The number one mistake I see apartment owners make is they fall into the trap of thinking (or assuming) that their property manager is their asset manager. Typically, smaller properties (sub 100 units) do not have a person hired specifically to be the “asset manager”, but the majority of them have a property manager. Many owners do not fully understand the roles and responsibilities of an asset manager, and they leave those (often unknown) asset manager duties up to their professional property manager. Consequently, the number one “big mistake” that owners make is they leave asset management duties to their property manager.
What is an Asset Manager? investopedia.com defines asset management as referring to “the management of investments on behalf of others.” The website further defines asset management as having a “dual mandate: appreciation of a client’s assets over time while mitigating risk.” Investopedia further describes asset management vs. property management:
“They (asset managers) focus on maximizing a property’s value for investment purposes—not to be confused with real estate property managers, who handle the day-to-day activities related to a property’s operations and physical structure.”
Typical roles for a real estate asset manager are: overseeing an asset (the real estate in this case), help plan and create an ownership plan for the asset, hiring the individuals (i.e. a property manager) to execute the plan for the property, and then managing the manager throughout the process.
In contrast, what is a property manager? A property manager manages the property and all the functions associated with day to day operations. Typical roles include: marketing the units, obtaining tenants, collecting rent, conducting repairs, enforcing property rules and regulations, paying and interacting with the landlord.
So, what’s the big deal? Why is it a problem to have the property manager be the (albeit default) asset manager? The main problem is the property manager may be following different goals for the property than the owner. For example, when renting out the vacant units, if a property manager’s sole goal is to get the vacant units occupied as quickly as possible, they may rent them out at lower than current market rates. This may achieve the goal of obtaining tenants for the vacant units, but it creates another problem, especially in the state of Oregon that now has rent control.
The owner of the property now has to wait to raise rents to market levels, and the discounted rental rate may effect the owner’s ability to pay expenses on the property (i.e. taxes, insurance, repairs, as well as the mortgage). The property manager may not even know how much the mortgage payment is! While the property manager achieved their goal of renting out the unit, the landlord’s goal of renting out at market rates was not achieved.
Here is another example: an occupied unit is vacated, and there are necessary repairs required to make the unit rent ready. Decisions need to be made on the repairs needed in the units, as well as the upgrade level of said repairs. Should the floors be upgraded to the highest level quality? What about the countertops? A property manager could decide to have lower level (and less expensive) repairs to the unit, which could result in lower rents, resulting in the same problem for the owner as in the first example.
On the other hand, the property manager could upgrade to a higher level, but not be able to achieve the rents needed to pay for the upgrades. This results in a different problem for the owner, resulting in “over upgrading” relative to market rental rates. Remember the asset manager’s primary function, the dual mandate:
“Appreciation of a client’s assets over time while mitigating risk.”
Since the rental amount and turnover expense both effect the Net Operating Income (NOI), and therefore dramatically effect the value of the property, having disparate goals can create a tremendous financial problem. The Asset Manager focuses on avoiding short and long-term depreciation of the asset, and the property manager focuses on the short term problem of renting out the units without necessarily understanding the goals of ownership.
WHAT IS THE SOLUTION?
To reiterate, the number one mistake I see landlords (owners) make is unknowningly leaving the asset management up to the property manager. In addition, typical asset manager roles may go unfulfilled. So, what is the solution?
Be your own asset manager!
Yes, you can hire an asset manager if you want, in many cases that is a great idea. It costs more, but then again, NOT having an asset manager costs A LOT more than the fee (if done correctly). Let’s be realistic here: the majority of property owners under 30-50 units do not hire an Asset Manager, so let’s talk about how to be your own property asset manager.
Step one: fully understand your goals.
Knowing who you are and what you want is often the hardest part about real estate investing. Knowing the answers to a few questions like these seem simple at first, but may be a process to get to the core answers:
-What are my specific goals?
-Why am I investing in real estate?
-What exactly do I want to accomplish?
When I ask people what their goals are for investing in real estate, they say: “obviously, to make money!” Yes, that is a great goal, but it may not be the only goal or the “real” goal. For example, what if you run your property poorly, and make $1 a year? Did you achieve your goal of “making money”?
Since hired asset managers for large funds have edicts they have to follow, make sure you have your own edicts and guidelines. Clearly understanding your specific goals and intentions will help guide you as an asset manager.
Here is an example of how understanding your goals helps:
I recently worked with an owner who was preparing a vacant unit for a new tenant. The carpeting was old, and needed to be replaced with either new carpeting or removing the old carpet and refurbishing the hardwood floors. The hardwood floors would be an upgrade (and about $50 a month more in rent), but costs more than a typical carpet replacement by about $2,000.
The owner has a criteria for upgrades: if the rent increase pays for the upgrade in four years or under, she will often elect to do the upgrade, as the return is approximately 20% if there is a four year payback. If the rent increases take over four years to pay for the upgrade, she does not do the upgrade. In this case, the $50 per month rent increase paid for the hardwood floor in 40 months, so she elected to refinish the hardwood floors.
Since this owner had a clear understanding of her goals regarding property upgrades, she was able to make a clear choice that matched her intentions for the property. This is a classic “Asset Management” decision.
Step two: Communicate your goals to your property manager (and team)
In the above example regarding the owner refurbishing her hardwood floors, the owner gave clear instructions to her property manager regarding her upgrade goals and criteria. Since she communicated her goals clearly with her team, they were able to focus on executing the plan of upgrading the hardwood floors as efficiently as possible. Make sure your property manager knows your goals, so they are not “guessing” at what you want (which is the best case scenario). You want to avoid the property manager operating the property with only their goals in mind and not yours. This could be exceptionally important during a pandemic, as the goals of landlords may have shifted during these uncharted times.
Step three: DO the things that Asset Managers Do!
Ok, now we get into the nitty gritty, what do Asset Managers really do? I will provide a checklist in this chapter, but here is an overview of the major roles Asset Managers provide:
- Create an operating plan for the property
- Implement the plan
- Review all statements and property documentation
- Visit the property
- Find ways to increase revenue
- Find ways to decrease expenses
- Review all contracts
- Obtain bids for insurance renewal annually
- Ensure all bills are paid
- Confirm the management team is executing the plan
Simply stated: do these items often, then repeat! For example, review all the items in the manager’s monthly report, make sure you understand everything in the report, ask any questions necessary in order to answer any questions you have. The successful Asset Managers never stop doing these roles, and it continues (at least) monthly with reading every manager report.
In conclusion, make sure your property has an Asset Manager, whether you hire someone or fulfill the duties yourself. Remember this: the job of the Asset Manager never stops as long as you own the property, the Asset Manager is continuously reviewing, evaluating, questioning- making sure as time passes the “right thing” is occurring at the property. The job never stops!
Even though asset management is a continuous job, when done well the work is infinitely easier than rebuilding a failed investment property. When the Asset Management job is done correctly, the property has a dramatically higher chance of achieving success, regardless of what occurs in the real estate market.
If you have any questions about this article, or want more information on Asset Management, call Bernard Gehret at the offices of Joseph Bernard Investment Real Estate: 503.546.9390 or email: firstname.lastname@example.org.