Back to the Basics of Asset Management in a Challenging Market
Three Phases of the Multifamily Investment Life Cycle
By Sean Thomson
Asset managing multifamily projects is difficult enough in the best of times, but when things go wrong it can become challenging. There are three major phases of a multifamily investment life cycle: acquisitions, operations, and dispositions. Each phase has its own processes, strategies, and challenges. Within each phase are also a variety of roles that make it all possible. Before diving too far into it, let’s set a foundation.
WHAT IS ASSET MANAGEMENT?
Asset management is a systematic approach to acquiring, maintaining, and trading real estate for optimum growth potential to maximize the value of the asset while maintaining an acceptable level of risk. It is the middle ground between property management and ownership and the bridge between the investment model and the physical asset. It is also the checks and balances between all the roles and is the pivot point between maximum success and failure.
How is asset management different from ownership or property management? In a typical multifamily syndication the ownership is responsible for deal sourcing, team building and management, and all capital related items. Property management is the daily oversight of the property through onsite operations, repairs, maintenance, security, and upkeep.
Each of these roles has a clear focus: ownership is the long term outcomes, asset management is mid-term impact, and property management is short term damage.
Phase 1 // ACQUISITIONS
This phase is all about discovery and creation. Commonly, this phase is just seen as only the ownership role sourcing deals. While that is a large aspect to this phase, it is so much more.
Underwriting
This part of the process is solely focused on discovering a deal that meets investment criteria, discovering the opportunity in its acquisition, discovering the risks, and discovering the most effective strategy. In this phase, asset management is trying to find all the possible risks and all the possible opportunities. Where it can get tricky is deciphering which is which. It is far too common for owners to see the risk but not understand how to eliminate, reduce, or manage that risk to create opportunity or on the other hand, seeing the opportunity but not how it could be a problem. The assessment of these risks begins by asking questions:
» Are these assumptions realistic to the demographics, location, and current operations of this asset?
» Will the demographics and locations of the asset support the expectations of the investment model?
» Are these expectations truly feasible?
» Are the rental comparables accurate and effective?
» Does this model allow for pivots, setbacks, or pitfalls?
Due Diligence
Due diligence still heavily relies on discovery, but this part of the process is also where creation begins. The discoveries now can no longer be put in the deal killer category of risks. It is all about planning and strategizing how to mitigate and manage the risks. This discovery includes:
» Financial audits
» Rent roll & lease audits
» Building inspections
» Market analysis
» Legal audit
» Marketing audit
As the discovery process happens, creation will start to take form: creation of the mission, vision, and plan for the asset. Each asset needs to have its own mission, vision, and plan that guides the investment model and operations to ultimately reach the targeted goal
or exit strategy.
Phase 2 // OPERATIONS
The money has been wired, the documents have been signed, and the key is in hand. This is where experience takes the lead. Operations is all about mitigation and optimization. In uncertain times and without the proper asset management foundation, this phase can be overwhelming and complex. When markets tighten up and competition for residents intensifies, it is important to focus on lead generating efforts and resident experience. Here are a couple of suggestions:
Customer Service
Standing out against the competition is a key strategy when times are tough. Why would a prospective resident rent this asset versus all the other options in the market? Customer service could be as simple as ensuring the on-site team is always available and answering the phones or ensuring the website is up to date. A well-thought-out customer service plan could be the difference between a cash-flowing asset and one that struggles to cover expenses.
Marketing Analysis
Rental revenue is the largest contributor of income in multifamily properties. It is crucial to understand the asset’s resident market and where those people are coming from. The answer to all this is in the marketing strategy. What marketing efforts are driving demand most and which ones are not? Key performance indicators for marketing are the conversion rate and monthly expense amount. Finding the right targets for each of these will keep the asset’s occupancy high and resources needed low.
Everyone Needs to be on Board
Even if one member of the team is not 100% invested in the project’s goals, big problems are more likely to occur. Everyone from the ownership, all the way down to the subcontractors and onsite property management team, needs to be working toward the same goal. It’s the asset manager’s role to set the tone and be a great leader. Set high expectations using the mission, vision, and plan created during due diligence and monitor progress every week, month, quarter and year. The asset manager is the lynchpin that holds everyone together. The more engaged everyone is, the more optimization potential the property could have and the more willing the team members will be to give input and feedback.
Data Driven
Numbers do not lie but knowing what to look for and how to read them is critical. Our top four KPI’s (key performance indicators) are:
» Occupancy/vacancy — This number in combination with unit availability speed can be full of information and optimization possibilities.
» Delinquencies/collections — The market and tenant circumstances will change so this is a critical metric to watch. Keeping good lease records on the asset’s residents and where they are employed will aid in predicting how specific industries are impacted by market changes.
» Accounts Payable/Aged Receivables — The clarity of what invoices are pending, when they are being paid, and how long it takes can be eye opening. If there are delays, it could present the question of, “is there a problem with cashflow or is there an issue needing to be addressed within the property management team or operations?”
» Economic Occupancy — When is the right time to offer concessions? If there is a struggle to keep occupancy rates up, concession offers may be the solution. Temporary and lower impact concessions could be 1 month free rent or 3 months rent for $100 off.
Stay Informed
Change is a certainty in this world. Understanding the market and nuances of the multifamily niche is imperative to ensure the success of an asset’s business plan. Learning and seeing trends quickly, allows for ease of pivots without jeopardizing the entire project. This could simply be done by completing market surveys every month to determine if rents are headed in the right direction or the opposite. Stay proactive and not behind the curve.
Phase 3 // DISPOSITIONS
The last phase in the multifamily life cycle is disposition. With good asset management principles in place, this phase is likely to be smoother and more manageable.
Physical Asset
When it comes to setting an asset up for a disposition, the physical asset plays a huge role. Much like when meeting a person, first impressions count. Ensuring the curb appeal is clean and maintained can make a world of difference.
Broker Selection
Similar to the property management team, the selection process of the brokerage team can make or break the maximization of this process. Communicating and illustrating the goal and plan is key to optimizing this aspect.
CONCLUSION
It is important to note that the items and suggestions mentioned are not the entirety of good practices for successful asset management. Asset management is a role of processes, systems, experience, wisdom, and time. At the end of the day, it is owed to the community of residents, the staff and investors to perform the role of an asset manager effectively.
