JF1786: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 1 of 8 | Syndication School with Theo Hicks
Now that we’ve talked about everything there is to talk about as it pertains to purchasing your first apartment syndication deal, it’s time to discuss asset management. This will be the longest period of time that you will be dealing with the property, and the investors. You’ll want to come with paper and pencil for this series! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.
Each week, as you know, we air two podcast episodes, every Wednesday and Thursday, and those are typically a part of a larger podcast series where we focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series – in fact, almost all of this series – we offer some sort of document, spreadsheet, template, some sort of resource for you to download for free, to help you in your apartment syndication journeys. All these documents and all of these Syndication School podcast episodes can be found at SyndicationSchool.com.
Now, we are at the second-to-last step in the apartment syndication process. We’ve been going in chronological order, starting from someone who really has no experience whatsoever with apartment syndications, all the way up to the point where in the last series we discussed how to close on your first deal, and the process surrounding that.
Now, as I mentioned, the second-to-last step is going to be to asset-manage that deal, to execute your business plan, with the last step obviously being selling the asset.
This is the beginning of that asset management series, and it’s entitled “How to asset-manage a newly-acquired apartment syndication deal.” This is part one. This will probably be an eight-part series; I’m not 100% sure, but it’ll likely be an eight-part series, because we’ve got a lot to cover. This is most likely going to be the longest timeframe of the entire process, depending on how long you plan on holding on to the deal for… But this is 5 to 10+ years of work.
So what we’re going to do is we’re going to start off by going over the top ten asset management duties. These are high-level ten things the asset manager is responsible for doing once a deal is closed on. If you remember all the way back to when you were forming your team, this might be the same person who did everything else – you might be a one-man team – or you might have the duties broken apart to the person who raises the capital and the person that maybe underwrites and asset-manages the deal.
So for all these duties, most of them will be done by the asset manager, but some of them will also involve the person who’s responsible for raising capital… Because ideally, the person who actually raised the capital is gonna be the face to the investors; you don’t wanna pull a Switcheroosky on them and have one person raise all the capital, build the relationship, send them the deal, send them the closing email, and then all of a sudden some brand new person is talking to them, that they either know little about or don’t know at all.
I’m gonna try to get through all ten of these duties in parts one and part two, so we can move on to other things in the later episodes. These first two episodes are gonna kind of set the foundation for this series, and then from there I’m going to go into some more details on things that the asset manager needs to think about, as well as things they can do in order to optimize the business plan.
Speaking of which, the first duty of the asset manager is going to be to implement the business plan. That’s going to be the main responsibility, and really I guess everything else falls under the umbrella of managing the business plan. So in order to ensure that the business plan is implemented successfully, obviously this starts off by making sure that your budget, from an expense standpoint (ongoing operating expenses) is accurate, that your projected rental premiums are accurate. This is done before closing by having the conversation with your property management company. To learn more about that, make sure you check out the series about underwriting and the series about performing due diligence.
At this point you should have your budget of “Okay, this is how much money we plan on spending each month and then each year, and then here’s how much we expect the rents to increase based on a set renovation or cap-ex budget.” Again, this needs to be included before you close; I just wanted to mention that again. So you’re gonna have this information in front of you, and your goal is to implement the business plan such that you’re able to achieve these projections and assumptions.
So once you close, you’re going to oversee this budget. Ideally, you’re able to gain access to the property management software, because you don’t wanna be spending your time inputting these numbers each month. That should be a duty performed by your actual property management company. So at the end of each month you’re gonna want to go ahead and access that software or ask your management company to send you the financials, so you can review the monthly financials.
The things you wanna look at – what was your projected/budgeted expenses and your projected/budgeted income figures, and how do those compare to the actual figures? Ideally, it’s something along the lines of you’ve got your actuals – this month, January, and then on the column side these are the income factors, these are the expense factors, and it’s got the numbers. Then next to that it has either your budgeted numbers, or at least a variance. So it’ll say “Hey, for loss to lease we projected a $10,000 loss, but we actually ended up getting a $20,000 loss.” Then you have that for every single income and expense line item.
