Are you wondering if you should hire a real estate asset management company? Or are you asking what the heck an asset manager is? If so, you’re in the right place. Read on to learn more.
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- What Is Real Estate Asset Management?
- Buying Real Estate As an Investment
- How Real Asset Management Works
- Asset Management vs Property Management
- How to Hire an Asset Manager
When most people hear the term asset manager, they automatically think about a stock portfolio manager. But they also exist in real estate. An asset manager is often critical to an investor’s ability to manage and grow a property portfolio.
Asset managers and the companies that they work for help real estate holdings rise in value while also managing risk. Ultimately, this produces superior returns.
Before you can find a great real estate asset manager, you must first understand their role and how they help your property make more money or increase in value.
As with any investment, real estate has its risks. Working with inexperienced or subpar asset managers could increase that risk. Always do your homework.
What Is Real Estate Asset Management?
The real estate asset management company is the firm tasked with overseeing a real estate portfolio’s valuation components. The company works on behalf of investors.
And it doesn’t manage the property’s tenants, but pays attention to market conditions, property pricing, and to determine strategies to improve the value and equity.
In many cases, asset managers oversee a company’s entire portfolio to ensure the property managers, leasing agents, and contractors are performing as expected. Think of them as a manager of the managers.
However, the property manager may also be involved in taking the portfolio and leveraging it into other investment opportunities – such as borrowing equity from one asset in the portfolio to acquire a second or third (or more) property.
The asset managers play smultiple roles in the management of the property’s use as an investment. This includes being a lending intermediary, venture capital negotiator, development strategist, acquisitions lead, and sales facilitator.
He looks at the overall portfolio the same way that a stock portfolio manager looks at buying, selling, and redistributing equities within a portfolio.
This is very different from the real estate property manager, who oversees the day-to-day operations of the building to include tenant occupancy and maintenance.
Buying Real Estate As an Investment
Of course, we all think of real estate as an investment, but many people don’t think of it as an asset that can be used in more significant financial growth strategies.
The reality is that many major investors, private and public companies, and government entities buy real estate to hold or develop with the strict intention of turning a profit on it.
There are several theories investors subscribe to when buying real estate as an investment asset. The most traditional approach is the buy-and-hold strategy where the property is purchased and leased out to residential or commercial tenants.
Some properties are bought at discounts to be flipped in either a fast or slow turnaround for profit. Yet, other properties are purchased to be subdivided to be either sold or leased.
“The success of any real estate investment is based upon an investor’s ability to develop and execute a sound business plan, which is the primary responsibility of an asset manager.”
— Paul Garancis, Transwestern Investment Group
Then, of course, there is a mix of these strategies depending on the market conditions. The difference between real estate and other investments is that real estate is tangible with many strategies that you can employ to help it grow. This is the strength of the real estate asset manager.
How Real Estate Asset Management Works
Real estate asset management is a service provided by a contracted company; the company has the legal authority to use capital investments to purchase properties. The way the service works depends on how the contract is established.
Some companies may have complete control and autonomy to work on behalf of clients, much like a mutual fund manager controls what is bought and sold.
Another structure is where the asset management company finds the opportunities and presents the deals to the investor for approval.
How an investor chooses to structure the relationship is contingent on their experience, trust, and total asset value. Some real estate asset managers may have a minimum portfolio value in the millions before they agree to work with clients.
In fact, many partnership contracts require the real estate asset management companies are required to be a custodian and fiduciary.
When the contract is being negotiated, the asset manager takes the time to thoroughly vet the potential client based on risk tolerance, experience, and overall circumstances involving the capital or the properties in question.
When You Need an Asset Manager
In the same way that the stock market is continually changing, there are unique trends in the real estate market that the average property investor may not be aware of.
Additionally, many property portfolios are held in partnership or family trusts where there is a wide range of experience and knowledge on how to manage the property best.
The property manager is there to look after the investors’ best interest based on the overall objectives of the portfolio. This means that the real estate asset manager doesn’t just monitor the trends.
Additionally, they predict where challenges and opportunities will present themselves. Maybe new legislation in a community leads to gentrification and revitalization of an area.
This creates a huge opportunity, and the manager knows how to spot these trends. The goal is always to exceed the fair market value.
On the flip side, with changing market landscapes, inexperienced investors might hold a property too long because they don’t see trends like an asset manager does.
Ultimately, commercial and rental property investors need an asset manager to advise them and protect their interests. The asset manager sees things while the investor is busy with work or life; no opportunity is missed as a result.
