Author: Aon Rent Protect
When it comes to operating a successful investment property there seems to be a never ending list of techniques, strategies, and products meant to offer protection. Having so many options can be an advantage, but it also creates challenges. Even for the most experienced investor, navigating through what services are available and how they are most effectively deployed can be daunting. Too often investors will throw perceived solutions at a problem as it occurs, but successful risk mitigation is not achieved by taking a reactionary approach. Instead introduce an overall strategy that consists of complimentary services meant to combat pre-determined and financially harmful risks.
Step one: Know your property
The first, most crucial aspect of risk mitigation is educating yourself. Not all properties come with the same set of problems. The owner of a single family home in Colorado Springs is not going to face the same day to day challenges as someone who owns a four-plex on the Southside of Philadelphia. Make sure you are well versed in the goings on of the neighborhood, what your target tenant demographic is, what your available options are for utilities, even the weather should be taken into consideration. Having a high level of familiarity with your property will make it easier to identify your unique risks.
Step two: Identify your risk
Once step one is accomplished, it’s time to identify the risk that exists. Is your property in a high crime area? If so, a vandalism clause in your property insurance is worth considering. Is your property near the coast? Are hurricanes a possibility? There is coverage for that as well. What about your tenants? If your property is in a lower income area, a more stringent screening process may be required to make sure you get the best tenant possible. Being proactive, and not reactive, is the key to successfully reducing risk. Predetermining your unique risks will allow you to establish a plan before problems arise rather than having to pick up the pieces following an unforeseen hardship that you weren’t prepared for.
Step three: Have a plan
You’ve followed step one and two, learned as much as you could about your property location, and used your knowledge to identify what the present risks are. The final and most important step is formulating a strategy by working backwards from the risks, and arriving at the preventative measures you can take.
I have a Landlord friend with property outside Detroit whose pool of prospective tenants primarily consists of auto workers. A few years ago this caused a real problem for him. The mass layoffs meant his tenants were no longer collecting an income, which in turn lead to rent payments being skipped and leases broken. The lack of money coming in ultimately made it very difficult for him to pay his mortgage. Luckily he had enough reserves to not lose the property, but what if that hadn’t been the case?
He learned this lesson the hard way, but the important thing is he did learn. Knowing now that one of his unique risks is higher potential for non-payment, based on his familiarity with the region’s economic climate, means that additional steps are taken to ensure that his assets are protected. Employment history, not just current job status, is now taken into consideration. So is the length of time spent in any one property. Finally, as a complement to his tenant screening, he now covers his property with rent default insurance as a final safety net.
Finding what’s right for you
My landlord friend identified one of his risks to be a heightened chance of rent non-payment based on what he knew about the location of his property, and the prospective tenants he would be renting to. After arriving at this conclusion he formulated a strategy to first, reduce the risk of getting a bad tenant by employing a more stringent background screen, and then paired it with a back end solution that would protect his rental income even if a tenant who met his pre-lease requirements stopped paying.
Remember, this strategy made sense given the challenges this landlord faced. But that doesn’t mean it’s going to be the same for you. Would I encourage everyone who is thinking about renting their property to use a tenant screening service? Yes, absolutely. It is probably the most important step you can take. But what that screen consists of, and what determining factor is given the highest degree of importance, should vary. Successful and effective risk mitigation isn’t achieved by following a preexisting template; it relies on you as the investor taking a proactive approach. Know your property, use that knowledge to identify what risks exist, and formulate a multi-faceted plan that makes sense for you.