5 BEST PRACTICES FOR MANAGING YOUR ASSETS
There are consequences for not managing the asset
Beth’’s investment group has a few days left in their “due diligence” phase before they complete the purchase of a large multi-family complex.
They are discovering the poor asset management by the current owner.
“Set it and forget it,” may be a good slogan for a TV commercial, but is proving costly for the current owner.
He is an absentee owner and hired a property manager to manage the complex. It appears the property manager has not only been misreporting income and expenses, they also have not been performing maintenance on the property as they had reported.
Beth’s investment group’s audit of the financial records and unit-by-unit inspection of the property documented a greatly reduced value for the property and resulted in more than $1 million lost by the current owner because of his poor management of the asset since he bought it.
We realize the critical importance of managing the assets we own.
Poor asset management can happen with your own personal home, with your single-family rental properties, or with any asset.
WHAT IS ASSET MANAGEMENT?
You might be asking the question, what is “asset management” and what is the difference between property management and asset management?
I once heard that asset management is managing the property managers. And this is true. Asset management is a level higher, different than simply managing the property – collecting rents and paying bills.
It is one thing to manage your properties – be they single-family homes or large apartment complexes.
Property managers deal with the day-to-day and week-to-week management of qualifying new residents, making necessary repairs, collecting rents, and paying the bills. Their focus is keeping the property maintained and occupied with residents who pay on time.
You may be your own property manager or you may choose to hire one.
But whether you do or don’t do your own property management, there is another very important element of owning a property. It is called “asset management”.
Asset management is more. Asset management deals with the whole life-cycle of the property. It starts with the decisions about acquiring the property in the first place and continues all the way to the decision to sell the property along with everything in between. This includes day-to-day and week-to-week property management.
The asset manager sets the goals for the property and is continually evaluating progress toward accomplishing these goals. The scope of asset management does include the operation of the property and more.
Perhaps the owner of the property at the top of this article was lazy. Perhaps he didn’t know he needed to do more than he was doing. Perhaps he was distracted with other matters in his life. For whatever reason, he didn’t manage his asset and it cost him.
If you own an asset, let’s say an apartment complex, here are FIVE things you would be wise to do as the manager of the asset. Perhaps you can think of others.
1. GET AND STAY CLEAR ABOUT THE BIG PICTURE AND GOALS FOR THE PROPERTY
Your job is to look at the big picture…from beginning to end, from acquisition to the eventual termination of ownership.
BE CLEAR ABOUT YOUR GOALS FOR OWNING THE PROPERTY. Is it cash flow? Is it appreciation? Is it tax benefits?
Develop an initial business plan and make adjustments over time, probably at least annually. This would be strategic adjustments based on the goals and the market as it changes.
Maintain this clear understanding of your why. This “why” will guide your decisions over time.
BE AND STAY AWARE OF THE MARKET, not just as you make decisions about its purchase, but over the life of the property. Things change. Markets change. Keep your pulse on the market at all times.
For example, the path of progress in a community may change. The tax laws may change. The highest and best use of the property may change. Or the needs of your investors and owners may change.
The market may even dictate a change in your objectives after you purchase a property. For example, a sudden drop in prices could change a quick turn into a long-term hold. Or an unexpected high offer could turn a buy and hold property into a quick sale.
IDENTIFY THE RISKS AND REWARDS. We find it helpful to develop a list of the risks and the rewards of a particular property.
Classic elements of this are the life-span of roofs and major systems. As the manager of the long-term ownership, build in capital reserves to handle these elements that wear out over time. Anticipate hazards and mitigate the risk with appropriate instruments, like insurance. “Key man” insurance is something that needs to be understood along with the standard ones like liability and windstorm and fire and the like.
COMMUNICATE REGULARLY WITH STAKEHOLDERS. You usually have several different stakeholders, such as the company that made the loan and your investors who provided the equity and capital reserves needed to buy and own the property.
As the asset manager, maintain good relationships and communicate clearly and openly to those who have an interest. You have fiduciary responsibilities during the purchase phase, during the ownership phase, and through sale of the property and distribution of profits.
Track and provide the necessary information and documents throughout the yearly cycle of ownership.
