Real estate asset management involves managing a property with a broader context in mind, such as manufacturing or office space, to maximize its value as a standalone business. Costs to consider include property taxes, vacancies, utilities, and maintenance, with maintenance being the preferred place for real estate exchange.
Property asset management is simply the management of the property with an eye to a broader context than the one in which the property exists. This context is generally an activity other than owning and managing real estate. Examples might include manufacturing, warehousing, retail sales, research and development, or office space for the executive branch of the company. Whatever the context, the goal of real estate asset management is to treat the property as a standalone business and maximize its value.
An independent real estate business is valued by the net income it produces. If the property has not been adequately maintained, the cost of restoring it will be deducted from the value shown by the net profit. So you want to know how to maximize the net income of a property.
There are four general categories of costs: property taxes, vacancies, utilities, and maintenance. Property taxes usually consume between 15% and 20% of a property’s income. Different tax jurisdictions, both within and between states, have different tax schemes, so the exact percentage may be higher or lower. Real estate taxes are the hardest expenses to reduce. Wise real estate asset management will seek to reduce the tax assessor’s valuation in recessions.
Vacation is the next biggest cost. Here, 9 to 18 percent of expected gross income can be lost. When a tenant leaves, the landlord incurs a loss of income, the cost of painting and redevelopment, the cost of new “tenant improvements”, improvements specific to the tenant’s needs, and leasing costs, such as publicity and legal fees associated with preparing and reviewing the lease.
Asset management of real estate properties will minimize turnover, even at the cost of not always getting the maximum rents. Reducing the rent for existing tenants by a few dollars a month is less expensive than the costs associated with leaving the tenant. Conversely, it’s cheaper to leave space vacant a little longer than to rent it out to a tenant who can’t afford it or to one who has significant credit problems. The only thing more expensive than losing a good tenant is evicting a bad one.
Utilities are a significant cost to the landlord in tall office spaces but not in shopping malls, where spaces are usually individually metered. In the context of real estate asset management, utilities are important because the largest commercial enterprise pays for them directly or indirectly. Lighting, heating and air conditioning are now normally controlled by computers, heat sensors and motion detectors. Make sure they are present and up to date.
Maintenance, which is expected to consume 8% to 12% of the rent charged, is the preferred place for real estate exchange. Failure to maintain property in good repair is a poor asset management strategy. Problems tend to grow over time and repairs cost multiples of what they would have cost if they had been done when they should have been. On the other hand, buying needlessly expensive devices is a waste of money, no matter which executive wants them. The best strategy is to repair the property properly and, where appropriate, avoid overpayments or over-improvements.
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