Obviously, what you’re looking at are any discrepancies from your budget, compared to the actuals. If there are discrepancies, you’re gonna want to jump on top of those right away, which is why we’re looking at these on a monthly basis… And you’re gonna wanna work with your property management company to confirm 1) what is the cause of the discrepancy; why was your loss to lease budget way off from the actual loss to lease. And then 2) you wanna formulate a plan to get back on track.
This brings us into duty number two, which is to do your weekly performance reviews with your property management company. Now, technically these could be monthly or quarterly, but the best syndicators will have weekly performance reviews… Because if anything were to come up, if there were any issues, not only will you know about them within a maximum of seven days, but you can start thinking of solutions right away as well. Ideally, those solutions are in place before you notify your investors with a new recap email, which we’ll get into later on in the series.
So the purpose of these weekly performance reviews is to help you track the progress of your business plan, and more specifically, track any key performance indicators (KPIs) that you and/or your property management company has set and decided to track.
For Joe’s business, he has these KPIs that are broken into three distinct categories. The little anagram that we use in the book was MOM – money, occupancy and management. So make sure that you always are taking care of MOM. That’s the key when you’re asset-managing apartment syndication deals; making sure you’re taking care of MOM.
We’re actually gonna give away a free document with this series – there’s going to be at least one free document, and as of now, it’s going to be a weekly performance review template. It’s gonna have the money, the occupancy, and the management KPIs, so specifically what we track for money, specifically what we track for occupancy, and specifically what we track for management, in order to confirm that we are on track with our business plan.
The goal would be to send this tracker to your management company and have them fill it out each week, and then send it to you before your call. Then the purpose of the call is to review the KPIs. And I guess on a monthly basis the meeting might be a little bit longer if you did identify some discrepancies in that monthly financial document.
So just really quickly I’m gonna go over these MOMs. I’ll briefly define these terms, but if you go all the way back to the “Master the lingo” episode, we’ve kind of exhaustively gone over what all of these terms mean, and provided examples of each of them… But I’ll do my best to explain them not as well.
For Money, there’s five different KPIs we’re looking at. Number one is the gross potential income. That is how much money would the property bring in if all units were rented at market rates. Then there’s the gross occupied income, which is the actual income; so not how much money it would be bringing in if we assumed all units were occupied, but how much money are we bringing in based on the units that are currently occupied. This is kind of like an economic income.
Next, how much money was actually collected that week. Next is the month-to-date collected and the month-to-date delinquent. Obviously, a week might let you know if you’re short or high that week, but the month-to-date collected is most likely going to be more important, because you wanna make sure that you’re hitting that collection number each month. And obviously, if you aren’t, then the difference between what you should be getting and what you’re actually getting is going to be that delinquent.
So if there is a lot of money delinquent, you’ll wanna know why, and you’ll wanna know what your property management company is doing to make sure that they are going to be able to actually collect that money. So that’s the Money.
Next is the Occupancy. A few things you’re gonna want to know – and there’s 7 different KPIs for this… Number one is the number of units that are pre-leased. These are units that are either vacant currently, or have a lease expiring at the end of the month and they are already leased by a new resident. You’ll wanna know the number of notices that were given this week (eviction notices), so you know how many people of that overall occupancy are actually going to be gone by the end of the month.
Then you wanna know the total number of notices you have on the book. Obviously, if I send out an eviction the first week of the month and they’re not leaving until the end of the month, then week three that notice is not gonna be accounted for, and the notice is given that week, so you wanna know how many of those are actually going to be evicted.
Next is the number of set outs scheduled.
Next is the number of applications you have denied, just to make sure that your property management company are getting qualified leads.
Next are the number of renewals. So of the leases that are expiring, how many of those residents have actually renewed the lease for a new 12-month term.
Then lastly, the number of people on the waiting list. Ideally, you’ve got a waiting list, because the property is in such demand that you’ve got a list of people who want to move in, so that if you have an eviction or if someone is moving out just because their lease ends, you’ve already got a list of pre-qualified people that you can lease that unit to. That’s Occupancy.
Then next is going to be Management, which there’s a whole lot of KPIs for management. First there’s going to be the current occupancy rate percentage; pretty self-explanatory – what percentage of the units are occupied. Next is the total number of occupied units this week; obviously, if you’ve got a 10% vacancy rate, how many of those units are going to be occupied or were occupied that week. Also, you want the total number of occupied units from the prior week, as well… Plus total number of move-ins; who all moved in last week, how many new tenants moved in the previous week.
