Asset Management (Part 1)
Managing investor’s properties and making decisions for these properties to help grow the portfolios are what asset managers do but there’s so much more that goes on behind the scenes to accomplish these feats. A good asset manager should possess strong analytical skills in order to evaluate a property’s performance, assess and implement value-add opportunities, make data-driven decisions but also maintain the pulse of the property, area and tenants. Our team at Saorsa Capital has broken down asset management into four important and strategic sections: 1. Occupancy – it’s the driving force for success 2. Property Management – vital to business plan implementation and execution 3. Maintenance/CAPEX – maintains and improves the value of the investment 4. Exiting the Investment – divesting and distributing final payouts to investors. Over the next 4 installments we’re going to take you deep into each section to see how an asset manager formulates and executes different strategies. In addition, we will navigate through some challenges and barriers asset managers must overcome. Our first installment will focus on occupancy and why it is so critical to an asset manager.
Installment #1 (Occupancy):
Occupancy rate is one if not the most important performance metric for an asset manager; it illustrates the percentage of units that have tenants. In an ideal world, an asset manager would love 100% occupancy, no delinquencies, and a plentiful waiting list of prospective tenants but as we know life a lot of the time isn’t ideal. Looking at these properties in terms of businesses, paying tenants are the property’s primary source of revenue. To make the property/business a successful investment an asset manager must take that revenue and squeeze out as much profit as possible. But no matter how many levers one can pull in an attempt to increase the property’s profit, a high occupancy rate is the one constant that is always needed.
An asset manager must deal with a variety of different issues to push and/or maintain a property’s occupancy levels. Whether it’s a tenant deciding to move, getting evicted or they leave you a voicemail that they moved out overnight, vacancies are inevitable (Saorsa has experienced all the above). The challenge is to get the units filled as quickly as possible and an asset manager’s best weapon is preparation. The unit must be assessed, primped/renovated, marketed and then finally filled. To cut down on the amount of time a unit is vacant a good asset manager will have processes in place to get the unit leased up.
Through our own trials and tribulations, we’ve learned to focus on being proactive rather than reactive. For instance, we start to get the feel from our tenants 2 months before their lease ends to see if they want to renew their lease; this way if we know someone is intending to move out we can start marketing the unit beforehand with the hopes of having a new tenant ready to move in. Also, if available we use our trusted vendor to get the unit ready; the reason being they have a familiarity of the property so costly delays are avoided. Sometimes our trusted vendor may not be readily available; in this case we’ll have 2-3 back up vendors in our rolodex who may be able to service the unit quicker. If we do have a persistent vacant unit, until the unit is filled we assess the marketing plan weekly and adjust based on several applicant metrics such as number of email responses, tours and applications submitted. All this preparation and strategy implementation are for one very important goal; 100% occupancy!
In terms of the success of a business plan, occupancy is the driving force. Showing consistent and solid revenue will be needed when shopping the property to potential buyers or even looking for long term financing if it isn’t already secured. Everything from financing, paying for maintenance, paying property bills and even investor distributions rely on the occupancy levels of the property. There are 3 metrics all asset managers need to pay attention to when thinking of occupancy. Occupancy Rate which shows the percentage of units being occupied at the moment; it is calculated by dividing the number of occupied rooms by the number of available rooms and multiplying by 100. Next you have Break-Even Occupancy Rate which demonstrates the minimal amount of occupancy needed to cover all operational costs; it is calculated by totaling the operating expenses plus debt service, divided by potential rental income. Finally, Gross Potential Rent which is the maximum amount of rent money the property can expect to make; it’s formulated by multiplying the property's total number of units and market rate rent. These 3 metrics give asset managers the ability to know the current state of the investment and what direction it needs to head in. Now you should have a better understanding why occupancy is one of the highest-level indicators of success to an investment.
Hopefully after we’re done with this series you will have a better sense of what it takes to strategize and manage a property. Also, we hope to give you Saorsa’s personal experiences and perspective being an asset manager: The Good, The Bad and The Ugly. Sorry my mother loves westerns so I had to throw that in there. For the 2nd installment of our 4 part series we’ll focus on property management and the important role they play in making our investment a success!
