When you hear the word “risk” as a real estate investor, what comes to your mind? You’re probably thinking about big things. The risk of buying a bad property. A lemon. You think about due diligence and ensuring that your property isn’t a dud. But there’s so much more to real estate investment risk than just when you buy your property.
And there’s so much more you, as an investor, can do to reduce your risk as an ongoing effort to make your investments more profitable.
You might not even think that some of these things are reducing risk. Some are ongoing actions that you or your property manager will have to train yourselves to do. Others are one-time things that you’ll have to research and weigh for yourselves! The fact is that real estate investment can be unpredictable. It has risk! That’s just an unavoidable fact of life.
But you, as a diligent, smart investor, can ensure that that risk is as small and manageable and possible.
Unexpected Ways to Reduce Risk in Real Estate Investment
Risk Reducer #1: Consider the Resident
Did you know that customer service is one of your best lines of defense when it comes to risk management? It’s true! When you anticipate what your customer (your resident) wants, you not only work to keep your resident happy, which is great for ensuring that your resident is more inclined to pay on time and be agreeable to keeping the property in good shape and keep to the terms of the lease agreement, but it means that you can prevent situations before they happen.
Oftentimes, it’s unaddressed situations—ignorance and negligence—the “I didn’t know” and the “We were going to” moments that create risk. If you’re anticipating things, those situations are less likely to happen. That might mean replacing old appliances and repairing broken walkways and bad lighting fixtures and putting up more money into your property more quickly than you’d like—but it keeps your risk down and works to better your property values at the same time.
Don’t forget to ask your residents what they want, too. Feedback is valuable! Maybe have your managers hand out a periodic survey, even one that has incentives with it if they are completed.
Risk Reducer #2: Uncommon Insurance
These days, there is insurance for just about everything. There’s the common type that protect your investment properties from fire and flood, but there are even more options out there if you’re worried about other potential damages. Can it get costly? Absolutely. But if it would give you more peace of mind, there’s no harm in researching further coverage.
There’s builder’s risk if you like to flip, there’s loss of income insurance, sewer backup, liability, hazard, and of course, always encourage your tenants to get renter’s insurance.
There’s no harm in getting extra lines of defense to cover you in case of an emergency.
Risk Reducer #3: Quality Property Management
What else reduces your risk? A strong team! Your property managers are the backbone of everything you do. If they’re weak, your investments will be weak. Invest in them and you’ll find the return well worth it.
But how exactly do they reduce your risk? Property managers are your eyes and ears on the ground. They alert you to the first signs of trouble—whether it’s a bad tenant damaging your property, a burst pipe, or some other disaster. Not only do they let you know, but they’re your first line of defense in handling it.
You have to be able to trust them to deal with a high-stress situation quickly, efficiently, and the right way. That means without breaking any laws or winding up on the bad side of a lawsuit. Good managers nip problems in the bud and bad managers exacerbate them.
Risk Reducer #4: Strong Marketing & Outreach
How in the world does marketing reduce your risk? Here’s a reminder: the most expensive time for a real estate investor is during a vacancy. If you have a strong marketing and outreach effort, you’re going to reduce vacancies. You’ll be able to get the word out faster and get a new tenant in and reduce that risk and start generating cash flow again. Simple!
Oftentimes marketing falls to property management, so it’s all the more reason to invest in good managers.
At the end of the day, risk is best handled when it is handled proactively. When you make a conscious effort to mitigate the risk you have from as many fronts as you can, you set yourself up for success—not just in real estate investment, but in whatever venture you choose!