Hiring a real estate asset manager is a natural step for rental property investors as their property portfolio grows. Oftentimes, however, investors confuse property management with real estate asset management, and wonder whether there’s really a need for two different professionals.
The fact is that property and asset managers play two very different roles, and the most successful investors find there is a need for both services. Rental property investors who use a real estate asset manager can realize higher profits and stronger portfolio growth.
Let’s take a look at how having a real estate asset manager can help an investor scale-up and grow a single-family rental property portfolio.
Why Do Rental Property Investors Need an Asset Manager?
As real estate prices keep rising and the competition for good rental property increases, the demand for professional asset managers who can maximize yields and market values for investors keeps growing.
A real estate asset manager monitors the market, keeps his finger on the pulse of the latest real estate trends and research, and stays abreast of macro economic, political, and financial trends. By doing this, an asset manager helps an investor’s portfolio to grow and ensures each rental property meets and exceeds its fair market value while mitigating any potential risks.
The best real estate asset managers also go above and beyond the hard data by understanding the subjective nuances of each client. That’s because each investor is unique, and to one degree or another bases investment goals and objectives on background, family situations and work histories, health, financial and knowledge resources, and desires.
At the end of the day, a professional real estate asset manager can provide a priceless perspective to rental property investors who may be too busy with a 9 – 5 job to fully appreciate and capture the profit potential of each asset in the portfolio.
Real Estate Asset Management vs. Property Management
A property manager focuses on the day-to-day operations of a rental property while an asset manager is concerned with the long-term, bigger financial picture. With one or two rental properties, an investor can get away with just a professional property manager.
However, as rental property investors scale up their real estate portfolio, it becomes increasingly important to include a real estate asset manager as a key part of the team.
Here’s a quick look at the differences between property management and real estate asset management:
Property managers deal with the routine, daily activities of managing rental properties.
Key tasks and responsibilities of a property manager include finding and keeping great tenants, executing leases and enforcing the terms and conditions, collecting rents, paying vendors, maintaining the property, and providing monthly and year-end financial reports to the owner.
Asset managers focus on the longer-term, strategic big picture of maximizing the value of each rental property and realizing the highest return on investment (ROI) for the owner.
Key tasks and responsibilities of an asset manager include creating an overall strategy for each rental property and the entire real estate portfolio, improving asset value by wisely reducing expenses and increasing income, hiring and overseeing the property manager; and preparing, monitoring, and adjusting property financial projections and financing strategies.
Core Responsibilities of a Real Estate Asset Manager
Real estate asset managers usually specialize in distinct asset types such as single-family rental property, certain geographic regions of the country, and specific investment strategies like long-term buy-and-hold.
The overarching goal of a real estate asset manager is to achieve the highest possible property value and return on investment for each asset and for the overall portfolio of the owner.
Asset managers for real estate accomplish this by strategically reducing expenses, maximizing rental income streams, and reducing potential risks and liabilities for the rental property investor.
Core responsibilities and goals of a real estate asset manager include:
- Advising the investor on how to best structure the capital stack of debt and equity, and direct ownership vs. joint ventures or partnerships
- Assisting the owner in choosing the best investment strategy, form of ownership and investment, and potential pros and cons of each approach
- Selecting and overseeing the KPIs (key performance indicators) that define the investor’s return and key asset controls
- Hiring and working with key members of the investor’s team including real estate agents, property managers, and leasing agents
- Generating, reviewing, and reporting property and portfolio financial performance and recommending any needed adjustments to achieve the investor’s long-term goals
- Managing cash flow from individual property and the overall investment portfolio
- Directly working with ownership investment partners and lenders to determine the most effective use of leverage
- Allocating capital and investment resources across the entire rental property portfolio to complete capital improvements and add value
- Determining the holding period of each property by understanding the life cycle of each rental property through acquisition, holding, and eventual disposition
Three Phases of Real Estate Investment Management
Throughout all three phases of real estate asset management – acquisition, holding, and disposition – the asset manager uses a well-balanced blend of experience and instinct with market knowledge to help owners improve investment performance.
Factors considered through each of the three phases of the real estate asset management cycle include available capital and the cost of financing, forecasted market activity such as demand and rent projections, and the opportunity to add value or reposition a rental property.
Real estate asset managers provide investors with consistent, reliable advice on the best time to invest in single-family rental property in specific geographic markets.
For example, transaction prices may be rising so fast in some markets that fair market rents may not be high enough to cover debt service and normal operating expenses. Other markets, such as Memphis and Orlando, may offer better opportunities for the rental property investor due to long-term fundamental factors such as population and job growth combined with a lower cost of living.
Additional criteria that real estate asset managers use to analyze the timing of potential property acquisitions include:
- Interest rates and the cost of capital
- Projected market rent rate movements, absorption and vacancy forecasts
- Opportunity to add value and increase existing income streams
- Market-specific cap rate and yield trends
- Stage of the real estate market cycle
Throughout the holding period the real estate asset manager oversees the daily activity of the property manager while constantly monitoring asset performance with an eye on increasing income.
During this period of holding and owning, the asset manager communicates regularly with ownership to measure the financial performance of each rental property against the expectations of the investor and investment strategy goals:
- Short-term strategy requires a fast return of capital invested through rapid property appreciation over a shortened holding period
- Long-term strategy focuses on steady cash flow and improved returns through consistent income and market value appreciation over the longer term
Regardless of the specific investment strategy, a real estate asset manager will constantly monitor the market to weigh the benefit of selling today versus continuing to hold.
Real estate asset managers consider a number of factors when deciding when, how, and even if to sell a rental property.
For example, the asset manager may believe that cap rates have bottomed out – or become so low – in a specific market due to unprecedented demand from other buyers that the capital gain realized by selling generates cash that can be better used for other real estate investments.
On the other hand, low cap rates created by a temporary supply shortage in a market with new product under construction may also be a sign that the time has come to sell. That’s because as new supply becomes available, markets often see vacancies rise and rents temporarily decline due to an increase in property for tenants to choose from.
Other reasons for disposing of a specific rental property include:
- Future net cash flow is expected to decrease due to the need for upcoming capital improvements such as a new roof or HVAC system
- Unrealized equity has accrued to such a high level that the investor may be able to sell, conduct a 1031 tax deferred exchange, and invest in a diversified portfolio of single-family rental property that is already cash flowing with qualified tenants
- Interest rates are expected to rise due to growing trade wars, political conflicts, or macroeconomic trends that may make cash-out refinancing more difficult and potentially more expensive
Rental property investors hire real estate asset managers to maximize the value of each property and the total portfolio, and to generate the highest possible returns. Real estate asset managers guide investors through the three stages of acquisition, managing and holding, and disposition.
The main goals and objectives of real estate asset management include:
- Focusing on the long-term financial performance and ownership investment objectives
- Hiring and overseeing a property manager to handle daily activities such as rent collection, lease enforcement, and routine repairs and maintenance
- Advising on the best way to structure debt and equity, managing cash flows, and working with key partners and members of the real estate investor’s team
- Understanding each stage of the real estate market life cycle and how to invest in each market phase