Investing in real estate, similar to any other endeavor, comes with a unique set of risks. And many of these risks are simply out of your control. For example, quickly changing demographics can be the difference between a successful commercial and residential real estate venture versus one that fails to meet expectations.
However, many real estate risks are within your control and completely manageable, which is where the team at the MB Group comes in. We are a group of experienced risk management CPAs and accountants who specialize in helping real estate professionals identify and mitigate risks as they come. Let's take a closer look at risk management for real estate.
Understanding Risk Management in Real Estate
As we previously mentioned, risk is simply a cost of doing business in real estate. However, this doesn't mean that all risks should be tolerated. In fact, certain risks can be eliminated altogether while other risks can be controlled or reduced by transferring them on an ongoing basis. At the MB Group, we use a vast range of creative and innovative risk management solutions, but they will all fall under three key categories.
Risk Avoidance in Real Estate
Undoubtedly, the best way to manage risk is to avoid it entirely. For example, if you are looking to avoid lawsuits associated with potential unintentional drowning cases, don't purchase properties with hot tubs or pools. While avoidance is the best risk management protocol, it's not always possible.
Controlling Risk in Real Estate
Because every risk can't be avoided entirely, control is typically the most common strategy for risk mitigation. With risk mitigation and real estate, it essentially means maintaining the property in a way to prevent problems from occurring. It can also mean having the necessary safeguards and protections in place to prevent problems from occurring. Examples include strategically having a gate around the hot tub or pool to prevent entry into the space. This measure can reduce your risk exposure and control it.
Transferring Risk in Real Estate
Another way to protect yourself from risk exposure is to transfer it. The risk transference protocol is often used in conjunction with other risk mitigation strategies. Continuing with the unintentional drowning risk, the transference strategy would be to purchase property insurance with coverages specifically for pools. In doing so, it moves the onus from you as the property owner to the insurance company. When the transference strategy is combined with control measures, you can greatly limit or reduce your risk exposure.
Real Estate Market Risk
The real estate market waits for no one and is constantly moving. Financial and economic circumstances as well as supply and demand can all dictate the success and profitability of your investment. Fortunately, the team at the MB Group offers a range of risk management consulting solutions designed to help you mitigate risk.
Diversify Your Portfolio
For example, we know that real estate is extremely localized, which highlights the importance of diversifying your real estate portfolio. This means owning asset classes in different sectors and different markets to minimize risk exposure. Strategically having assets in several markets can minimize the impact of a drastic downturn in one market.
And this same strategy goes for asset classes. For example, while office space, hotels, and retail real estate have suffered greatly during the pandemic, industrial retail space has fared relatively well. Another key strategy to manage market risk is to ensure your portfolio is not over-leveraged and ensure you have substantial reserves available. This way, when the inevitable market downturn happens, you will have the liquid resources available to maintain the investment until the market levels off.
Legal Risk for Real Estate
Another major risk for real estate investors is litigation. Because of this, we always advise our clients to have the proper structure in place to protect their investments in the event someone gets hurt or injured on your property and files a lawsuit against you. Other common causes of real estate litigation include:
- Breach of contract
- Wrongful eviction
- Failing to disclose a property defect
- And more
Mitigating Legal Real Estate Risk
When it comes to mitigating legal risk, our team regularly advises our clients toward all three strategies. Some risks can be holistically avoided — but this only goes so far. As such, we work with investors to stay in the know about the current state, local, and national laws that could impact your real estate investments. And it's up to the investor to comply.
Work with an Experienced Real Estate Attorney
It's imperative that all loan documents, leases, contracts, and underwriting measures are drafted by an experienced real estate attorney. And even if you closely adhere to all the rules, legal actions or foreclosure can still arise, which is why risk transfer is critical
Purchasing the proper general liability insurance can help cover medical costs and property damage claims if someone is injured on your property. The right insurance can also cover legal fees as well as settlement claims.
Another key type of insurance for real estate investors is errors and omissions insurance. This type of liability coverage insures anything associated with employee relations with clients. Errors and omissions coverage can be vital if one of your employees goes rogue and a lawsuit is filed against the real estate firm or employee.
Contact MB Group for Risk Management for Real Estate
At the MB Group, we specialize in offering tailored real estate risk management solutions for investors. Our experienced CPAs and accountants can offer you guidance and assistance in mitigating the risks associated with your investments.
Contact our team today for specialized risk management for real estate investments.