or tapping into external expertise could certainly advance that goal. One of Steinbarth’s most critical pointers is understanding the Fair Housing Laws, which have major implications for anyone renting property to others.

Prospective landlords and property managers have much to contemplate. Renting property could yield serious rewards so long as the associated risks are well-managed. These thoughts do not constitute a complete roadmap by any means but they should offer some reasonable direction.

Ahmed Guillen leads OI's editorial staff. He is passionate about professional development and helping our readers navigate starting and enhancing their businesses and investments.

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