Risk is a fact of life. Whether we are driving a car, using the internet, interacting with other people, or just breathing air, we are all taking some degree of risk that has to be managed.
When it comes to business, there are several ways you can mitigate risk:
- Make good business decisions.
- Have good business advisors around you.
- Have adequate insurance in place.
- Monitor and control activities.
- Avoid dangerous situations.
One important thing you need to do is assess the risks in your business as it currently exists, and there are two levels of that risk analysis that are required. The first is an overall risk analysis based upon the type and nature of your business, who you are, and what you are doing. What risks come from your product or service? What risks come from your customers? The second level of risk analysis is an asset-by-asset analysis in which you ask yourself what things can go wrong with each one. Can major components of a rental property fail (furnace, plumbing, roof)? Can contractors steal money and leave you high and dry? Can tenants become liabilities by suing you or damaging your property? Can the debt on a rental property go from being leverage helping you grow to being an anchor pulling you under waves of debt and default?
It isn’t possible to eliminate all risk, but you should endeavor to limit it as best you can by:
- Reviewing the liability insurance policies covering various aspects of your business.
- Verifying that you have written procedures in place regarding your rental property operations and that your team members are following those procedures.
- Having written procedures regarding how you select and manage contractors for any rehab, including having a written scope of work, and established payment plan, and making them provide proof of insurance.
- Avoiding institutional financing despite its attractive low rates and choosing to work with private lenders with whom you can have rational conversations.
I’m not urging you obsess over risk, but you need to conduct a reasonable evaluation of your current situation, consider the risks on the horizon, and govern and guard yourselves accordingly.
Proverbs 22:3 – A prudent man foreseeth the evil and hideth himself: but the simple pass on and are punished.