Asset Management vs. Property Management
In a nutshell, a real estate asset manager seeks ways to improve the overall value of the property while the property manager oversees the daily operations.
The asset manager seeks ways to flip a property, develop it, get more significant revenues from tenants for the same property, or to leverage one into another.
The property manager deals with tenant issues, vacancies, maintenance, and general improvements. The asset manager doesn’t collect rent, call a plumber, or enact a lease agreement.
Instead, the asset manager wants to find out how to use the same property to make his client more money. This could be refinancing to lower interest rates and maximize rents.
Or it might be to redevelop it for a marquee client, or to subdivide and sell for profit. The property manager is not concerned with local real estate values, while the asset manager is obsessed with them.
The Duties of a Property Asset Manager
Because real estate is thought of as a slow investment – things don’t move at the same pace as an actively traded stock – it can be easy to dismiss the value of a great property asset manager who sees trends and acts on them.
Garancis also mentions that that real estate management is very active.
… [Real estate seeks] to create value by finding operational efficiencies for an individual asset or for the portfolio by making strategic leasing decisions, securing favorable financing, and positioning each investment for disposition. Real estate is not a passive investment and requires active oversight from a qualified asset manager in order to maximize the value of a portfolio of properties.
The core duties of a real estate asset manager include:
- Hiring a competent property manager
- Reducing expenses
- Preparing financial projections
- Developing financing strategies
- Establishing exit strategies to maximize profits
- Managing cash flow
- Advising the investor on debt and equity structures
- Deal with investment partners on behalf of the investor
- Establish a holding period for each property to maximize growth
The real estate asset manager acts as a fiduciary and must always work in the best interest of his clients. If the asset manager has two clients with a competing interest (one buying and one selling), the asset manager must disclose the relationship.
Any transactions that potentially overlap must be disclosed in writing. After all, fiduciary means having the client’s best interest at heart, and real estate is no exception.
Three Phases of Real Estate Investment Management
While there are multiple strategies that an investor can employ within a real estate portfolio, they all come down to utilizing the three phases of real estate investment management.
The three phases are the acquisition of properties, holding of assets, and the disposition to exit the investment.
While you may have already acquired the property before hiring a real estate asset manager, understanding the acquisition phase will help you best utilize your relationship.
The asset manager’s role in the acquisition phase is to project rents and vacancy forecasts, seek out the best financing terms based on available interest rates and capital resources, strategize income streams, and project cap rates and yield trends.
During the holding of the assets phase, the real estate asset manager is overseeing how the property manager is conducting property operations.
This includes reviewing lease terms, seeking out ways to reduce costs through operational budget cuts and to look at strategies to maintain and improve cash flow based on existing and new leases.
For example, this could be finding an end cap tenant that makes the retail location more desirable for other tenants, thus increasing the value of lease space.
The disposition phase involves more than just listing the property for sale at the highest market value. It creates a plan for the most profitable way to dispose of the property while keeping in mind market trends to prevent losses.
Disposition of property could involve a program that subdivides it, improves it before selling, or using a 1031 exchange to replace the property before committing the final sale.
The 1031 exchange allows property owners to defer taxes when selling one property and investing in a new, like-kind property. For example, say you are selling a retail building.
You’d have to identify and purchase a similar property within 45 days. And the transaction must be completed within 180 days. Usually, great asset managers have identified several opportunities before starting the disposition phase of any single property.
How to Hire a Real Estate Asset Manager
Getting the right asset manager requires more than just finding someone who has some experience in real estate assets. There are a lot of factors, including the type of property and geographic region that factor in.
Garancis elaborates with three things to look for when hiring an asset manager for your real estate portfolio:
- “It’s crucial to find someone who has experience with both the property type and geographic location of the real estate portfolio they will oversee. Different skill sets are needed for each property type, and having a familiarity with the local and regional areas is also important.
- An asset manager who has worked with similar investors or firms will benefit from insight as to the investor’s objectives.
- Find someone with a good reputation in the industry will provide advantages as real estate is a relationship orientated business.”
It goes without saying that you want to hire someone that you feel you can trust and speak with. You want to enjoy this relationship and not feel like you are always fighting to be heard or have your way.
Remember that the real estate asset manager works for you and should be willing to sit down and explain their processes in detail. A bad manager can easily run your portfolio into the ground, so take your time to vet all options before signing a contract.