You and your team have pulled off an impressive feat over the course of nearly a year – working day and night each week to prospect for potential seller leads, underwriting potential deals, and crafting together offers and negotiating contracts to secure your recent purchase. Your team has then followed that up with the even-steeper mountain to climb that is due diligence and capital raising to get the deal from contract to close. But you did it! Unfortunately, the difficult work is only now beginning . . . .
You have employed a property management team to manage the daily operations of your new investment – which is a great move. And, of course, as an asset manager you will work closely with them to carry out your business plan. The journey you take with your property manager from acquisition to disposition will be highly-dependent upon your ability to minimize the common threats to effectiveness that often plague apartment investments. And while experience is one of the best teachers to accomplish this, it does not have to be your own experience to learn from in order to navigate this relationship.
It begins with understanding and maintaining clear and distinct roles between Asset Manager and Property Manager.
Asset Manager (AM)
your main objectives are to maximize the property value and the return on your investors’ capital. While this may manifest itself in hands-on management of daily operations of the property, that is not ideal. Asset Managers need to stay closer to the 30,000 feet perspective to be able to properly navigate the overall direction of the property. Such demands require the AM to possess entrepreneurial capabilities. Maintaining a higher altitude perspective allows them to be able to successfully handle negotiations, analyses, and approvals based upon risks and forecasts. Often times, an AM is responsible for the overall marketing and leasing of vacant units, while also overseeing maintenance and repair work – again while maintaining a higher-reaching perspective. More importantly, the AM will guide the the strategies for enhancing the property’s fiscal positioning. In the end, AMs are focused on Profits & Protection: maximizing the Profits of their investors’ capital by Protecting the financial stability of apartment property.
Property Manager (PM)
of course, the role that fills up much of the AMs time is working with the Property Manager, or PM. If the AM is the CEO of the property, the PM serves as the COO – directly responsible for carrying out the daily plans set forth by the AM. The PM needs to be centered around the two main goals of 1) meet or exceed budgeted rental income and 2) meet or exceed budgeted net operating cash flow. It is imperative that the PM (and PM team or PM company) possess the ability to maintain accurate property activity tracking and record-keeping. Paramount to this will be the monitoring and management of all Key Performance Indicators (or KPIs) – something to be explored in detail in a later post. For a PM to be successful, they will need to be able to be organized and detailed in their systems and processes, comprehensive in their daily strategic approach, and highly-personable to deal with residents, employees, vendors, contractors, and the AM team. These broad skills are only the beginning of what is needed to be successful.
Unfortunately, much of your asset management experience will be wrought mitigating these threats to the overall effectiveness of your property, your business plan execution, the sense of community and quality of life of your residents, and your ability to maximize the return of your investors’ capital. The most common threats to effectiveness fall into four main areas: Communication, Staffing/Roles, Accounting Processes/Budget Consciousness, and Marketing/Leasing. It should be noted that these four areas are not necessarily mutually exclusive of each other, as there is certain overlap amongst the categories and examples that will arise.
The first common threat area is communication. Which is, to say, typically the lack thereof. The old saying that “bad news never gets better with time” applies. We have seen expenses escalate in areas where rapid and clear communication channels would have minimized the damage. And the communication fundamental applies to all levels within the relationship, from residents to staff, vendors/contractors to staff, staff to PM, the PM to AM, and AM to investors and partners. The greatest way to stay ahead of communication problems is to ensure that you embed Communication has keystone value of your culture. Never miss an opportunity to reward those who are communicating at the standard you are trying to implement. Early on, you will need to lead from the front in showing what proper communication looks like including written, oral, virtual, and personal forms. You must embody what you want the culture of your business to be.
The second area of threats is the staffing area. First, is simply the amount of staffing – in essence, operating the property while significantly understaffed (failing to perform the functions of the property and execute the operational plan) or overstaffed (failing to operate efficiently and negatively impacting the property’s NOI).
Many PM companies experience staffing challenges and have been doing so for some considerable time. And, of course, the multifamily industry is not alone in that plight. In our experiences, the cause of understaffing issues is largely two-fold. First, many property management companies simply overextend. They take on additional properties whenever they can, rather than when a new opportunity fits within their strategic direction of growth. This is also because many often do not have a strategic direction of growth. Because of this, they take on too many property management jobs to increase revenue, which can lead to a painful lesson in both the short- and long-term for asset managers.
In that same vein, too many PM companies attempt to keep too many crucial activities in-house, rather than delegating out – to which these activities may be better governed directly by the AM. First among these are Capital Expenditures (CAPEX). These are typically exterior improvements such as roofs and windows, pavement and parking lot work, swimming pool, commons areas, etc. And also include heavy interior work such as HVAC or boiler/chiller systems, but can even include unit turns. PM companies may prefer to get paid to do that work directly, but it rarely pays off for you – the AM – and inevitably draws the limited manpower away from the important daily operational activities. This also cuts into the operational effectiveness of the overall PM and, eventually, into you – the AM.
It is imperative to establish this division of role assignments before your relationship begins and to spend some time asking other PMs and AMs on their approach to these operational procedures.
While not as common due to the current difficulty in staffing, overstaffing still can occur if not monitored. Particularly if a PM company as the ability to hire and retain employees, they can be prone to keeping more than is necessary on payroll. The overstaffing can be a byproduct of the preferred comfort of having more than enough manpower to carry out the daily operations of the property. This can also result from too many inefficiencies in the processes and procedures of many PM companies – something you will need to monitor as an AM, and something that we will delve into further in future posts.
