Asset Management - The 5 W's Explained
When the word “investing” is mentioned to most people, their initial thought is around putting money in the stock market via their brokerage account or retirement savings. While it’s true that the stock market and 401K investments are great options, there are several other options to choose from.
Real estate syndications are an excellent alternative investment strategy. Commercial real estate investing can be lucrative when done with a trusted syndicator. Part of investing in commercial real estate well includes the critical element of having excellent real estate asset managers on board. Asset managers ensure that everything goes according to plan.
Unlike equities and bonds, real estate investments need active asset management and real-time decision-making throughout the holding period. With a stock, you research it, buy it, monitor its progress, and sell it when you feel the moment is right. Your investment remains in a hold/sell analysis while you wait to sell.
Real estate investing has some key differentiators. For one, the property must be well-managed, updated, and monitored post-purchase to protect its value and return on investment (ROI). This is where a real estate asset manager is the key to success.
In this blog post, we will discuss the five W's (who, what, where, when, & why) of an asset manager, along with tips for getting the most out of your assets and warning signs to look for when investigating/researching a potential real estate syndication investment.
Who is an Asset Manager? Are They the Same as a Property Manager?
Don't be fooled by the title; an asset manager is not the same as a property manager. They have different skill sets, hold distinct roles, and have diverse goals in assisting investors with their investments.
Property managers manage tenant interactions, basic upkeep of the real estate property, set up and monitor on-site activities, and manage the facility's day-to-day activities. Property management personnel are the people in charge of keeping everything on the property running smoothly each day.
Simply put, asset managers maintain the residual value and enhance an asset's capital growth to maximize the investment's cash flow. This means they are responsible for managing: the property manager, the construction updates, tenant leases and turnover, budgets for the investment, the market value for the property, service providers, taxes (and their appeals), and cash flow of the property. They are basically like a financial manager for the property as a whole - asset managers have their eye on anything that costs or earns money.
To maximize production and cash flow for each asset, asset managers develop solutions suited to that location's specific features and driving forces. In short, this means asset managers are key for real estate investors and the key to a successful investment.
What and How do Asset Managers Maximize the Value of a Real Estate Investment?
Every asset has pros and cons but having an experienced asset manager uniquely positions your property to have stable cash flow in three ways.
How Does an Asset Manager Maximize Cash Flow?
It's critical to maintain and improve property cash flow. You probably think this is a simple concept: have discussions with your renters about an acceptable lease making both parties happy.
Surprising to some, commercial real estate leases are sophisticated documents with numerous nuances and structures that need technical understanding to reap their full potential. Leases can be beneficial for investors as they help to attract high-quality tenants, improve rental rates, and lower vacancies in the property – all of which can help to maximize rental income and cash flow.
Asset managers handle:
Leases – In a real estate investment portfolio, asset managers can help find renters and conduct tenant interviews. They may also negotiate, verify the long-term financial success of your portfolio, and structure lease agreements to attract high-quality tenants.
Minimize Vacancies – To be proactive about filling a future vacancy rather than reactive about filling an existing one, an asset manager keeps track of rental rolls, connects directly with tenants, and verifies renewals. Avoiding vacancies is critical for maintaining healthy cash flow. Asset managers minimize vacancy risk by strategically scheduling lease expirations and contract extensions.
Market Intelligence – Since asset managers are familiar with the rental market landscape and have up-to-date information on rates, tenant discounts, and vacant units at competing properties, they can negotiate stellar lease terms.
What Does an Asset Manager do to Minimize Operating Expenses?
Real estate asset managers aim to save on costs while maximizing revenue and owner satisfaction. The key to successful leasing is to be proactive, and several benefits are associated with closing a deal early. For example, regularly negotiating with service providers ensures you receive the best possible price. In addition, the landlord is protected from yearly operational cost hikes and expensive capital repairs by shifting maintenance and capital expenditure liabilities to the tenant or tenants.
Furthermore, an asset manager is well-versed in the operational expenses that might jeopardize a company's net operating income (NOI) and cash flow after debt service (CFADS). Property taxes, for example, are frequently one of a landlord's most expensive running expenditures and can significantly impact the NOI and asset value. Therefore, property managers with prior experience appealing real estate taxes may be able to save investors money during the appeal procedure, which would lead to significant returns for all investors.
The commercial real estate asset manager is in charge of:
Lease Agreements– Asset managers negotiate contracts that limit an owner's daily responsibilities and common area maintenance expenditures.
Appeal Taxes – Before a property's reassessment triggers substantial hikes in real estate taxes, the asset manager will monitor assessment cycles and guide tax appeals.
Budget – By delving into past budget-to-actual discrepancies, asset managers can understand which operating costs are eating into NOI and how to cut them.