2. PROVIDE THE APPROPRIATE RESOURCES NEEDED TO ACHIEVE THE STATED GOALS
At the time of purchase, the asset manager not only provides the resources (read money) to be able to close on the property and take over ownership, they make sure a plan is in place to have adequate resources to operate the property.
FINANCIAL RESERVES. Determine the appropriate amounts of operating and capital improvement reserves to keep.
Anticipate the worst-case possibilities, as best you can, and plan ahead of time to be solvent in these times.
Anticipate changes in interest rates on loans when balloons come due. Note the “break-even” point necessary for the property. Be prepared, here in Florida particularly, for insurance co-pays should there be a hurricane or fire or other hazard.
Investors do not like a capital call surprise.
BUILD A TEAM. Build the team necessary to operate the property and business profitably and successfully. As an asset manager, you will often have the responsibilities of choosing professionals such as bankers, attorneys, accountants, bookkeepers, insurance agents, and property managers, among others.
Along with the property managers, the asset manager will want to qualify the vendors and others who serve the property year to year with other skills and materials.
Your clear objectives for the property will guide your decisions about the resources needed and about decisions regarding their allocation.
3. WRITE CLEAR OBJECTIVES AND A SMART PLAN TO ACCOMPLISH THE GOALS
When the asset manager has all the information he needs and has noted the choices that need to be made, it is time to put it into writing.
WRITTEN DOCUMENTS. If a syndication or a set of partners are purchasing the property, the necessary documents will be put into writing and reviewed and agreed upon prior to the purchase. These might include items such as: partnership agreements, a private placement memorandum, operating agreements for entities, roles and responsibilities of the various managing parties, etc.
Among the documents are the written business plan, the budget for the first years of operation, and a clear statement of the overarching goals or objectives for owning the property.
TAKING CARE OF RESIDENTS. Some say the biggest asset for a multifamily property is the group of residents. These are the “customers” of this business and it is they who will ultimately be paying the bills.
Most complexes have a goal of a certain level of both physical and economic occupancy. The people who choose to sign leases, along with the rents and other income collected from these people, are key to achieving that goal.
If you allow the property to deteriorate it will become an undesirable place to live. Then the property will have high turnover, and perhaps high vacancy, and added costs or reduced net operating income.
REDUCE EXPENSES AND INCREASE INCOME. The asset manager works with the property manager to make decisions that will have an effect on the expenses and the revenue. In order for the property to have a profit, if this is a part of the overall objective, the expenses need to be controlled and kept to a minimum without neglecting maintenance. Always challenge any increases in property taxes, which can be one of the biggest expenses.
Find ways to increase income. This will not always be with raising rents. This can come with reducing resident turnover, providing additional services such as laundry machines, and charging appropriate individual fees such as for pets, etc.
4. MANAGE YOUR TEAM TO STAY ON TARGET TO ACHIEVE THE GOALS
The owners of the property described at the top of this article were not operating the property as a business. The asset manager’s job is to see that best business practices are employed. Owning a multifamily complex is a business. Learn to be efficient and effective as you work toward your stated goals.
PUT SYSTEMS IN PLACE FROM DAY ONE. Although the property managers are responsible for the day-to-day operations and the asset manager would be wise not to micro-manage, it is important for the asset manager to understand the various systems for owning a property. Marketing, leasing, turning apartments, resident communications, financing, investor relations, and risk management are just a few of the systems to have in place. It is best to have these systems in writing, with step-by-step instructions, including dates and responsible parties, and checklists.
TRACK KEY INDICATORS. The asset manager can track a few key indicators including vacancies, revenue collected, expenses, etc and know when to intervene and ask questions.
5. SELL THE PROPERTY WHEN THE GOALS ARE MET
The final element is the eventual sale of the property. When the goals are met, plan and execute an effective sale of the property. Know when the market is telling you to sell. Adjust your objectives based on what the market is telling you.
Prepare a sales plan and execute it wisely and you will have completed your responsibilities with this property and can move on to asset manage the next one.
WHAT ELSE? In this short article, we have hit some of the high points of asset management. We invite you to help us improve. What have we missed? What might be made more clear? What was helpful?
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Harland leads our Investor Relations. He is a “repurposed” Pastor and Army Chaplain. He is an author, speaker, mastermind facilitator, and coach. Harland lives with his wife, Barbara, in DeLand, Florida.