From Active to Passive
You’ve probably noticed that there’s lots of attention on real estate syndications, passive real estate investing, and multifamily investing these days.
You might be one of those newcomers to the subject looking to learn more.
It’s really no surprise that people are so attracted to the prospect of achieving financial freedom through their real estate investments.
I would wager that 99% of people, once properly educated, would be attracted to that possibility.
All of this excitement and new energy is great, but it can also lead to lots of information being lost in translation as new people enter the space.
One thing I’ve noticed is that people are starting active real estate investing companies that raise investor money to purchase real estate, but their mindset and approach is that of a passive investor.
Let’s set the record straight here: if you’re a syndicator or general partner in a syndication, you are not passive at all!
You should be far more active than any other type of real estate investor as you are managing far larger portfolios and have investor money depending on your performance.
As general partners in a syndication, there are three key responsibilities you must dedicate yourself fully: acquisitions, capital raising, and asset management.
One of the areas that our company puts a tremendous amount of focus on is asset management.
Unfortunately, this is one of those roles that newcomers to the space might overlook, or, worse yet, be completely ignorant of.
Let’s say you’re new to the space and just syndicated your first deal.
The excitement is in the air after your closing and you feel like you just scored the game winning touchdown in the super bowl!
Don’t get ahead of yourself, though.
While sourcing deals is one piece of the puzzle, even more important is your ability to act on your business plan.
In real estate investing, this is known as asset management.
If your business plan for the property included increasing the rent or reducing expenses, you have to actually then act on that plan and make your vision a reality.
If you don’t, you won’t meet your goals for the property.
The truth is, asset management is the domain of real estate investing where the actual money is being made.
As we mentioned earlier, this involves taking an active role in the management of the property. As the owners, you have to be heavily involved in this and watch over every element of it.
A simple way of understanding the role of an asset manager is they manage the property manager.
Asset management involves closely monitoring the property’s finances, but there’s much more to it than just looking over reports quickly from your computer chair.
It’s an active, full time role that many beginners overlook.
We want to provide you with the knowledge we’ve gained through years in the trenches, so you don’t have to learn that the hard way.
In a sense, asset management is like an enhancement that works in tandem with your property management team.
Asset managers need to work very closely with the the property manager’s staff at every level of the organization as it relates to your property.
They translate the goals of the investors and general partners into action.
The asset manager is the one that is making sure the investment’s goal are being met.
They need to be in place from the moment you close on the property to ensure that your projected returns are being realized.
The first step to giving your asset management plan a chance for success is thoroughly, painstakingly vetting your property manager before signing them on.
If you work with the wrong property management company, asset management can quickly become a nightmare.
That said, even the best property management companies need an asset manager watching over their shoulder in order to achieve the best results.
Here are a few steps to great asset management for your multifamily investments:
1. Weekly Calls:
There are two important members of the property management company you should be contacting at least weekly.
A. Regional Manager:
Each week you should be speaking to the property management company’s regional manager.
These calls can be biweekly during the early phase after the acquisition, which requires additional focus from your team.
The calls should focus on a variety of topics, depending on what your vision for the property is.
For example, an important topic to be focus on during the early phase in the life of your hold period for the property, is potential sources of new revenue streams you could implement.
You want to be giving the regional manager a top-level rundown of your goals, which will vary over time.
This all might seem a little redundant on paper, but it’s you and your investors money on the line and even a great property management company needs additional oversight and communication on what you are trying to achieve.
One important thing you should be doing in your calls with the regional manager is demonstrating your awareness of market conditions.
You should know what comparable properties are leasing for, vacancy rates, and market concessions.
It’s much more difficult for a property manager to slack off when you are not only aware of how things should be, but also prove to them that you’re watching.
Another thing you should be doing every so often during your calls with the regional manager is performing audits of different expense items.
These should be random and unpredictable so as to keep the property manager honest. For example, you could request every invoice related to common area cleaning one month, and then switch that to all maintenance related invoices the next month.
B. Site Manager
Weekly review calls with the site manager. You need to be working with top-level organizations within each submarket you’re investing in that have the resources to appoint a site manager for each property they manage for you. These calls can be focused more on physical issues or any problems with leasing.
2. Monthly Site Reviews:
In addition to your weekly calls with the site manager, you should be conducting monthly site reviews.
Check in on an in-person level any issues that might have gone overlooked from a distance.
During these visits you should meet with all the staff, tour through any vacant units, and meet in person with the regional manager, site manager, and leasing staff.
Keeping a close relationship with each cog in the machine keeps pressure on the property management company to perform at a high level as they see how seriously you take the investment.
During these visits, you should also investigate to see if there are any tools or methods that could help the property management team up their game.
An example of this might be if you are investing in several markets and your property management’s maintenance team in one of your other markets has implemented new software that has led to work orders being completed more quickly.
Proper asset management would involve you leveraging this knowledge and helping your property manager implement this software as well. As we said, it’s your money on the line.
TIP: During your site visits, take a look at some files to ensure they match the information in your system.