Next is what’s the projected total number of occupied units, and then the projected occupancy percentage. This is pre-leased. So you’ve got your current occupancy, which is today, but as I mentioned before, you’ve got some units that are pre-leased, you’ve got some people who are going to be renewing, and then you’ve also got people who are gonna be moving out for some reason or another, so you’ll wanna know what is the projected occupancy by the end of the month. That’s covered by the total occupied units projected, and the projected occupancy percentage.
Next is the number of evictions filed, number of skips, number of transfers… Skips are when people skip out; they’re supposed to be moving in, but they for some reason just don’t move in on that date. The number of transfers is pretty self-explanatory – I’m moving from unit one to unit ten. Number of units that are currently vacant, and then of those vacant units, how many of them are rent-ready and how many of them are not rent-ready.
For some of these there’s a specific number you projected. For the current occupancy you kind of have an idea of what you want your occupancy rate to be… But there’s really no absolute “Hey, if I have this many evictions filed, then I’m having an issue”, it’s more of something you wanna track. If you’re having ten evictions one week and then eight the next week, you’re trending positively. If you’ve got two evictions, and then four, and then six, and then eight, and then ten, something’s going on. You wanna track the trends, so ideally all these are trending in that positive direction, which means for example the number of units that are vacant is trending positively would mean the number of vacant units is actually decreasing… Whereas the number of skips – you want that to be as close to zero as possible.
That’s MOM. As I mentioned, we’re gonna go ahead and give away a free document, so all of those KPIs will be in this spreadsheet we’re giving away, so you can just send that to your management company, and maybe add some colors to it, add your logo to it, customize it however you see fit, add or subtract certain KPIs based on your business plan and the types of things that you wanna track, and then go ahead and send that to your management company.
One last note on the weekly performance reviews – I mentioned this in the Syndication School episode when we were talking about how to actually qualify and interview a property management company… You want to set expectations for these reviews. You don’t want to not really say anything to your management company about these reviews, and then when you close, say “Hey, by the way, I want to schedule a weekly call with you, and I want you to fill out this template each week, and I want you to send me the financials each month.” You wanna set expectations for all of that upfront. Obviously, not during the first conversation with the property management company; you don’t wanna have a list of all these things you need them to do… But just mention “Hey, once we actually close on the deal, can we do weekly calls?” And they say “Yeah, sure.” Then once you actually find the deal, say “Hey, on these weekly calls here’s what we wanna do. Are you still on board with that?” If they say no, then you either need to not do that – but you’re gonna want to do that, so you might need to find another property management company or figure out a way to work with them in order to get that data. So that’s number two, weekly performance reviews.
The third asset management duty is going to be the investor distributions – you paying your investors. Whatever frequency you’ve determined – whether that’s monthly, quarterly or annual basis, you’re going to need to send out the correct distributions to your investors. So whatever that preferred return is that you offer to your investors, you need to distribute that to your investors each month, each quarter, each year, by the way that you set out in your investor guide, which we talked about in the previous series. That’s the guide that talks about timing, and distributions, and other important information; you communicate that to your investors in that closing email.
Ideally, your property management company handles these distributions with your oversight. They’re the ones that are collecting the money, so they should also be the ones that are sending the money out… So however your investors want to receive their returns, whether that’s through the direct deposit or a monthly check, make sure (again) you set expectations with your property management company and let them know “Hey, I wanna send out monthly distributions either through check or through direct deposit. Is that something you’re capable of doing?” They might say “Yeah, sure” or they might say “Well, we only do direct deposit and we do it quarterly.” So it’s a negotiation. If they say they can only do it quarterly and that’s okay with you, then do it quarterly. If not, then you might need to find another management company or figure out a way to negotiate those monthly distributions, and ask them what you can do to help them make that happen. So that is number three.
Number four is actually investor communications. We’re gonna skip that one for now, because that’s very detailed. We’re gonna start tomorrow’s episode by talking about the ongoing investor communications.