Oversee Service Providers – Minimizing costs and obtaining competitive pricing for necessary services is easier when you manage the service provider's RFP procedure.
Invest money wisely – Capital expenses can improve cash flows by either extending long-term capital maintenance or conducting regular capital maintenance to avoid costly replacement.
When and How do Asset Managers Stay In-Tune with Real Estate Markets?
As any asset manager knows, continuously keeping tabs on the markets is crucial to predicting real estate cycles and making sound investment decisions. Part of this process involves refinancing existing debt when interest rates are low, which can significantly impact an investor's cash flow.
Real estate asset managers monitor capital markets to reveal the most advantageous capital stack, maximizing risk-adjusted returns. Constantly changing market conditions may be difficult and time-consuming to follow. Still, investors must be aware of interest rate fluctuations, debt and equity available funds, and transaction volumes to ensure their investment's success.
A real estate asset manager's responsibilities include searching for debt financing from multiple sources, negotiating loan terms that benefit both the investor and the property, and helping with documentation and closing procedures.
Other ways the Asset Manager guides the investment:
Asset managers utilize asset-level financial projections to determine the optimal time for debt repayment.
Asset managers use a network of banks and other financial institutions specializing in levered buyouts to help investors obtain favorable loan terms, making it easier for capital to be sourced.
Asset managers can ensure timely closure by supplying interactive management strategies during the mortgage banking process.
Asset managers create a plan to increase profits for properties with soon-to-expire debt, regularly test commercial real estate lender covenants, and keep track of all debts' maturity schedules.
How do Asset Managers Create a Smooth Transition from One Investor to the Next?
Asset managers ensure they have the personnel to manage and maintain the property from day zero to the sale of the property. They will also have well-defined policies for how the property will be handed over from the investment's inception through the property's closing.
Any good asset manager will say the most important thing is, " Always keep your tenants' experience pleasant, with as few disruptions to their daily lives." Remember you are providing a service and a place for people to live, have shelter, and enjoy their lives.
How to Analyze Potential Problems in the Investment Property
The asset manager ensures that a real estate investment property is up to par before investing in it. This includes examining financial statements and visiting the prospective property. Likewise, the syndication sponsor monitors properties to ensure they run smoothly after an investment has been made.
Potential Dangers Noticeable in Writing, Questions:
What is the ratio of tenants behind on rent compared to the number of residencies?
Cost of expenses compared to Income: How does the income compare to the cost of maintaining the property?
How do rental rates compare to others similar in the area? Are they too low or high?
Potential Dangers Noticeable in Person, Questions:
How does the property look? Are things falling apart, missing, or just trash? If so, is it worth the cost of repairs to make it a worthwhile investment?
Is the area's population growing, stagnant, or declining? If growing, are there enough housing options in the area? Conversely, will there be enough tenants to make it a wise investment if declining?
How is the area? Do residents have amenities, stores, and other businesses close to them? What opinions do residents and others have about the property? If it doesn't have a favorable outlook from others, how can that be changed?
Assessing an Investment’s Potential
Real estate asset managers know that research is key to success. When looking at a potential investment property, many different criteria need to be considered to create a cash flow analysis.
When examining prospective investment purchases, asset managers seek signs of future development. By asking themselves several questions: How can I expand the growth or the property while minimizing expenses? Do I need to improve the property to increase the percentage of occupied residences? What are the conditions of the amenities, and do more need to be added? Is there a possibility of switching to high-efficiency units?
The property's value will be enhanced by installing energy-efficient improvements on the whole facility and individual units, attracting higher-paying tenants eager to maintain the newly repaired area and boosting potential revenue each year, boosting market worth.
Real Estate Asset Managers are Crucial for a Successful Real Estate Investment
The risks of investing are very real, whether we’re talking stocks, business joint ventures, or even real estate. Without a competent asset manager, your commercial real estate investment could render lower than expected passive income returns, or you might even experience capital loss. An asset manager’s first priority is to increase the returns and cash flow while ensuring that the investment's value reaches its full potential.
This information will all be included in the asset managers' business plan. The business plan will also likely include opportunities to reduce operational costs and increase asset revenue. As a result, everyone involved will earn a greater return on their investment.
Focusing on NOI and cash flow results in more distributions, property value growth, etc. It also allows investors to reinvest excess money and expand their portfolios.
An experienced asset manager is someone you want on your side. They have an eye for spotting a good deal and can quickly tell when an investment might not be worth it.
Real estate investments can be very complex, so having a great asset manager or team will help simplify the process, minimize the risks, keep stability in the investment, and maximize your returns.
As you explore investing in (perhaps your first) real estate syndication opportunity, your number one priority should be to make sure you are investing with an experienced syndicator with an accomplished asset manager on the team.