CRE asset management is the practice of maximizing property values and your return on investment. While each property should have its own strategy for profitability, asset management focuses on overall real estate investment portfolio management, analyzing how each property impacts (or would impact) your total collection of assets.
A carefully crafted CRE asset management plan will help you:
- Acquire the right investment property at the right time.
- Hold each investment for the optimal period.
- Dispose of each property when and how it makes you the most money.
An effective plan will help you make sound investment decisions and build a diversified portfolio of real estate investments. That way, you consistently have cash flow that you can use to buy additional properties or fund other goals.
What does CRE asset management involve?
CRE asset management involves taking specific actions throughout the real estate investment lifecycle. Here’s what needs to happen from acquisition to disposition:
Acquisition and due diligence
Before you make an offer on a property, you need to find a solid area to invest in. Start your real estate market research by determining which locations are up and coming, which are over-saturated, and which are starting to contract. Then, look at the crime rate, average income, and other area statistics to see if the type of tenant you want will do business, work, or live there.
Next, decide what type of property you want to buy. While diversifying your holdings is smart, it can also make sense to specialize in a specific type of commercial real estate, like retail shops, industrial sites, office buildings, or multifamily apartment complexes. That way, you can become an expert at finding and vetting deals.
Once you’ve identified a potential property, you must do your due diligence by reviewing all the available financial and legal information. Look for metrics like current rental income, expenses, and cash flow.
Then, project future cash flow and perform valuation modeling to determine an appropriate price to pay for the property. Your model could be based on potential income, recent comparable sales, or how much it would cost to build a similar property from the ground up (an existing structure shouldn’t exceed this price).
You must also inspect the property’s physical condition. The deal may not be profitable if it needs extensive repairs or capital improvements. Consider having the property inspected by a professional who can give you a full rundown of what the building needs.
Property management and maintenance
Once the asset is in your portfolio, you move into the property management and maintenance phase. Sticking to a regular maintenance schedule and making necessary repairs promptly will keep the property in good condition, preserving its value. In addition, upgrading the property with modern amenities and listening to tenant needs and wants will keep tenant satisfaction and retention high, leading to less turnover and steady occupancy rates.
Behind the scenes, you’ll also have to pay property taxes, ensure the site is adequately insured, and comply with government regulations. You may want to hire a property manager to help with some of these responsibilities—especially as your portfolio grows to several properties.
Financial management and reporting
Each property in your portfolio should have a business plan with a budget to help you control expenses and maximize returns. As you manage the asset, keep tabs on its performance to ensure your investment is cash flow positive.
Caution: Inflation can erode your profitability. But you can mitigate its effects and keep your operation in the black by reducing costs. For example, you can partner with affordable contractors for maintenance and repairs.
You should prepare financial reports for each property and your overall portfolio every quarter. That way, you can track performance and catch potential issues before they drag on for too long.
Leasing and tenant relations
Tenants are the lifeblood of your commercial real estate investment business. That means you must find, screen, and sign renters to fair but profitable leases. Then, once they’ve moved in, you must answer questions, address concerns, and resolve disputes quickly to maintain their satisfaction. Your goal is to maximize your occupancy rate, tenant retention, and rental income.
Pro Tip: A real estate agent can find quality tenants and a property manager can maintain positive tenant relations at your sites.
Each property’s business plan should contain an exit strategy that generates the best return on investment (ROI) while mitigating risks. For example, let’s say you own an office building downtown. The percentage of people working from home in that area has steadily increased for years, but most professionals still work onsite.
Since selling a commercial property can take a long time, you decide to put it on the market now. That way, you can hopefully cash in before most professionals work remotely and the building loses value.
Now, you have to prepare the property for sale, which includes performing maintenance, adding upgrades, and informing your tenants. A real estate agent can help you market the property to potential buyers. But if you want to do it yourself, take high-quality photos and videos of the entire site and include them in the listing. Adding overhead drone footage is also an interesting way to show prospective buyers the property from a different perspective.
Your buyer will try to get the best deal they can. But you need to have a bottom line number in mind and promise yourself that you won’t accept an offer below it. That way, you can get the ROI you need to make the sale profitable.
Key metrics in CRE asset management
There are several key metrics in CRE asset management that you should know. Here are five of them:
- Net operating income (NOI): The revenue earned from a particular property. It’s measured as total income less operating expenses (which excludes mortgage payments).
- Cap rate: The ratio between the income generated and the asset’s current value. It’s measured as NOI / property value.
- Return on investment (ROI): The profit earned expressed as a percentage of the property cost. It’s measured as profit / cost.
- Internal rate of return (IRR): Also known as annualized return, it estimates the property’s potential profitability over the holding period. The Corporate Finance Institute breaks down the complex calculation for IRR.
- Debt service coverage ratio (DSCR): The operating income you have available for debt payments in relation to your total debt balance. It’s measured as NOI / current debt
Pro Tip: Commercial real estate software, like Blooma, can help you calculate and track these essential numbers.
Benefits of effective CRE asset management for lenders
Lenders can benefit greatly from effective CRE asset management. Proper asset management practices mitigate risks and maximize returns. They also ensure that all properties are in regulatory compliance.
Challenges in CRE asset management for lenders
However, there are some challenges in CRE asset management for lenders. Even the most skilled and experienced real estate professionals can’t anticipate and safeguard against all risks. For example, economic turmoil and real estate industry fluctuations can impact property values and rental income. A down economy often features layoffs, which could mean your tenants have to move to cheaper housing – or miss rent payments.
In addition, local governments can change regulations seemingly overnight, which could lead to unexpected costs to remain in compliance. Plus, even the best-maintained properties eventually need a major repair, like a new roof or HVAC system, taking a large bite out of your profits.
Blooma streamlines the asset management process
CRE asset management is a financial strategy for your real estate portfolio. However, there’s an art and a science to getting this complicated practice just right.
Fortunately, Blooma streamlines the commercial real estate asset management process. Blooma is an AI-powered platform that helps you manage your portfolio easily and offers data-driven insights and analytics. Blooma’s features include market research, property valuation, financial analysis, lease management, and much more. With Blooma, investors and lenders can manage their assets more efficiently, expedite decision-making, and achieve better returns.
Check out the CRE software that can help you generate more revenue with less effort.