For implementing the business plan and the weekly performance reviews – those are gonna be the responsibilities of whoever is responsible for asset management. Whoever that asset manager is will be on those weekly calls and will be focused on implementing the business plan, reviewing the financials each month, having that conversation with the management company if there are any discrepancies.
Investor distributions can either be managed by the asset manager or the person who’s responsible for ongoing investor communications, or whoever your money raiser is… Just because this is not really something that the person who’s sending out the distributions — I mean, they’re kind of interfacing with the investors because they’re sending out the distributions, but there’s really no conversation about that; it’s more of they look at their bank account and the money is in there or it’s not in there, or they open up their mailbox and the check is in there or the check is not in there. Then obviously if they don’t have the correct distribution, they’re going to reach out to the money raiser and say “Hey, what’s going on with this distribution?” at which point they can either reach out to the management company or they could tell the asset manager, because the asset manager is the one who’s going to be in frequent communication with the property manager.
Number four is one that’s going to be the responsibility of both parties, but we’ll get more into the investor communication tomorrow, as I mentioned.
Number five – and this is the last thing we’ll talk about today; we’re going through these four, and then six through the rest tomorrow… So number five is managing the renovations. If you’re a value-add apartment syndicator or a distressed syndicator, or even if you’re a turnkey syndicator, you’re likely going to have some sort of renovation you’re going to do to the property, whether that’s interior or exterior, or just upgrading some amenity. So the asset manager is gonna be responsible for making sure those renovations are done at the right cost and on time.
There’s really two ways that these renovations get funded. They’re funded out of the capital that was raised, or they’re funded by the bank. If they’re funded by the money that was raised, then you have a bank account and the money comes out of there to pay the contractors and pay for the supplies… But if you did some sort of renovation loan where these renovation costs were included in your financing, then there’s gonna be extra responsibility, which is having that constant communication with the lender during the renovation period… Because typically how it works is you’re not gonna get a lump sum dollar amount upfront; if your renovations are ten million dollars, you’re not gonna get a check for ten million dollars at closing. It’s gonna be based on draws from the bank, based on your budget and your cap ex timeline that you provided to the lender before closing… So you’re gonna need to interact with someone at the bank in order to make sure you’re getting those construction draws, so you can pay for those cap ex projects.
Typically, your general contractor and your property management company should know beforehand 1) that you’re getting a renovation loan, and 2) they should have an idea of how that process works… Because again, you’re hiring a property management company who has experience repositioning these types of properties.
In reality, you’re managing the people who are managing the renovations, because ideally, your property management company is the one that’s doing the day-to-day work; you’re just making sure each week that they are on track.
And if your renovations are not included in the actual budget and you’re covering the costs out of the money raised from your investors, then you’ve got a lot more control on when you can get projects done and when you can pay people for doing those projects… And you won’t have to have that extra responsibility of going back and forth with the lender.
We’re gonna go over one more actually, so we’re gonna do number six. So we’ll do four, and then seven through ten tomorrow. Number six is the asset manager is responsible for maintaining the economic occupancy.
Once you’ve taken over the property, obviously you’re gonna begin implementing your value-add business plan, which requires performing renovations, both interior and exterior. If you remember, during the underwriting we accounted for a higher vacancy rate, or a lower economic occupancy rate during the renovation period, which would be the first 12-24 months, depending on the level of renovation. But even though you’re projecting a lower number, that doesn’t mean you can just not think about occupancy at all during the renovations, right? You still wanna make sure that you’re hitting that projected number. So if it was 8%, you wanna make sure that each month (technically each week) your occupancy is not dropping below 92%. If you projected 10%, that number is 90%.
We’re gonna go over in a future episode specifically how to maintain the economic occupancy; the whole list of ways to essentially bring in high-quality tenants, where a high-quality tenant is someone who pays on time and actually stays in the property, takes care of it, resigns the lease. But if you don’t hit your economic occupancy goal, then you’re not gonna hit your return goals either, which means you can’t distribute your money to your investors.
