All right, let's dive into asset management.
So, what exactly is it?
And how does it differ from property management?
Typically, an asset manager oversees a portfolio of properties for an investor or owner, with the primary goal of maximizing investment returns through big-picture oversight. Asset managers focus on the financial health of the investment, considering market trends and other external factors.
While property managers are primarily concerned with the day-to-day operations, asset managers are looking at the broader picture — tracking the financial performance of the investment, setting annual goals for the property, making decisions on behalf of investors, managing risk, and ensuring that the investment gains value over time.
At our company, like most companies, we handle our asset management.
Managing Your Asset After Construction
Let’s think about this from a couple of different angles.
It’s decision time, and although you should have already determined your strategy — whether you built the asset to sell, hold, or hold for a period of time, market conditions can change.
For instance, a few years back, some developers had buyers show up right after construction, offering ridiculous amounts of money to purchase the property.
The market was so hot that selling made a massive win for investors.
Selling can be great. But so can holding.
Holding a property longer term enables you to maximize tax benefits through depreciation, receive cash flow AND watch your investment grow in value over time.
So, do you hold or sell?
Understanding Stabilization in Real Estate
Let’s talk about the term “stabilization.”
This means your building is leased up and, even if it’s not 100% occupied, it’s been over 90% full for three consecutive months.
This is the point where the project is considered stabilized.
Typically, this is when you’ll look to refinance, as permanent lenders like Fannie Mae, Freddie Mac, life insurance companies, and sometimes banks are ready to lend on the asset.
At this point, you’ve taken some of the risk off the table, and they’re ready to consider a new, what is often referred to as a permanent loan.
If you’re planning to hold the property, you’ll usually refinance out of your construction debt.
Now, we’ve touched on this before — sometimes with smaller deals (say, 12 or 15 units), you might have locked in a longer-term bank loan upfront, so refinancing might not be an option.
In these cases, if you’ve locked in a great loan and interest rate, that’s fantastic.
You can focus solely on asset management without worrying about refinancing or selling.
I’ve been involved in a few projects like this, where refinancing wasn’t an option because we had a long-term loan in place, and it was a great loan.
The downside? If you’ve created value, there’s no way to cash out and get a new loan to capture that value immediately, but you’ll see the benefits down the road, and the cash flow is probably solid.
For larger projects, the typical refinancing options are with Fannie Mae, Freddie Mac, or life insurance companies.
The goal here is to replace and retire the construction loan.
Hopefully, you’ve created value during the construction phase, assuming the market hasn’t taken a downturn during the 24-36 months of building, leasing, and other processes.
Your building should now be worth more than it cost to construct.
Challenges in Refinancing During Market Shifts
However, as of July 2024, that’s not always the case.
Some buildings completed in the last 12 months have entered a challenging market where interest rates have skyrocketed, leaving developers unable to refinance or holding off if they can.
This situation underscores why longer-term construction loans with extensions are crucial.
When refinancing, you’ll shop around with various lenders who can connect you with Fannie Mae, Freddie Mac, and life companies.
The benefit of these new loans is twofold: if you’ve created value, you might be able to secure a larger permanent loan than your original construction loan.
For example, if your construction loan was $10 million for a $15 million building, you might be able to get a $12 million permanent loan because you created value and the finished building is worth $16 or $17 million, allowing you to pull $2 million in cash at the refinance and distribute it to your investors.
This outcome is a huge win and makes everyone happy.
These loans typically come with longer terms — five, seven, or ten years fixed - with options for interest-only periods, which can maximize cash flow and investor returns.
The other major advantage to developers is that in most cases these new permanent loans come without the need to sign a personal guarantee.
However, there are times, like now, when refinancing isn’t ideal.
Sometimes it’s a cash-neutral situation, and in tougher scenarios, it could be a dreaded cash-in refinance, where you need to put money into the deal.
Thankfully, I’ve never had to do that, but it does happen.
Selecting the Right Brokers for Selling Your Property
If you decide to sell, it’s crucial to engage the right brokers — those who are top in your market and specialize in selling this type of product.
Avoid going with a cousin who’s a real estate agent or someone inexperienced.
And please, don’t ever think about selling it yourself.
Instead, reach out to the top brokers, ask for a Broker Opinion of Value (BOV), review the BOVs, interview the brokers and choose the best fit.
Be cautious, though, of brokers who inflate their BOV to win your business.
It’s tempting to go with the highest number, but if the property doesn’t sell at that price, it can create doubts among future buyers.
Stick to realistic assessments.
At the end of the day, asset management is really about keeping your eye on the big picture and making smart moves to boost your development’s value. Whether you're thinking about holding or selling, refinancing, or sticking with your current loan, every decision has a real impact. The trick is staying flexible, keeping up with market trends, and partnering with people who know what they’re doing. Things in real estate are constantly shifting, but with a proactive approach and some smart planning, you can keep your investment on the right path and set yourself up for long-term success.