Look at things like move in dates, rental rates, and budget items that have physical copies were input accurately into the property management software system.
3. Forensic Accounting:
This is one of the most time consuming and important roles of asset management.
This is simply investigative accounting that arises from some minor discrepancies you notice when monitoring the property’s reporting.
Property managers learn to hide certain things over time in order to make themselves look better that are easy to overlook.
You need to be very meticulous in assuring that the reports you are receiving from your property management company are accurate.
For example, a property management company might claim your property has full occupancy, but they are fudging the numbers slightly in order to give that impression.
Let’s say you had a tenant moving out on the 31st of the month.
The property manager is supposed to be providing you with their monthly reports for the asset on the 1st.
An unscrupulous property manager could simply delay entering the information that the tenant had already moved out until the 2nd or 3rd, after you had received your report.
This might give you the impression of higher occupancy, even though that’s inaccurate.
Forensic accounting will uncover these discrepancies due to the lost revenue, but you need to have someone who is dedicated full time to these kind of tasks or you’re leaving money on the table.
4. Mystery Shoppers:
Mystery shopping is a technique that companies can use to discretely measure the performance of their staff or marketing techniques.
If you were a sales manager, for example, you could pay a company in order to pose as a prospective buyer of a product to see how your sales staff perform “in the wild.”
When looking at multifamily real estate, a great way to leverage mystery shoppers is to test how well your property management’s leasing staff is performing.
They will pose as prospective tenants and can test out the staff’s performance both through calls and in-person unit tours.
The mystery shopping service will record with either audio and video and provide the recordings to you thereafter.
This is a great way to test responsiveness and professionalism from the leasing staff.
Make sure to use this method at least once a quarter, as staff can change over time and you don’t want to run off of a good impression you had that is no longer accurate.
One thing that people find as they gain more experience in multifamily investing is that tenants rent from the staff, not because of how great the property itself is.
If you’re following proper investment principles and have a solid product, the main variable is the people involved in the transaction.
If your mystery shoppers proved your leasing staff are not doing their jobs properly, the asset manager starts probing more deeply to understand where the failure is and how to fix it.
You would be looking at what kind of closing ratio the leasing staff currently has.
If you found, for example, that a recently vacant unit were shown to 50 prospective new tenants, but there was only one rental application submitted, you’ve now confirmed there’s a problem with the people themselves.
If you had only 1 application out of 50 showings, but your mystery shoppers left you with a good impression of the staff, you might need to look for other reasons for the problem, such as an outdated floor plan.
One bad person in the management chain can cause tremendous problems that have ripple effects throughout the property.
For example, if the agent that is in charge of touring prospective tenants through your units is rude or misses appointments, you can expect your occupancy to plummet, even if the property manager is really good at staying on budget.
There are situations where it might be appropriate to work with the property management company to select new individuals for these roles.
Of course, if the whole organization is rotten, you can fire the entire property management company, but that’s a drastic step with consequences.
It’s sometimes all about identifying the weak link in the chain.
5. Financial Monitoring:
Here’s a rundown of all of the financial metrics, reports, and items you need to carefully monitor as an asset manager.
Net Operating Income – the thing you’re looking for here is consistency. Where changes are noticed, there needs to be further investigation.
Occupancy – You should be looking at both physical and economic occupancy rates. It’s important to pay attention to economic occupancy, as it’s easy to go unnoticed when looking purely at NOI. For example, new or variable revenue streams like lost key fees could obscure dropping occupancy if viewed purely through NOI.
Profit and Loss Statement – A good asset manager should be aware of all of the nuances of a property’s P&L. This is the statement that varies the most and changes can most easily be identified. You should have live access through your property manager to watch the general ledger each day as new expenses come in.
TIP: When you’re monitoring your property’s P&L and trying to find areas of improvement, remember that revenue is the first thing you should be focusing on.
Expenses can be lowered where there’s waste, but there are diminishing returns. You can’t lower the cost of your common utility expenses to zero if you put a lot of effort and time into it.
On the other hand, it’s much easier to identify reasonable new revenue streams, such as pet fees, that you could implement and have an immediate impact on your NOI. Areas where expenses can be reduced are often in inherited contracts from the previous owners, like the property phone services.
Variance Reporting – These are simply reports that show the difference between budgeted items and their actual cost. It’s great when the property manager provides super detailed variance reporting that explains in detail why and where variances occurred, but that’s not always the case.
As the asset manager, you’ll need to go line item by line item to understand where budget variances occurred, why they occurred, and how to prevent future variances or update budgeting to more accurately reflect real costs.
A typical asset management fee for a real estate syndication is 1-2% of invested funds in a deal.
This is typically not enough to compensate someone’s salary, so if you are looking to become a syndicator yourself, it is imperative that you or one of the managing principals are experienced with asset management.
Beware of real estate syndicators that are not paying attention to asset management and using best asset management practices.
It is easy for novices to assume the property manager in and of themselves are sufficient, which is a recipe for disaster.
A good property management will work hard to keep you on budget and meeting targets, but an asset manager is the one that gets you under budget and performing above expectations.