Most everyone in a real estate deal understands the need for Property Management.
We know the property will require routine maintenance. And that the residents will need to be managed.
What is less understood is the term Asset Management. And how it differs from Property Management.
So let’s clear that up right now.
What Is Property Management?
To get on the same page, this is how we identify Property Management:
Running the day-to-day operations of the property, such that it maintains value.
Like we said above, this boils down to a focus on, and intimately dealing with, the physical aspects of the property itself as well as the tenants who reside at that property.
It is people and service-oriented.
Finally, the Property Manager is tasked with executing the plan devised by the Asset Manager.
What Is Asset Management?
Asset Management is the long-term focus on maximizing the value of the property, as well as the return on investment.
Before we go into further detail, let’s take a very simple example of wages. The PM team gets paid a wage to run the property. Whether the property value stays the same or goes up wildly, they still get paid that wage to do their job. Their incentive is different than the investor’s incentive. You (the investor) would prefer the value of the property to increase in addition to the normal cash-flowing aspects of the property. And that is where the incentive of the Asset Manager lies.
Asset Management, then, drives ROI through:
* value-add planning (reducing expenses and increasing income)
* overseeing the Property Manager
* making and monitoring financial projections
* engineering the acquisition and disposition
The first of the three bullet points have to do with the holding period. The final point refers to the massive amount of work involved with both transactions of the deal — buying and later selling the property.
* due diligence
* dealing with lenders
* and more
So as you can see, the vast majority of Asset Management occurs on a higher business plan level, as opposed to the day-to-day running of the property.
Where Strategy & Tactics Meet
Everything works together, of course. But to run the most efficient real estate investment there needs to be an order or hierarchy through which the goals flow.
And the easiest way to explain that is by examining Strategy versus Tactics.
Asset Management sets the overall Strategy, which Property Management implements via Tactics. This is, of course, just a helpful way of explaining the conceptual differences (obviously a good PM team is going to have developed strategies to deal with residents and maintenance that don’t originate from the sponsors).
The business plan, the entire hold period, and the transaction moments are entirely driven by the strategies set in place by the Asset Manager. But they will all come to nothing unless the Property Manager executes day-to-day on a tactical level.
As sponsors, we hire PM teams with incredible experience within a narrow field of that community and specific property. We don’t want to micromanage every little thing they do; presumably (if we’ve chosen correctly) they are a lot better at it than we would be.
But by the same token, as investors we cannot expect the PM team to then also be able to focus and excel on a wider time horizon.
That is the scope of the Asset Manager / Sponsor. To make sure the business plan meets the goals from the outset of the deal (and indeed to set those goals in the first place).
The most common example of this is when rents are raised across a stabilized property after the value-add has been implemented.
That is driven by Asset Management.
It is for reasons like this that you will often see separate fees for Asset Management and Property Management in the legal documents. Because they are for different scopes, with different responsibilities, requiring different skillsets.
But of course, as you have just read, both types of management must work in harmony to safeguard your investment.