How To Properly Evaluate & Mitigate Risk Within Your Company
By JD Esajian on December 18, 2015
If real estate investing was easy, everyone would do it. For as much upside as the business offers, it also has its fair share of risk. If you are not constantly on your toes, you can lose your shirt. While you never expect bad things to happen, they can absolutely happen to anyone. Even minor complacency can cripple the most experienced investors. However, with the right education, and a little due diligence, you can mitigate risk. Here are some ways to deal with the risks that your real estate company may confront one day:
1. Acknowledgement: Everything we do in life has some degree of risk; the real estate world is no different. The first step in dealing with risk is acknowledging it. Instead of looking at all of the wonderful rewards the property can bring, think about the worst case scenario. What if there was a fire in the property? What if the property doesn’t sell for the amount you anticipated? What if you find unexpected damage to the foundation? There are literally dozens of things that can bring a property down. Most, if not all, of them will never happen, but they need to be accounted for. You need to at least have a plan in place if they do. The more prepared you are, the quicker you can react if bad things happen.
2. Minimize the risk: There are certain things that are out of our control, regardless of what we do. However, we can minimize the risk simply by taking a few simple steps. If you own a rental property, walk the yard and look for potential trouble spots. Is there a hole in the yard that needs to be filled? Are there limbs hanging over the house that could cause damage the next time there is a storm? Does your lease cover all of the areas that you need protection? During the purchase, you can minimize your risk by simply minding due diligence. The minute you let your guard down and assume there are no issues is when you will run into trouble. Once something happens, it may be too late to protect you. You can never avoid risk altogether, but you can minimize it by focusing on the little things.
3. Take preventative measures: One of the most important things a rental property owner can do is maintain their property. With every change of season, there is a different set of updates that must be made. When the winter comes, you need to service the furnace, fireplace and oil tank. In the summer, you should do the same for your central air unit and HVAC. The longer these items go ignored, the greater the chance that they will break down and need repairs. Without adequate funds to replace them, you are “playing with fire”. Take a look at the windows, roof, foundation, appliances, entry walkways and deck. Don’t wait for bad things to happen. Get a jump on them before they do.
4. Insurance and lease: When is the last time you looked at your insurance policy? If you are like most people, you may have looked at it when you closed, but haven’t given it a thought since. Your property and area may have gone through dramatic changes in the years since you bought. You should really go through your policy and see if there are any necessary tweaks. The same is the case with your lease. Are you protected in the event your tenant stops paying or damages the property? How about if an injury occurs or a natural disaster happens? Instead of using a one page generic lease, spend the time and money to have your lease looked at by an attorney. You may not utilize the language on your lease for years, but when something happens you will be glad you have it. A good lease will cut off any issues before litigation gets involved and costs start to pile up. Your lease and insurance serves to protect you in the event of the unforeseen.
You need to be prepared for whatever comes your way. It may be several years before you face a major issue, but you need to be ready when the moment comes. Risk is part of any business, and the real estate industry is no different.