What Does Asset Management Mean for a Passive Multifamily Investor?

Asset Management: a systematic approach to acquiring, maintaining, and trading real estate for optimum growth potential in order to maximize the value of your asset while maintaining an acceptable level of risk

How is asset management different from property management? 

Typically the first question from both active and passive investors is, ‘The asset already has property management, why is asset management needed?’ This stems from not fully understanding how the roles differ and what makes each individually essential in multifamily investment. The best way to illustrate this is through the roles each holds in the operations of a property. 

Why is asset management important?

When it comes to a multifamily investment, asset management has the power to be the pivot point between success and failure in the performance of that asset. Without the asset manager's role being fulfilled, a beautiful, slam-dunk investment can quickly struggle to be successful. Same for the flip side, by having asset management, a challenging project could be taken on with confidence and see a high performance. 

Best Practices

Passive investors rely heavily on the operator/syndicator/partner to know what to do or how to optimize a positive project outcome but the reality is many don’t know it is a piece of the process, and weren’t taught how to do it effectively, or don’t have the natural skill set/team to fill in that knowledge. This is why the number one piece of advice to new multifamily passive investors is to “vet your syndicator.” What does that mean? Following are five core best practices to look for in a potential partner to assess their knowledge or focus on asset management.

#1 Mission

#2 Vision

#3 Plan

#4 Accountability

#5 Communication

#1 - Mission

A clear mission for each property is critical. Think of the mission as a destination. If you were to take a road trip without knowing where you want to go first, it would be very difficult to get there. Setting the mission for your project first gives everyone a big-picture destination to shoot for giving you the best shot at successfully getting there. An example of a mission might be “we want to have a safer property for our residence”. 

#2 - Vision

Now that there is a set destination the path can be determined, this is the vision. Again, much like on a road trip, there are multiple routes, which is the best for the asset? The mission guides selecting the most applicable path while ensuring timing, efficiency, and quality standards are maintained. An example of the path would be “to increase safety on the property we are going to add lighting around the property, install new security cameras, install security systems in units, add security patrols.”

#3 - Plan

Once these previous two things are agreed upon, it is time to curate a plan for the asset. Each of these builds on one another and doing them in order sets the property up for the best success and potential for maximum growth. This is where we get granular and establish a detailed and accountable action plan. Using our example already established of increasing security, here we would start to detail a plan. How many lights, are placed in what locations, at what cost, and by when will they be installed. I think you see the pattern we are trying to create here.

Every plan should include at least the following:

• Liability and risk analysis

• Financial summary

• Performance goal setting

• Leasing and marketing review

• Market rent analysis and market surveys

• Retention and turnover review

• Other income analysis

• Renovation and capital plan

• Exit Strategy

#4 - Accountability

This practice comes in after the takeover and once everyday management begins. At the end of the day, numbers and data don't lie. To ensure the plan stays on target and everyone involved is doing the necessary actions, Key Performance Indicators (KPIs) are used for accountability. There are dozens of KPIs that need to be measured and monitored to ensure success and to demonstrate the need for adapting a plan as time goes on. However, there are a few that are top of mind at all times.

These are our top 5 KPIs we track to gain a general view:

• Vacancy/occupancy

• Delinquencies/collections

• Renovation timing

• AP Aged Invoices

• Economic occupancy

These, and more, are tracked weekly, monthly, quarterly, and annually to get an accurate and clear representation of the plan, strategy, and execution of the investment.

#5 Communication

Last, but most certainly not least, is communication. Clear communication happens throughout the process and across all roles in any successful project. When this happens varies based on the company/partner and property but as a passive investor, it is imperative that you are receiving regular communications on what is happening with the asset. This is to look at and ensure success in things like financials, property performance and progress, and any renovation/Capex updates (if applicable). If as an investor this is not a part of your experience it could be an indicator of the performance of your investment.

How to look for these best practices? 

Now that you have all the “why,” it is time for the “how.” The fastest, easiest way to look for these practices is to ask questions like: 

1. Will there be someone dedicated to asset managing this property? If so, what other roles does that person currently hold?

2. What reports will I as an investor be receiving throughout the hold period and when?

3. Will there be a renovation plan in place with the property management team? 

Another way to do this, if you don’t have a relationship with the operator, is to look at the information you were given when investing or what you receive when you go to invest. This could include an investment pitch deck, subscription agreements, or investment standards. Some of these things could also be covered by including particular team members, for example, hiring an asset manager or third-party asset management firm.

In Conclusion

Asset management is vastly different from but works in collaboration with property management, and without fulfilling those roles it has the power to turn a good property into a bad investment. However, as long as each asset creates a mission, vision, and plan, and practices regular accountability through KPIs and communication with its investors it is satisfying a large majority of the necessary actions associated with successful asset management.