The Rookie’s Secret Weapon for Creating Cash Flow in ANY Real Estate Market

Ashley:
My name is Ashley Care and I’m here with Tony j Robinson

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today’s guest is the one and only bad Ash. Ashley Wilson. She’s a real estate investor in asset manager and a friend of the show now she’s managed over 1500 units and is coming on our show today to give a crash course on how rookies can be better asset managers of their own real estate portfolio. So today we’re going to discuss what is asset management and why rookies should be thinking about this on their very first deal, how to effectively manage your assets, and lastly, how to optimize your investment for top returns. So Ash Wilson, thank you so much and welcome to the show.

Ashley:
Thank you both so much for having me. I’m so excited for today especially because I’m just talking with my best friends now, so this is going to be awesome. Well, Ash, you were one of the people that really influenced me to learn about asset management and to have an asset management plan in place for my business. So can you start off explaining what asset management is? Great question, and I think a lot of people confuse this between property management and asset management and there is a very clear distinction when people first get started. The reason why they go hand in hand is because most people choose to do both themselves. So they property manage, they handle anything that the tenant has an issue with or even if the tenant doesn’t have an issue with the overall property needs as compared to asset management, which is really essentially managing the investment as a whole.
The easiest way to look at it is when you look at it on a larger scale, those two positions seem to be owned by two different people or two different organizations. So property management really is speaking to the tenant’s needs and the property needs, whereas asset management, you might be managing the asset according to the business plan, answering investors inquiries and making sure that you adjust your strategy based on whatever the market dictates. So Ash, can you give us an example of what are some of the actual tasks that an asset manager may do throughout the day? An asset manager is tasked with basically being the eyes and ears of the overall investment. The simplest way that I like to look at it is I like to think of the asset manager as a conductor of a symphony almost. So for example, if you have a violinist who is acting as the property manager, you have a cellist who is acting as maybe a contractor.
The asset manager is making sure that not only the right people are in the right positions, but that together that it makes a good sound. So for example, the asset manager might be reviewing financials, might be looking at the business strategy and seeing what the market dictates. Currently we have a very volatile interest rate environment. I mean it’s not as volatile as it used to be, but it’s still very unpredictable. That might change your overall business plan in terms of okay, is it a good idea to refinance your property and pull some equity out or is it a better strategy to continue renovating units and trying to increase the overall net operating income? So what is a measure that’s used to evaluate a property’s value and continue along that road and hold the property longer? So an asset manager is not only reviewing financials, but they might be following up with a property management team to discuss the strategy in terms of where they want to put the rents. Do they want to be very aggressive and try to increase the rents or do they want to scale back and just focus on keeping the property occupied? And then there are other items that they’re following up with making sure that any investor that comes on board and on the investment is well aware of what’s going on with the property with respect to not only the financials but operationally to make sure that the asset is found.

Tony:
Ashley, can you give an example if you’re okay sharing your actual portfolio of a recent decision you made from the asset management perspective?

Ashley:
Actually I can talk about one that we are going through currently. So we have a property that has a variable interest and what that basically means is that our interest rate is not fixed, it fluctuates with the interest rate environment. So the bank, when you secure a variable interest rate loan, the majority of banks require you to get what is called a rate cap, which is essentially an insurance policy on your interest rate that creates a ceiling. So if the interest rate goes higher than that ceiling, that insurance policy essentially refunds you that extra amount that you’re paying to the lender every month. So right now we’re in a little bit of a transitional period where we’re trying to determine, okay, should we purchase our replacement rate cap now or should we wait until the end of September for when the rate cap actually expires?
Because there is a term associated with each rate cap that you purchase. There are a lot of factors to consider and one very important factor is whether or not you think the interest rates will come down or go up. And not only is it correlated to whether or not the interest rates rise or fall, but it’s also with respect to the predictability of those interest rates. So for example, over the past year and a half, the interest environment has been very unpredictable. So what ends up happening is the rate caps become really expensive because the rate caps, they are also forecasting whether or not they believe the future of the interest rate environment is going to be 6% interest, 5% interest, 4% interest and so on. So in those situations, because it’s such a guessing game as opposed to a more stable environment, the risk is much higher and in turn the cost of that rate cap becomes higher. This is a decision that our team is analyzing currently and we’re looking at a lot of different economists outlook on where they think the interest rate environment will be. We’ve also really tried to dive into what the Fed chair Jerome Powell is saying in all of his speeches to try to dissect where we think the most opportunistic time would be to pull the trigger on buying a replacement rate cap.

