We turn to many professionals to optimize our financial health, and asset managers work to make the most of a real estate portfolio. Even if your portfolio isn’t large enough to warrant the cost of a professional asset manager, you can implement their essential strategies to improve the performance of your assets and overall portfolio.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
Asset Management Focuses on 4 Strategies
Asset management strategies are simply techniques used to evaluate a portfolio by finding areas of strength and identifying others that need improvement. Fortunately, the strategies are not mutually exclusive and can instead be implemented in tandem with each other.
Unlike stocks or bonds, real-estate-based portfolios require active management due to the constant needs of an income-producing property. Whereas other investments are simply bought and sold, real estate is purchased and then managed before eventually being sold. Inattention or lack of a cohesive management plan during the holding period can have deleterious results on the final return on investment.
To maximize ROI create a robust, well-performing portfolio. Here are some things to consider:’
Maximize Revenue
First and foremost, maximizing revenue establishes the cornerstone of asset management. After all, portfolios exist to make money.
At first glance, maximizing revenue seems like a simple enough strategy. However, it is much more than raising rents and finding a popular property likely to grow in value. Asset managers also look for the most consistent sources of income or ways to improve consistency.
Ultimately, dependable income increases the property’s value and provides the owner with a steady income that can fund additional projects and boom wealth. Multifamily properties are a favorite asset class for creating consistent income, as are other rentals.
Reduce Expenses
Second, asset managers work to reduce expenses. For example, in some markets, increasing rent simply isn’t an option to remain competitive. In those situations, reducing operating costs and other expenses is just as crucial as maximizing revenue to bolster the performance of an asset.
Property management is often one of the most fruitful areas for exploring expense reduction. They manage contracts with the many subcontractors that keep an income property in business, and an efficient management company can orchestrate impressive savings. Of course, the management company contract itself is often one of the biggest expenditures related to operating a property, but the solution is rarely to eliminate professional management altogether.
Professional management companies serve as the customer-facing representatives of an income property and consequently fill a crucial role in tenant recruitment and retention. Therefore, rather than the least expensive option, pursue the most efficient.
Risk Management
Next, another essential asset management strategy involves managing risk. Unfortunately, some risk is to be expected with any investment, even when dealing with real estate.
This strategy emphasizes risk mitigation and preparing contingency plans should the worst-case scenario materialize. Rather than eliminating risk, this approach embraces the identification of potential adverse outcomes.
Ideally, identification can lead to a plan to mitigate risk, but the solution may be to sell the specific property or bolster the portfolio with less uncertain assets.
Asset Accumulation
Finally, the last management strategy entails building the portfolio by strategically growing it. It encourages intentional asset accumulation as part of an overall investment plan rather than emotion-based purchases.
A key component of asset accumulation is diversification and acquisition in a manner that maximizes leverage. Growing a portfolio through intentional planning will also reduce risk and maximize revenue.
Ideas for Implementing Each Asset Management Strategy
Identifying a goal or need may be the easy part of asset management for many investors. Finding a solution can be a bit more challenging, so we have a few specific ideas for each asset management strategy.
Focus on Leases for Increasing Revenue
All aspects of a lease should be up for consideration when searching for ways to maximize revenue. Asset management requires the negotiation of leases to create the most favorable leases for the property owner while striking the balance of being attractive enough to tenants to convince them to commit.
After signing, lease management is far from over. Stagger lease end-dates to prevent a burst of unoccupied units all at once. Remember, maintaining consistent cash flow is one of the most important goals. Of course, tenant retention is ideal for preventing the unit downtime that occurs while preparing it for the next resident.
Use Realistic, Honest Budgeting to Reduce Expenses
Underestimating expenses may be a sign of optimism, but it rarely yields a good outcome. Brutally honest budgeting will help you tackle expenditures.
First, analyze the historical financial data for the property. If the building is new to you, this information should be in the due diligence documents obtained during the purchase process. Knowing the expenses will put you on the path to reducing them.
Next, control expenses by planning ongoing maintenance and allocating capital to replace systems racking up costly repair bills. Routine maintenance extends the life of most machines and reduces unexpected repair costs. Unfortunately, items that have already reached the end of their useful life are best replaced before sinking even more money into repairs.
Manage Risk Through Market Knowledge
Real estate becomes a risky asset when it declines in value or fails to generate revenue to cover expenses. Unfortunately, both of those events occur when demand for the property drops. Consequently, we only recommend purchasing property in markets where the investor is knowledgeable about the area and the property type.
Use 1031 Exchanges to Acquire Properties
Finally, use the 1031 exchange process to maximize our capital for future properties. Under the U.S. Tax Code, investors can defer capital gains taxes upon selling a property if the profits are used to purchase another “like” investment property. The exchange cycle can go on an unlimited number of times and can even replace one property with two.
By taking advantage of the tax deferral, investors have more cash to leverage to purchase the following property, which usually leads to an upgrade in properties.
Asset Managers Customize and Implement the Strategies
Most investors can create and implement some of the above asset management strategies on their own. In many ways, it is an intuitive part of running any single property. However, professional asset managers create and implement an investment plan on a larger scale.
They perform the analysis and evaluation in the above areas, but that is only a small part of their role. Additionally, they perform many concrete tasks to implement the identified strategies and improve the performance of a single asset or an entire portfolio. Below are some actions asset managers perform to define and enact management strategies.
Create a Comprehensive Financial Strategy
An asset manager works with the investor to identify their financial goals, whether they be aggressive returns at high risk, slow, long-term growth, or something in between. The manager then conducts market research to suggest markets and property types that furthers the investor’s goals.
The investor’s goals will guide all asset management strategies going forward.
Execute Property Transactions
An asset manager assists in the process of onboarding a new property. First, they help an investor secure financing by finding a lender or alternative source of financing. After that, the manager can jump in where needed throughout the purchase transaction to facilitate the process, but they play a critical role in analyzing and interpreting the due diligence documents with the investor.
Ideally, the due diligence documents will confirm the underwriting assumptions, but the asset manager uses a critical eye to ensure that the property remains a good candidate for furthering the investing goals. The due diligence documents set the stage for future efforts to maximize revenue and reduce expenses.
Optimize Asset Operations and Value
Once an investor acquires a property, the asset manager becomes a resource for boosting the value and revenue of the new asset. Tasks may include negotiating and drafting leases, marketing the property, and enacting plans to improve the property value.
When to Use a Professional Asset Manager
Asset managers are experts in their field, so their services do come at a price. Large companies often employ an in-house asset manager, but that is an unrealistic expense for most investors. However, new investors or those with just a property or two will greatly benefit from an asset manager’s planning and research functions, even if an ongoing relationship isn’t feasible.
Investors with several holdings or those who plan to make investing a career stand to benefit the most from the services of a professional asset manager. The manager’s assistance should improve efficiency to free the investor’s time for more projects and increase cash flow to fund those projects.
Final Thoughts
Much like real estate itself, asset management strategies are ongoing, ever-changing plans that give an investor focus and direction. Investing without these strategies weakens the performance of each asset and ultimately increases the effort an investor must apply to achieve financial goals.
To further your portfolio, consider investing in a real estate syndication. A professional sponsor applies asset management strategies to optimize property performance and maximize returns for limited partners.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
