In the world of investing, the term “passive” is widely overused. This is exceptionally true when it comes to real estate investing.
Since most active investors are also working professionals, the phrase “time is money” is one nearly all investors eventually become widely aware of.
As one begins investing, they come to understand the importance of being a truly passive investor and how their time is indeed money.
For that fact and many others, investing in certain real estate vehicles such as real estate private equity funds or REITs may be more beneficial for some than others.
Although investing in REITs holds its advantages over investing in private equity funds and vice versa, they both have one main feature in common: an asset manager.
An asset manager, not to be confused with a property manager, is, in a sense, the investment property’s project manager on a very high level.
Typically, an asset management company is hired as a team of asset managers that will oversee the property. Therefore, the asset management company is technically the asset manager.
The additional team power is exceptionally useful when managing larger properties that perhaps were purchased by ultra-high-net-worth individuals, family offices, and/or companies that have no experience or expertise on how to effectively manage the property.
What Asset Managers Don’t Do
It’s easier to start here as there is really not much they don’t do. To put it shortly, even for the tasks they do not physically handle themselves, they are still in charge of delegating and ensuring that they are completed.
For instance, while an asset manager’s responsibilities and project scope vastly differ from a property manager’s, an asset manager is likely responsible for identifying, vetting, and selecting a property manager to work with.
The property manager is responsible for advertising, screening and evaluating potential tenants. Property managers also oversee the property’s maintenance.
An asset manager must ensure that the property managers are provided with strategic market rental rates and are adhering to the budget. This example is just one of the many responsibilities that an asset manager carries.
From The Beginning Of The Process
Even before an investment property is purchased, the asset manager is well at work. They are hands-on and remain involved throughout every stage of the process.
The asset manager starts by identifying an investment that suits the risk objective and possesses the investment characteristics that their investors are seeking.
They might have to search through tens, even hundreds of properties, and underwrite each one before they can find one that meets their checklist.
Underwriting a property can be a very tedious process that can take days, even weeks to complete. The asset manager is seeking to establish specific information like the property’s debt-service coverage ratio (DSCR), net operating income (NOI), or the loan-to-value (LTV) ratio. These numbers are all vital data that can propel a deal forward in the due diligence review stage or instantly have it thrown out of consideration.
Considering that an asset manager may have to process handfuls of underwritings to find one worthy prospect, their personal investment and “sweat equity” in a deal begins long before any capital is invested.
Ensuring Everything Goes As Planned
Once the “perfect” property has been selected, the asset manager will assist with finalizing and closing the deal. This step usually warrants an “acquisition fee” that is paid to the asset manager.
The asset manager will then be responsible for creating a business plan and property performance plan for the investment. The business plan will state the asset’s investment time horizon, down to the projected rent per unit. It is a metric of measurement that the asset manager will use to ensure that they leverage the most strategic investment plan, thus maximizing their client’s investments and returns.
The type of property being acquired significantly impacts what roles the asset manager will have to fill. To illustrate, for a multi-family investment, the property manager may be the one who negotiates the rent terms with individual tenants.
However, with a commercial investment property, like a warehouse or shopping center, the asset manager would likely be the one who negotiates the lease terms directly with the client.
The same holds true with a new construction investment. While the asset manager may not do any of the physical labor themselves, they are responsible for hiring and managing the general contractors.
Numbers Don’t Lie
You can expect the asset managers to know their numbers the best. They constantly perform competitive market analysis on market rates and similar properties performance. Asset managers frequently adjust their rent rates or property budget accordingly.
Along with ensuring that their property is operating to produce maximum returns on investment, they frequently run scenarios or hold-sell analysis. They are continuously evaluating how to maximize returns.
For asset managers, there is no such thing as “passive investing.” In most cases, they are even tasked with providing their investors with reports, whether monthly, quarterly or annually.
In the scenario where a property disposition makes the most sense financially, the asset manager will oversee this process. This approach includes finding a seller to represent the property and negotiating numbers as well.
As you can see, the asset manager holds a great deal of responsibility and influence over what performance standards an investment is held to.
By this point (possibly even earlier), you may be asking yourself what the benefit is to the asset manager or why they would take on such responsibilities.
Of course, any real professional is focused on their track record and building a reputation for themselves, including an asset manager. Yet another factor for them is the asset management fee they receive.
Main Fees
There are other fees that an asset manager receives throughout an investment property’s life cycle on top of an acquisition fee. This includes an asset management fee, and in some cases, a performance fee.
Asset management fees vary depending on the size of the investment property, and the duration of the hold. These fees also depend on how involved the asset manager is, or what tasks they are responsible for, and more.
More commonly, you will see asset management fees average around 2% annually on all invested equity or the total value of the property.
While the entire asset management fee collected may not be 100% distributed to one person, the asset manager usually receives the majority of it for their role in effectively managing a dividend-producing asset.
Asset managers are usually incentivized with a performance fee. If the property performs better than they had expected based on their original forecast, there may be a performance fee, or reward promised to the asset manager. This usually comes by way of a “hurdle rate” – or the rate of return an investor must achieve before the asset manager can earn a share of the profits.
The fees we just covered are more than likely part of every deal that involves an asset manager. The following fees we will cover may not apply to every deal.
Situational Fees
Similar to the acquisition fee an asset manager gets paid once the property has been acquired. A disposition fee will also be paid to them once the property has sold. If a broker is used to assist in selling the property, the asset manager may still receive a disposition fee; it would just be a smaller percentage paid.
Should an asset manager choose to refinance the property, a refinancing fee would be awarded to them. An effective refinance would allow investors to recoup some of their initial investment or, in some cases, all of their initial investment.
Again, if a broker’s help is leveraged for this process, the asset manager could still receive a refinance fee just at a lower percentage paid. If the project requires new development or construction, an asset manager can be rewarded for efforts here as well. This is called a development fee, also known as the “construction management fee,” which is usually a fixed percentage fee applied to project cost.
As you just discovered, there are numerous ways an asset manager can be compensated when managing an investment. Even still, some might say it is well deserved when managing assets that are as complex as these.
What Really Is An Asset Manager?
Ultimately, an asset manager is the person or company who could be the deciding factor between a superior investment decision and a “can’t wait to get my money out” mistake. A successful asset manager is proactive, and constantly searching for answers. They are always analyzing their numbers for the property and market.
Asset managers solve many problems throughout their daily operations. Their primary focus though, is to solve just two main issues their clients are facing. These clients have funds and the desire to invest them in alternative assets to the stock market. The problem is rather they do not have enough insight or time to learn the ins and outs of the real estate market.
To whom much is given, much is expected. And with investments ranging from millions to even billions of dollars, having a sound asset manager is one of utmost importance. Asset managers are key to a long-lasting, return on investment and income generating asset.
