5 Asset Management Strategies to Avoid in Real Estate Investments
In any kind of investment, asset management plays a crucial role. In real estate investment, that holds true as well. But there are a few pitfalls to avoid in real estate asset manangement strategy.
Real estate, like any other kind of investment, has its risks and rewards. It is valued by investors because of the interesting properties it offers – capital preservation, rental income generation, and inflation hedging. But what about the risks? As with any investment, careless mistakes can often contribute to unforeseen dangers to your investment. That is why skilled real estate asset management is very essential. While safeguarding your money, it reduces the risk, and maximises the tax benefits. Asset management firms like Strata provide investors access to high-quality commercial real estate investment properties but knowing the correct firm to go with also requires extensive research on your part.
When it comes to asset management, firms can go the extra mile to say the right things when courting customers, and that makes it more difficult to choose between the firms. Potential investors must analyse and evaluate the firms based on how they have demonstrated their capabilities in the management of assets.
What is Asset Management in Real Estate?
Managing tangible/intangible, financial/non-financial assets is simply referred to as asset management. Investors can have investment options falling under classic, savings, or the shares category. Real estate as an investment asset falls specifically under Asset Management – Real Estate, or Real Estate Asset Management (REAM). This deals with specific ways in which the value of a single property or a portfolio of properties can be increased. It includes planning, management, implementation, and control of a real estate property. Through continuous management, the end goal is to maximise the capital used while increasing the value of the property and the rental income derived from it. Real estate asset management takes care of the strategic decisions that influence the risks and benefits of real estate investments. As has been observed, the higher the risk, the higher the possible profit, but investors should always carefully weigh their risk tolerance against their returns before going ahead with any kind of investment.
The Role of an Asset Manager in a Real Estate Investment
Terms can be used interchangeably when a firm just deals with real estate investments, but in this respect, an asset manager can also mean an investment manager. A firm may also differentiate roles of asset managers and investment managers based on the duties assigned to them. If that is the case, the investment manager mostly interacts with the investor, while the asset manager deals with the transactions that must be done on the property’s side. If the roles are separate, a real estate asset manager handles the following responsibilities –
- Cash Flow Management – Once an investment is done in a real estate asset, it is normally for the long term. Keeping that in view, cash flow management becomes important, so that the asset does not end up burning more than the required amount of funds for maintenance, upkeep, and the like. Profitable rental agreements and cost-cutting opportunities are the focus of the asset manager in this regard.
- Finding Lenders – Sometimes, a property might need some repairs or upgrades to be market ready. The asset manager can help the investor in finding lenders who are willing to help financially in such cases.
- Market Research – Market research is crucial to help investors make prudent selections for their portfolio. It is imperative that the asset manager is a specialist in market research.
- Property Transactions – Property transactions can be quite complex, with a lot of jargon that can unnecessarily put people off. An asset manager’s role also includes simplifying the process and helping the investor through the transaction processes.
- Property Agreements and Leases – Sometimes investors can hire their own legal team, but in case that is not so, the real estate asset manager will also have to take care of the agreements and leases involved in the transaction, so that the terms are acceptable to tenants and profitable to the investor.
- Boost Property Values – The real estate asset manager also must stay on the lookout of how to boost the value of the property. Capital appreciation contributes to an increase in the property’s value, but so does efficient marketing and well-timed promotion.
- Create a Budget – Budgeting is important because most real estate investments are long term in nature. Budgeting accounts for expenses that may or may not happen in the future and they must be well within the profitability of the investor.
At times, in several firms, some of the above tasks are divided among the legal team or the operations team as well.
The 5 Bad Asset Management Strategies to Steer Clear Of
Irrespective of if you are handling your real estate investments yourself or having a firm handling them for you, these are the blunders in asset management strategies that you should stay away from. When choosing a real estate investment firm, you can also be ready with the questions that can help you get more insight on these –
- Failing to evaluate commercial property on a regular basis – Commercial real estate is rather illiquid as an asset. While it allows for an easy long-term investment, it also forces investors to hold on to assets for too long for a specific return or sell at any available price for want of liquidity. A good asset manager regularly evaluates the properties in a portfolio and predicts when the appropriate time is to exit an investment, based on the investors’ preferences.
- Failing to vet commercial real estate assets – It is a part of the due diligence that goes together with selecting the best investment assets. A posh office space in a remote location might not always be a prudent choice in investment. Likewise, a location close to major connectivity hubs might appreciate over time. An asset manager must keep tabs on such kinds of possibilities, so that an investment turns up the best returns.
- Failing to be patient – The payroll of an asset manager can depend on the switches and moves an investor makes on any property in their portfolio. However, this might not spell good for the investor. Jumping the gun just because an asset is not performing as expected in the initial few months of the investments is a sign of being finicky and shows that the asset manager has not really done their homework with their asset. Patience is a virtue, and with commercial real estate, it is more so. A consistent deal flow improves the relationships between property owners, builders and the investment firms and helps score better investment opportunities.
- Failing in doing a comprehensive underwriting on agreements – Another facet of due diligence. Cash flow of a venture and real estate assessment are just some of the many criteria on which agreements and leases are based upon. Observing the changes in rent over time also counts towards it and helps the acquisition team assess a business strategy and its financial assumptions in real estate. Being careless in underwriting can lead o legal problems or major capital loss.
- Excessive cross-collateralization and debt – Debt can be used intelligently as a leverage for real estate investments, but the percentage should be kept at a minimum. If in case the rental income falls below the required amount needed to service the loan, it can cause a negative cash flow for the investor or can even cause the property to be lost. Sometimes real estate asset management firms can make a serious debt blunder while cross-collateralizing assets within the fund. That happens when one gets used to guaranteeing the debt on another. That can expose the entire fund loss of any single investment and greatly increase the risk of the investors.
Investing in real estate is a great way to earn passive income and it is one of the most stable asset classes to invest in. But one should always be wary of the risk involved, especially when one small decision can cause a serious loss of capital. Stay away from real estate investment that promises you any kind of return. Returns are merely indicative, derived from past experiences with similar kinds of properties. Through Strata’s fractional ownership model, an investor can minimise the risk involved in real estate investment and can also diversify investments across a wide range of real estate assets. To learn more about how we do that, please head on over to our FAQ section.