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operational risk in multifamily

Understanding and Mitigating Operational Risk in Multifamily

Multifamily operations is a risky business. Whether you manage five properties or five hundred, operational risk is all around you. How do you recognize and mitigate that risk?

Multifamily operations is a risky business. Whether you manage five properties or five hundred, operational risk is all around you. How do you recognize and mitigate that risk?

Multifamily risk is categorized into five types: Financial, Legal, Operational, Reputational, and Asset (FLORA). We’ve already written an overview of the five types of risk. In this post, we dive deeper into operational risk, looking into common examples and practical tips to mitigate them. Operational risk is vital for multifamily property owners and managers to comprehend, so let’s begin with a brief definition.

Understanding Operational Risk

Operational risk refers to the potential for losses or disruptions arising from inadequate or failed internal processes, systems, or human actions within an organization. In multifamily, this includes maintenance-related issues (equipment failures, faulty repairs, insufficient mold remediation), neglect of essential tasks (roof maintenance, pothole repairs), failure to follow established policies and procedures, compliance problems with building codes, poor performing personnel, and high turnover rates. Identifying, assessing, and mitigating these risks is crucial for smooth operations, financial protection, regulatory compliance, and resident satisfaction.

Common Operational Risks

  • Maintenance – Property managers have competing priorities, often prioritizing urgent matters over preventative maintenance. Resident issues, personal concerns, and evictions take precedence, leading to the neglect of less pressing tasks like changing HVAC unit filters or checking for ill-fitted pool gates. Furthermore, while service managers are expected to possess some knowledge of critical preventative maintenance procedures, it is unrealistic to expect them to consistently remember all tasks for all kinds of equipment and their proper timing. Failure to address maintenance issues promptly can lead to safety hazards, property damage, large unexpected capital expenditures, and resident dissatisfaction.
  • People – Multifamily management is a people-centric business that relies heavily on field staff for safe and efficient operations. However, the industry experiences high turnover rates, causing a lack of consistency across portfolios. When key staff members leave, valuable institutional knowledge is lost and the costs of recruiting and training new staff members is significant. A loss of a key staff member can often be seen in the NOI performance of property for months afterwards.
  • Leasing & Marketing – Neglecting tasks such as leasing, marketing vacancies, adjusting rents, or updating websites can harm your financial performance. Even a small error like an incorrect phone number or email listing can pose operational risks. Also, maintaining the quality of leasing interactions is an ongoing effort – call centers need to be monitored, secret shopping results need to be reviewed, and fair housing guidelines need to be revisited regularly. Occupancy and achievable rents all decrease when attention to leasing and marketing efforts is neglected.

Mitigating Operational Risk

Whether you manage five properties or five hundred, you’re aware of the type of operational risk you’re facing. How do you mitigate that risk?

  • Regular Property Inspections – Regular property inspections are an essential tool for mitigating operational risk in multifamily. Conducting regular property walks and unit inspections allow property managers to identify and address potential issues before they become more significant problems.
  • Track Adherence to Policies and Procedures – Ensuring employees comply with policies and procedures is one of the most difficult aspects of property operations. Unfortunately, policies hold no weight if they’re not followed by everyone. The right tools can make all the difference. Software with remote monitoring dashboards and detailed reporting provides you with visibility into all your operations in real-time.
  • Preventive Maintenance Programs – To simplify preventative maintenance, move away from traditional methods like binders, clipboards, or Excel spreadsheets. Utilize a software system that automates and assigns tasks to service teams at the appropriate times. This system provides staff with the necessary information and forms for successful maintenance, even if they lack expertise in the specific task. Real-time tracking ensures nothing is overlooked, enabling prompt action before problems arise.
  • Training – How do you prevent employee turnover? The answer is simple: recognize good work and invest in improving the tools available to them. Onsite staff is all too often still working with paper and spreadsheets in a world of smartphones and cloud computing. Giving the tools and technology to site staff to allow them to be successful is key to morale and a sense of achievement. This keeps people engaged with their company.

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The Role of Technology in Managing Operational Risk

The resident, accounting, and CRM side have been largely taken care of for years by property management systems. When you look at the asset side of the house, there’s risk, inefficiencies, and wasted dollars all over the place. How are you keeping track of the day-to-day operations? How are you measuring your employees’ success?

It’s not enough to hand them a binder of your Standard Operating Procedures (SOPs) and expect them to remember everything. They need more than just information. They need modern tools to excel in their jobs and feel confident about what they do.

Instead of having your SOPs stuffed away in a binder and gathering dust on a shelf, utilizing tools such as Leonardo247, takes it out of the binder and puts it in their hand. This shift increases accountability and reduces operational risk. There is greater understanding of priorities coupled with the visibility needed to hold the onsite team responsible for their duties.

You can also use software like Leonardo247 to establish Key Performance Indicators (KPIs). By incorporating KPIs into performance reviews, and discussions surrounding compensation, raises, and promotions, organizations can align employee incentives with operational excellence. This encourages employees to prioritize adherence to SOPs, thereby reducing operational risks and fostering a culture of continuous improvement.

At Leonardo247, we make sure you’re doing the right things, at the right time, with the right person, in the right way. While unforeseen events can still occur, demonstrating proactive risk management with Leonardo247 helps safeguard against negligence claims and minimizing your exposure to Operational Risk. Request a demo of Leonardo247 today.

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