The “5 W’s” of Asset Management Explained (who, what, where, when, why)…and More!

by | Feb 14, 2024 | Financial Freedom, Life of Your Dreams, Real Estate Investing 101 | 0 comments

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 is a decent option, 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. When you invest in 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 after purchase to protect its value and return on investment (ROI). This is where asset management 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.

Is an Asset Manager 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 set up and monitor on-site activities and manage tenant interactions, marketing and leasing to new prospective tenants, the basic upkeep of the property, and 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 while minimizing risk. This means they are responsible for managing the property manager, the execution of the renovation plan, the property’s budget, the property taxes (and their appeals, when necessary), the insurance policy, the property’s net operating income (NOI) and resulting market value, the property’s cash flow, and how well the NOI and cash flow perform compared to the original projections (i.e., how well they execute the business plan). 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.

Asset managers are often part of the sponsor team or a key officer of their company. There is much overlap between what a property manager and an asset manager handle, so it’s a team effort. Good asset managers identify and maintain their focus on the most critical issues and key performance indicators (KPIs, which measure those issues), develop solutions suited to the property’s specific features and driving forces, and may direct the adjustment of property management processes to maximize the property’s value and cash flow. In short, this means asset managers are critical for real estate investors and the key to a successful investment.

Related article: Cash Flow in a Real Estate Syndication — Where Does it Come From?

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.

Maximizing Revenue

It’s critical to maintain and improve a property’s income or revenue since this is a major part of determining the NOI, which determines the cash flow and property value. This may seem like a simple concept, but surprising to some, it can be quite complex. Put simply, a property’s income is a factor of occupancy, rent levels, other charges (i.e., Other Income), and collections or delinquency (how many residents are actually paying their rent and other charges on time).

Occupancy is one of the most important factors in a property’s revenue. However, occupancy is a lagging indicator. To manage it effectively, the asset manager and property manager have to also look at the number of vacancies, the number of units whose tenants have given notice to vacate and who move out or skip, the number of renewals from the number of units set to expire in a given month, the number of leases signed and new move-in’s, the leasing funnel and the marketing channels used to support it, and the number and prioritization of vacant units that have been made ready to rent…among other things. All these things are leading indicators of what occupancy and revenue may be in one, two, or three months’ time.

Minimizing Operating Expenses

Real estate asset managers also aim to save on operating expenses toward maximizing the NOI. Regularly negotiating with service providers ensures you receive the best possible price. If the asset manager oversees a portfolio in the same market, they may be able to get even better pricing by volume. 

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 a property money during the appeal procedure. Similarly, an asset manager weighs the cost of renewing insurance at the same level or accepting risk with a larger deductible for lower costs. These things can significantly affect investor returns.

Staying In-Tune with the Markets

Continuously keeping tabs on the real estate and capital markets is crucial to predicting real estate cycles and making sound investment decisions. Part of this involves staying in touch with market cap rates and sales trends in the local area, and some involves monitoring debt trends and interest rates to be able to refinance when it’s advantageous, which can significantly impact an investor’s returns.

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 maintaining relationships with brokers for market information, as well as with mortgage brokers and lenders, negotiating loan terms that benefit both the investors and the property, and helping with documentation and closing procedures.

How to Analyze Potential Problems in the Investment Property?

The asset manager ensures that the real estate investment property is up to par before investing in it. This includes examining financial statements and physical due diligence on the property. Likewise, they monitor the property to ensure it runs smoothly after an investment has been made.

Potential Dangers that May be Noticeable in Writing:

  • What is the ratio of tenants behind on rent compared to the total number of residents?
  • What are the expenses compared to the income — how does the income compare to the cost of maintaining the property?
  • How do rental rates compare to similar properties in the area? Are they too low or high?

Potential Dangers that May be Noticeable in Person:

  • 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?
  • How is the area? Do residents have amenities on site, 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 of the property while minimizing expenses? Do I need to improve the property to increase the occupancy or the potential rents? What are the conditions of the amenities, and do more need to be added? 

The property’s value will be enhanced by improving the finish level, both on the exterior as well as in individual units, attracting higher-paying tenants eager to enjoy the newly renovated area and boosting potential revenue each year, which in turn boosts property value.

Real Estate Asset Managers are Crucial for a Successful Real Estate Investment

The risks of investing are very real, whether we’re talking stocks, new business ventures, or 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.

Focusing on NOI and cash flow results in higher cash flow, which can result in higher investor distributions and property value growth. 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.” After all, we’re providing a service and homes for people to live in and enjoy their lives.

Real estate investments can be very complex, so having a great asset manager or asset management 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.

 

Further reading: How to Effectively Manage Multifamily Properties