Now ideally, this is not solely the responsibility of the asset manager. Like all of these responsibilities, your property management company should be involved and should be implementing the best practices. For this particular duty, your property management company should be implementing the best practices for maintaining that economic occupancy rate, through advertising, marketing, making sure they’re adjusting rental rates properly… But you are the asset manager, or your partner is the asset manager, so it’s your responsibility to oversee and advise your management company. Specifically, you need to let them know how quickly you want the renovations to be made, and making sure that they can actually do the renovations… So you don’t wanna say “Hey, I wanna do 30 renovations a month”, and they’re like “Well, we can only do 10”, and you say “No, I’m gonna force you to do 30.” You don’t wanna do that. You need to make sure that you are adhering to their abilities.
So you don’t wanna force them to do renovations too quickly, you don’t want to be too aggressive with the pace you do renovations either… So you don’t wanna go in there with the plan of doing ten a month and then all of a sudden deciding you wanna do 15-20 a month. Stick to whatever your pre-approved renovation plan and budgets were based on your conversation with your property management company, as well as your pre-approved rental premiums that you specified during the underwriting and the due diligence phase.
Now, before we wrap up, a quick note on how to actually renovate units… Because if you’re a value-add investor, you’re buying a property that’s already stabilized, so the occupancy rate is 85%+… So obviously you can renovate those 15 vacant units pretty quickly, or ones that want to be turned over within the end of the month… But what about the other units? You most likely don’t want to wait for those 85 units, you don’t wanna wait for all those leases to expire to actually renovate the units, so here are a few tricks to renovate your units at a faster pace, without having to wait for the leases to naturally end.
One would be once you’ve renovated those 15% vacant units in our example, then you can offer those newly-renovated units to a resident who currently lives in a non-renovated unit, so that you can renovate their unit. So if you can technically transfer 15% of your unrenovated unit tenants to the 15% that are now newly-renovated, and do those next 15%, and then continue that on until you’ve done all of the units – obviously, in combination with a few other strategies…
We can also increase the rents on the unrenovated units to promote turnover. For example, if a lease were to expire and the person wants to resign their lease, you can increase the rent by whatever your projected rental premium is… Let’s say you plan on spending 10k on a unit and raise the rent by $150. Then if someone who is living in an unrenovated unit’s lease expires, you can raise the rent by $150. If they accept it, then great; you’ve got essentially $10,000 worth of work for free. If they don’t and they move out, then you can renovate that unit.
But obviously, you don’t wanna have a large influx of vacant, unrenovated units, and if you do, don’t feel like you have to renovate every single one of them. If you take over and then 15% of the people’s leases expires and you say “Hey, I’m raising the rent by $150” and they leave, don’t feel like you have to renovate all 15% of the units. Just make sure you stick to your plan. If you’re gonna only renovate (let’s say) half of them, then lease the rest back and renovate those the next 12 months.
Another strategy is to renovate the units while someone’s currently living there. The way to solve that is you say “Hey, we’re gonna renovate your unit and you will get the new, upgraded unit for really no cost to you.” This will depend on the level of renovation, but you can do it while they’re at work, basically. If you want to, you can put them in a hotel; if something crazy happens at the unit from a maintenance issue perspective, you can put people up in hotels… Again, these are just ideas; it’s really up to you and what your budget allows.
So one is renovate them as people move out, two is offering a newly-renovated unit to someone who’s already living there for a small charge, or even for free. Three would be to renovate the units while someone is actually living there, and then four would be to increase the rent on a non-renovated unit, so that you promote some turnover.
And again, if you have 100 vacant units, don’t feel like you have to renovate all of those, ten a month, for ten months, and you’ve got all these vacant units sitting there. It’s okay if you’ve got 5-6 units that become vacant; you renovate only half of them and then lease the remaining units back to the market unrenovated, and then catch them on the next cycle… As long as your plan was to renovate these units over a 24-month period.
Overall, you want to renovate at a pace that will not adversely affect your occupancy rate, plus it will not make your property management company go insane. It needs to be based on what you and your property management company agreed to.
So those are five of the ten top asset management duties. Just to review – number one is implement the business plan. Number two is the weekly performance reviews, and we gave away that free weekly performance review document; three is investor distributions, four is the investor communications, which we’re going over tomorrow… So the real four is managing renovations, and then five is maintaining economic occupancy. In part two we’re gonna go over these last five top asset management duties – that’s six through ten.
In the meantime, make sure you check out the other Syndication School series that we have about the how-to’s of apartment syndications, and download that free weekly performance review tracker. All of that can be found at SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.