Real estate professionals face a diverse and ever-changing risk portfolio. While many risks can be minimized through diligence and best practices, others are unavoidable.
It’s important for real estate business owners to protect themselves from these risks with business insurance. But what does effective real estate risk management look like?
The capital stack is the order of debt and equity investments made in a real estate project. It dictates which investment holders receive rights to a property’s income and profits over the hold period and upon sale, as well as how much risk they take on for their expected returns.
The bottom layer of the capital stack contains senior debt, which is generally a mortgage secured by the actual asset itself. Senior debt investors take the lowest risk and are guaranteed to be paid in priority to everyone above them in the event of a default. But in return, they typically receive the lowest expected returns for their investment.
Moving up the capital stack to mezzanine debt and preferred equity, investors take on more risk but can still expect a better return than common equity. But at the top of the stack is the unsecured common equity, which carries the most risk and can be wiped out completely by a catastrophic event such as a major tenant default or bankruptcy.
Liquidity refers to how easily a real estate investment can be sold at any given time. If you have invested in a property with low liquidity, it may be difficult to sell and you might end up making a loss on your investment.
Real estate investments are generally less liquid than stocks, as they often require a large amount of capital to purchase and a lengthy process to complete the sale. The liquidity of a particular property can be influenced by many factors, including location, market conditions and ease of transaction.
As the PBWM Residential Real Estate Risk Lead, you will be responsible for Credit Risk Governance and Policy across our global RRE portfolio throughout its credit lifecycle. This includes risk appetite definition and monitoring, 2LoD transaction approval and oversight of mortgage servicing activities. This role will also oversee the Risk Integration of our retail and consumer residential mortgage businesses.
Vacancies can hurt your real estate portfolio by reducing rental income that is needed to pay for the mortgage, insurance, property taxes, and maintenance of your asset. A high vacancy rate is also difficult to recover from, which can lead to an inability to refinance the loan and may require a sale of the property.
The loss of a large tenant can have devastating financial consequences on the performance of a shopping center real estate asset. In addition to the direct loss of rent, it can cause a ripple effect that impacts the ability to lease other spaces or attract new tenants.
A continuous, streamlined tenant risk assessment process is key to minimizing the impact of these risks. Use a tenant score to identify risk in advance by assessing applicant credit, criminal and eviction history. Gain a holistic view of each candidate’s tenant profile that goes beyond their credit scores and improve the quality of your applications with granular, ongoing data analytics.
Real estate has low volatility compared to other investments, but that doesn’t mean you can put your fears to rest. The truth is, if you don’t have an investing strategy in place, you could lose big.
Real Estate Risk Management helps you identify and mitigate risks by implementing a calculated plan that addresses the potential for loss. This may involve choosing risk avoidance, risk control or risk transfer, which is when you move certain responsibilities from your shoulders to someone else’s, such as through insurance.
Today’s fast-paced mortgage and real estate lending market has no tolerance for delays. Chasing down data or dealing with information gaps disrupts the customer experience, raises decisioning risks and slows lending operations. LexisNexis Risk Management Solutions for Real Estate connects businesses to industry-proven research tools to help them strengthen fraud defenses, improve efficiency in their compliance programs and make faster, more confident decisions. This reduces costs, shortens processing times and delivers a better customer experience.
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