For you as the AM, you must be able to have clear communication on the expectations of roles and responsibilities assigned to your apartment property (and to the hard-earned capital of your investors).
ACCOUNTING PROCESSES & BUDGET CONSCIOUSNESS
The third common threat area is your PM’s ability to sustain proper accounting processes, maintain budgetary vigilance, and – in effect – protect the overall NOI. Chief among these accounting processes are entering invoices from vendors/contracts into the accounting system in a timely manner. And this should be less the result of staying disciplined to task, and all the result of the systems and processes you have implemented from the top. What would otherwise be a standard Accounts Payable could fall into the Aged Payable category and may trigger a contractor’s lien or cancellation of service if aged long enough – all from the result of poor practices and procedures. This can often be mitigated, or even avoided, by simply incorporating today’s advanced property management technology. Systems and software such as DoorLoop, Landlord Studio, Rent Manager, and Propertyware are just a few of the multitude of highly-effective (and some are even low-cost) options on the market for protecting your investment in this area. Most of these examples also help improve the fight against previous threats by aiding in the financial reporting to you and with outreach to residents (communication) and improving the efficiency of the tasks and roles assigned to the PM team (staffing/roles).
Specific to this area is the hyperfocus on utilities and ensuring that the constant desire to improve efficiencies here is interwoven into the property’s culture. Today, we have numerous advancements in technologies to improve a property’s common utilization rate from the common approaches of quality shower heads, faucets, low-flow toilets, and LED lighting to the commonly overlooked examples of energy-effective landscaping, using in-house signage (or nudges) to improve behavior, and carrying out consistent and regular inspections of units, pipes, and fixtures.
MARKETING & LEASING
The final common threat area is the marketing and leasing strategies, tactics, and procedures that make up the approach for you and your PM. Without a doubt, the most common specific threat in this area is undermarketing. There are a few issues with this. Similar to the need for delineating distinction between your PM team and CAPEX responsibilities, so too should you carefully monitor the overall marketing plan and activities for your property. Few PMs today possess the ability to understand and embrace the fundamentals of marketing – and of executing a marketing plan to its fullest extent – that is necessary for most apartment properties pursuing an aggressive growth strategy. Though, this is not a specific charge against PMs in any way, as the same can be said for many industries. Its why marketing and advertising are typically one of the first management tasks that get outsourced, as it is the lifeblood of your business.
Any lack of effectiveness in this area often starts with the staffing area discussed early. Here, it is typically the lack of a leasing agent. Its difficult for most apartment complexes to maximize their growth strategy without the utilization of someone devoted to lease-ups and generating new leads. This person needs to wake up with that sole focus and then go to bed reflecting upon that day’s leasing activity went. And while the position does not need to be 100% commission-based, it certainly needs to be heavily commission-oriented, and that individual needs to be one driven by incentives. Your leasing agent can keep their attention turned towards all marketing activity, creating leasing events, and overseeing the follow-up process with new and existing leads.
Another issue underlying your undermarketing threat is a failure to embrace the new technologies, platforms, and best practices that lead the way in the multifamily industry. Currently, our industry is filled with readily available options, and several with low-cost – or even no-cost – options. Apartments.com leads the way, but other examples include Facebook Marketplace, Google AdWords, Local Twitter Lookup, and Community Newsletters. There are medium-term platforms such as FurnishedFinder.com and CHBO, that are commonly used for such programs as Traveling Nurses and other temporary professionals. Even shorter-term options would be AirBnB, Vrbo, Vacasa, and evolve. But those are just for the direct, first-order marketing.
Indirect marketing strategies will be effective, as well, by targeting social clubs, educational institutions, third-place locales in the area, and other business organizations with whom alliances could be built. In essence, you want to target these groups that would have members who fit the avatar of prospective residents you want to target. But it is this facet of the marketing strategy that requires creative thinking and an outside-of-the-box perspective to be able to connect points that are not always apparent at first.
This approach requires someone – or a team – that can devote considerable attention towards crafting creative solutions to the typical marketing problems. This demand does not pair well with also attending to the daily operational demands of managing an apartment complex; which makes it difficult for many PM teams to be able to effectively do both. Though, a full-time leasing agent devoted to this alone is a start.
Aside from undermarketing, another treat to effectiveness in this area is leasing below pre-established guidelines. Unless you have sound systems in place to avoid, this can become a common occurrence when PM teams are confronted with consistent vacancies and begin to cut corners to get empty units filled. Remember, your pre-established leasing guidelines are in there for a reason – at some point, those inadequacies are going to manifest themselves in the form of troubled tenants that require costly solutions. Guidelines such as no prior evictions, a gross income 3X the total rent, proof of employment, character references, etc. all are common considerations for future residents – and for a reason.
A final threat to the effectiveness of your property’s operations is failing to adhere to tenant policies and even reviewing them regularly. These would include rules on pets, noise, living standards, etc. But would also include the official method through which residents communicate with staff, the use of the common areas, and disputes amongst residents themselves. Fortunately, Association #1, Association #2, and Association #3 are examples of organizations that offer up established best-practices in these areas and of what should be included in your set of tenant policies.
Legal elements of these would include such actions as evictions, complying with local/state/federal housing laws – including fair housing compliance, and accessibility throughout the property. Its critical that these policies – and your proof of systems and processes to keep you in compliance – are reviewed periodically by legal counsel
In the end, mitigating or eliminating these threats falls back upon your ability as an AM to build a championship team around you and to instill the proper culture amongst that team. As with any business, it will come down to your ability see the venture as an investment to protect, and then to create systems and processes – built around leading and lagging indicators that become Key Performance Indicators – that are oriented tightly towards that one goal.