Rental Property Risk Management
Preventative Measures for Successful Risk Mitigation
by Shaun Shenouda
While there is no stopping acts of God, you fortunately can mitigate many of the risks pertaining to your rental properties relatively easily and inexpensively. As you might suspect, some of the most prevalent risks pertain to losses caused by the residents. Given the increased propensity to spend more time at home due to COVID-19, there is an overall increased risk. Proactively taking steps to evaluate those risks and putting best practices in place to minimize those risks could save your rental property as well as lives!
Fire!
According to the National Fire Protection Association (NFPA), there were 340K house fires in 2019 (26 percent) resulting in 2,770 civilian fire deaths (75 percent); 12,200 civilian injuries (73 percent), and $7.8 billion in direct property damage (52 percent).
Over the past three years, house fires have resulted in 40% of SES Risk Solutions overall losses which sustained an average loss of $70K per fire. We have also seen an uptick in frequency due to more people working from home, overloading their outlets, cooking fires, etc.
WIRING
Nearly 1/3 of the properties we insure were built in the 1960s and 70s, which coincidentally is when aluminum wiring was often used as opposed to the more expensive and higher performing copper wiring.
Aluminum conducts electricity safely. It’s the connections that pose the most issues. According to the U.S. Consumer Product Safety Commission (CPSC), homes with aluminum wiring are 55 times more likely to have “fire hazard conditions” than homes wired with copper. Since permit data is often incomplete and/or unavailable, our investors do not always have easy access to determine if the wiring has since been updated.
Solution: Engage with a professional contractor to inspect the property(s) to determine if the wiring has since been updated. Our research suggests the cost to be between $1500-$3000 to upgrade, if needed.
FIRE EXTINGUISHERS
Another highly effective and affordable best practice is equipping all your rental properties with a fire extinguisher. In a study performed by FETA (Fire Extinguishing Trades Association) where it recorded over 2,600 incidents, they concluded that in 81.5% of cases the portable extinguisher successfully extinguished the fire and in 74.6% of the cases the fire department was not required to attend. Despite the effectiveness, according to the PEMCO Insurance Northwest Poll, 27 percent of Northwest residents live without a fire extinguisher in their home. The poll suggests that among the most at-risk are renters, who are significantly less likely than homeowners to have fire extinguishers—58 percent of renters vs. 82 percent of homeowners.
Solution: Generally, fire extinguishers are around $20. While they are easy to use, they will only be used if they are easily accessible. They also have a shelf life, so it is important to implement a recurring replacement process. We also recommend incorporating the location of the fire extinguishers and how to use them into your property management process.
SMART HOME DEVICES
Despite marketing advantages, better tenant satisfaction and increased profits, the value proposition for most smart home devices has only recently become more compelling as the price point for these devices has come down considerably. In fact, demand for smart home devices is growing so fast that experts have coined the term IoRE—or Internet of Real Estate—to describe the booming market in smart home devices. The smart home device market has doubled in size from about $44 billion to $91 billion over recent years and is expected to reach $158 billion by 2024, according to data from Precise Security.
While tenants are likely to value smart lights and virtual personal assistants (VPAs), installing smart home products in your rental property can also be an easy and cost-effective way to protect your property. The acronym “Smart” comes from “Self-Monitoring, Analysis, and Reporting Technology”. Some insurance companies, like SES Risk Solutions, value this increased real-time awareness and may even offer a premium discount for landlords that have invested in installing such devices.
Solution: Evaluate the specific needs of your property and investment strategies when considering Smart home technology options. The two we have found to provide the most value are:
1) Flood or moisture detectors. Renters may not place a high degree of value on these devices, but for a small price, moisture sensors can potentially save landlords a considerable amount of money through water damage prevention. Easy to install and affordable, these detectors can alert you to problems like slow leaks that may otherwise go unnoticed before they turn into major issues. They can also quickly inform you of big problems like burst pipes that can do major damage quickly.
2) Smoke and carbon monoxide (CO) detectors. Smart smoke alarms and carbon monoxide detectors take safety a step further than traditional models. Rather than just sounding an alarm, these smart versions can also alert you and/or your renters if there is a problem via an app.
VACANCY
Another very important set of loss prevention best practices are centered on vacancies. With nationwide occupancy rates above 94%, according to John Burns Real Estate Consulting, vacancy risk management may not be top of mind for investors. However, according to SES Risk Solutions loss history data, losses on vacant properties are over 1.5 times more prevalent and severe. There is the obvious increased risk of slow detection of an issue be it smoke, water leaks, etc. There is also an attractive nuisance, which can draw in squatters and thus increase propensity for vandalism, theft and arson as well as bodily injury.
Solution: Top 3 suggested preventative measures:
1) Inspections. The landlord or property management company should physically inspect the vacant property on a regular basis (weekly). They should perform regular maintenance, remove fire-prone debris, check the plumbing, ensure the smoke detectors are functioning, confirm there has been no intrusion, etc.
2) Winterization. Make sure plumbing is drained and heat remains on.
3) Secure the property. Set up motion-activated exterior lights and put interior lights on a timer (simulate real usage). Home security systems and cameras are another great option. Lastly, make sure that your insurance policy has a vacancy provision that would cover your property in the event of a loss while vacant.
TENANT LEGAL LIABILITY COVERAGE
Another effective risk management strategy for real estate investors is to offset risk by requiring their residents to procure coverage that would protect their rental property from tenant induced damage (accidental or otherwise). Many investors/property managers require their residents to show proof of renters insurance in order to fulfill the lease requirements. However, nearly 1/3 of renter’s insurance policies are cancelled by the tenant mid-lease. Investors need to work with their insurance providers to establish a Tenant Legal Liability program. Costs can be less than $10 per property per month for $100,000 in coverage.
