Return to site

What is Asset Management

Real Estate Asset Management Explained

· Commercial RE,Asset Management,Multifamily,Property Management,Investing

In its most basic form it can be said that asset management is managing the property manager, but there is more to it than that. It is an active role on the general partner side of the deal and is something that must be done and done well the entire length of the deal, this even includes the acquisition and disposition of properties. Asset management is a step past property management, our job is to maximize the financial value of the asset, this is generally through scrutinizing expenses, forcing appreciation and working with our property manager constantly. We have a longer term focus though, specifically on the overall financial picture. It is making sure that returns are met, investment goals are achieved and that the property is run according to the business plan or better.

You could say that while property managers need to keep tenants and property owners happy the asset managers need to keep the investors/owners happy. When all is going well, asset management is not very difficult but getting to this point and staying here may not be that easy. Many times the asset manager or managers may need to get into the weeds and solve bigger issues. Issues including bad collections, how to stick to the budget, high delinquency and the list goes on. As asset managers we look at certain metrics more than others, keeping these in line keeps the property where it needs to be in order to pay all of its expenses and create great returns for its investors.

Metrics That Should be Known Well Include

We are constantly looking at the NOI, we want to see consistency and of course a positive number after all expenses are paid including the mortgage, principle and interest.

The P&L is a big deal too. We want to see this regularly (having a live P&L is great if your property manager's software allows this) as these numbers - the income and expenses, are the lifeblood of the property. We want to see the expenses, are they consistent? Are the property managers bringing in good contractors at good rates? Are turn costs all similar for each turn of the same unit style? How do utilities stack up each month? Are the other income sources besides rents such as pet fees, laundry and application fees also consistent month to month?

Another important thing we do as asset managers is that while reviewing the P&L we like to make sure that all expenses are in the correct category. Some that we often see blended together are Turns with Repairs and Maintenance and Contracted Services with Utilities. A big one that typically gets overlooked and comingled are the capital expenditures (capex for short), many times these expenses get mixed in with Repairs and Maintenance. We like to make sure these are all separated out into their own line item, this makes it easier for potential buyers, yearly tax preparation and also helps with the bottom line, the NOI of the asset.

As you can tell the P&L is a good place to look for inconsistencies and issues which if there are any, can typically be a good point to focus on in order to bring up your cash flow.

Also you should ask about all fees and bills that you don't understand or are not aware of. This does another important thing - it shows that we are watching how the property is run, we are involved and want it to be run well.

Occupancy, both physical and economic. We want a high occupancy, seeing 100% physical occupancy is great, but if we are only at say, 80% economic occupancy we have an issue with collections that needs to be dealt with. If economic occupancy is low we need to dig into this problem and put systems in place to increase collections.

Delinquency is another one to look at. We like to see tenants paying on time. During the current economic climate this is slightly more challenging due to COVID-19 and new CDC guidelines and regulations that vary form state to state. Still its very important, your property manager should have an open dialog with any tenants that are habitual late payers and try to solve this problem. The asset manager needs to try to give the property manager any tools that may be needed in order for this to work.

Other Parts of the Job

As asset managers it is also important to visit the properties under management. The frequency can vary, if its running smoothly you may not need to visit very often. If there are issues or major projects you may want to visit more often. Ideally monthly to quarterly is a good rule of thumb. While in town you should be spending time visiting the staff, walking the property and the vacant units. Speaking with leasing managers, making sure they have what they need to lease quickly and at market rent, also ask what can be changed to do this better. Check on your maintenance people and make sure they have what they need in order to get jobs done quickly and efficiently. Visit other employees you may have in the area. Lastly check a few nearby comparable properties to see what they may be doing better and that can be mimicked or done better at your property.

Best practice for handling construction is for the asset manager to work with a GC if it is a larger complex, with smaller complexes its very common for the property manager to work with contractors to get jobs done. If it is a large scale rehab it would most likely fall back on the asset manager. This is because the property manager should be focusing on leasing units, keeping the property full, collecting rent and getting turns done quickly.

All in all asset managers need to work with the property manager and always try to stay a few steps ahead. They have one of the most involved jobs on the team and its important that it is done well. Asset managers can truly make or break the deal, just as property managers can. Make sure you are working with asset managers that have a good, solid level of experience and expertise for that specific asset class, be it multifamily, industrial, self storage, etc. They should always have the best interests of the investors top of mind and be ready to do the necessary work up front and throughout the life of the deal in order to follow the business plan, maximize returns and run the property to its full potential.