I Just Closed On My First Apartment Community…Now What?
You just closed on your first apartment community. Congratulations!
Now what are the next steps?
As the asset manager, in return for your asset management fee (the industry standard is 2% of the collected income), it is your duty to ensure the successful take over and ongoing management of the apartment community. To do so, here are the 11 things you need to do:
1 – Implement the Business Plan
As the asset manager, your main responsibility is to ensure the successful implementation of the business plan. This starts by forming a budget (i.e. the ongoing expenses) and calculating the projected rental premiums based on your rehab plan (through a rent comp analysis) – both of which should be completed via underwriting and due diligence – and running these figures by your property management company for approval, all before actually closing on the deal.
Once the management company has confirmed your budget and rental premium assumptions and after you close on the deal, it is your responsibility to oversee the budget. I recommend gaining access to your property management company’s online reporting systems so that you can review the monthly financial statements. You will be comparing the budgeted expenses and projected rental premiums to the actual figures on an ongoing basis, making adjustments when necessary.
2 – Notify Investors at Closing
The weeks leading up to closing, my company always prepares a “Congrats! We Closed” email that we will send to our passive investors once we’ve officially closed. The purpose of this email is to not only notify the investors that the deal is closed, but to also set ongoing expectations.
In the email, we explain how often they should expect to receive update emails (we prefer once a month, but quarterly or annual updates are also an option) and the financial statements (we prefer sending the trailing 12-month income and expenses and a current rent roll on a quarterly basis). We will also include links to relevant articles that reinforce the project and/or market.
We will also attach an Investor Guide to this email. The purpose of the investor guide is to proactively address common investor questions about the project. The guide will inform the investors about ongoing investor communication in more detail, tax information, distribution frequency and amount and any other piece of information deemed relevant to the investors.
I strongly recommend preparing both the email and the investor guide before you close so you can send it out immediately.
3 – Weekly Performance Review
Before closing the deal, you want to schedule a weekly call with your point person at the property management company to go over and track the property’s key performance indicators. Examples of KPIs to track are, but not limited to:
- Money related: gross potential income, collected rent, delinquent rent
- Marketing: number of new leases, notices, renewals, waiting list
- Maintenance: vacancy, rent ready units, units not rent ready
- Management: current occupancy, move-ins and move-outs
4 – Investor Distributions
On either a monthly or quarterly basis, whichever you’ve negotiated with your investors, you will need to send out the correct distributions. Before closing on the deal, make sure you know who will be responsible for sending out the distributions and where they need to be sent. Ideally, your property manager handles the distributions with your oversight.
5 – Investor Communication
You will be responsible for ongoing communication with your investors. Each month, we provide our investors with an email that recaps the previous month. The information we include in these emails are:
- Distribution information
- Occupancy and pre-lease occupancy rates
- Renovation updates (i.e. how many units have been renovated?)
- Rental premium updates (i.e. are we meeting or exceeding our projections?)
- Capital expenditure updates
- (i.e. holiday parties, resident events, local business or real estate news)
Additionally, on a quarterly basis, we provide the financials (trailing 12-month income and expenses and a current rent roll). Finally, we provide our investors with their tax documentation, the K1, on an annual basis.
6 – Managing Renovations
If you purchase the asset with a bridge loan, meaning the renovation costs are include in the financing, or another loan type that includes renovation costs, you will have constant communication with the lender during the renovation period. You won’t get a lump sum of money upfront for renovations and capital expenditure projects. Instead, you will receive draws from the bank. So, you will be interacting with the lender about the construction draws as you implement your capital expenditure projects.
If you’re renovations are not included in the financing and you’re covering the costs by raising equity from your investors, you’ll have control of the capital expenditures budget and won’t have to go back and forth with the lender.
7 – Maintaining Economic Occupancy
Assuming you’re a value-add investor like me, once you take over a property, you will begin to implement our value-add business plan. Since you are performing renovations, you should have already accounted for a higher vacancy rate during the first 12 to 24 months. However, it is your responsibility to make sure you’re maintaining occupancy so that you can hit your return projections.
Hopefully, your property management company is implementing the best practices for maintaining occupancy, like advertising and marketing to local business and competitors, adjusting rental rates as occupancy dips and doing weekly market surveys to determine the market rents. But as the asset manager, it is your responsibility to advise the management company on the speed at which renovations are made. You don’t want to handicap your property management company by forcing renovations. So, don’t be too aggressive with the pace at which you do your renovations.
Generally, you will renovate vacant units (ones that are vacant at closing or due to turnover). Other strategies include offering newly renovated units to residents who are living in nonrenovated units so that you can renovate their unit once they move, or increasing nonrenovated rents to promote turnover. However, if you have a large influx of vacant, nonrenovated units, don’t feel forced to renovate all of them. It’s okay if for every five or six units that become vacant, you only renovate half and lease the remaining units back to the market unrenovated, because you’ll get them next time people move out.
Overall, you want to renovate at a pace that will not adversely affect occupancy rates and won’t put an unnecessary burden on the property management company.
8 – Frequently Analyze the Competition
You want to set up a process for doing rent surveys of the competition in the area. The goal of the rent survey is to compare your property’s rental rates to those of surrounding apartments, as well as the overall market rates, to determine if you can further increase your rates while remaining under the leading competitor. Hopefully, this is something your property management company will perform and will provide you with the results and advice on rate increases.
9 – Frequently Analyze the Market
You will also want to pay close attention to the market in which your apartment is located. Where are the prices and cap rates at? What would you get if you sold right now, or refinanced? Even if your business plan is to sell in five years, don’t wait until then to look at the market. You may be able to provide your investors with a sizable return if you sold after two years, or three and a half years. But you’ll never know if you aren’t constantly analyzing the market conditions. I recommend determining how much return you’d achieve if you sold at least a couple times a year.
10 – Plan Trips to the Property
I recommend visiting the apartment community at least once a month. However, don’t announce every one of your trips. If the management company is aware of your visit, they will have time to prepare and you may not get a true representation of how the property is typically managed. Whereas if you visit unannounced, you’ll see how the property is actually operated on a day-to-day basis.
11 – Expect the Unexpected
Finally, as unexpected issues arise (and you can guarantee that they will), you are responsible for making the proper decision to resolve the problem. For example, if you receive a call from the property manager, notifying you that the boiler unexpectedly broke down, you’ll have to decide if you will use money from the operating budget to replace, refurbish or repair it.
QUESTION: What do you think is the most important asset management duty, and why?
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