Tony:
So Ashley, what it sounds like is the property manager is almost like if we look at this as like a business, your property manager is almost like a COO where they’re really in the tactical piece and trying to move the bus forward and the asset managers kind of like the CEO world where you’re looking at the overall landscape and trying to make strategic decisions about where to take the business.

Ashley:
I couldn’t agree with you more and that’s why I’m a firm believer in understanding all aspects of multifamily ownership. And the reason why I say that is because it actually then circles back to acquisitions. So for example, asset management is seeing the day-to-day and what’s going on along with the property management, but almost at a macro level and they can take that information and use that information to their advantage when sourcing new properties because then they can use that information to help forecast when they’re underwriting a property and making an offer to purchase a property. If you have very defined criteria and you don’t have communication between your asset manager and your acquisition folks and when you’re first starting off, it’s all you. That’s how I started. I literally wore every single hat, which in one respect was stifling in my growth because it would’ve been much easier if I had assimilated a team from day one and been able to just outsource every single piece to owning rental properties that way.
But the benefit is that I learned every single aspect of ownership so I can see how everything connects and marries to each other. More specifically, I can look at a situation like this or I can look at the rising insurance costs that we’re seeing across the nation and I can then go to our underwriting projections on an offer we’re about to make and say these insurance projections aren’t real anymore. We need to increase our projections because the insurance rate environment is charging a much higher rate to ensure these properties due to natural disasters due to the lack of supply of insurance carriers within given markets. You see a lot of insurance carriers vacating a market, and this is something I’m seeing real time as an asset manager because when we go to renew our insurance, the premiums aren’t jumping up 5% year over year as they historically have done, but 10 to 20% in some cases.
So that’s another reason I think the asset manager is kind of like the mama or papa bear of the investment. They’re really trying to safeguard everyone, not only the investors but the team and the property itself. Okay, we’re going to take a short break and when we come back we’re going to talk to Ashley about how to optimize your revenue with having an asset manager. Okay, thank you so much for taking the time to check out our show sponsors just like you guys. They really make the show happen. So Ash, what skills do a rookie need to have to effectively manage their portfolio? So if you can’t go out and hire the best asset manager around, what are the skill sets that you need to have? In my experience, the best asset managers are unfazed with things they don’t know. And what I mean by that is you’re constantly thrown different challenges and you have to remain very even keeled.
I know when you first get started you don’t even know what you don’t know, but if you know who to ask or where to look for the information, a simple Google search or YouTube video might be the difference maker in finding the solution. So I would say someone who is really strong in asset management is someone who is not phased when something very difficult comes their way, is very good at looking up information they don’t know and asking questions and is really good at synthesizing the information that they discover along the way and then applying it to the investment. Because owning rental properties, in my opinion, isn’t real estate investing. It’s owning a business and that business just happens to have real estate attached to it. If you look at it from a business perspective, every single person who steps into owning multifamily comes with some sort of skillset that will help them along the way.
So if you’re really good at marketing or accounting or legal, it doesn’t matter what skillset you had before, asset management seems to need a piece of all of those different fields. I know for example, both are very good at creating demand for your own holdings. I follow both of you on Instagram and I see everything that you do and it makes me want to stay at your properties not because you’re my friends, but well that’s also a benefit, but it’s also because of just the interest that you create in staying at your properties. That’s something that is transferable in owning rental properties. So don’t think just because maybe you haven’t purchased a rental property before that you’re starting at ground zero, no one is starting at ground zero, they’re always coming with some sort of skillset that allows you to leverage that skillset and use it to your advantage to grow your portfolio.

Tony:
Actually I’d love everything you’re sharing here, but I know for a lot of our Ricks there, I guess lemme take a step back because for a lot of the, when we use the term asset management, we’re focusing on larger multifamily, but for a lot of the folks that are listening to this podcast, maybe they’re starting off with a single family or duplex or maybe a triplex. So I guess are there any differences between asset managing for a large multifamily and doing it on a smaller scale for a single family? I guess what kind of things translate when you’re doing it on a smaller scale?

Ashley:
What’s interesting is I think this answer might surprise you. I actually think it’s harder. I think it’s harder to do it on a smaller scale and the reason why is because you can’t outsource as much from day one. So I know there’s two different tried and true ways on how to grow your portfolio. One is called the stacking method, which is essentially doubling your investments with every purchase. Not exactly, but say you go from a duplex to a quad to an eight plex to a 16 plex, alternatively you can just throw your floaties to the side and jump in the deep end and hope you have a friend that is a really good swimmer that can help you out along the way. And I actually think that is a better method and the reason why I think that it’s the better method is personally that’s the journey that I took, but I also think that’s a better method because it allows you to align yourself with someone else who has that experience.
So when I said before that you can leverage experience you have in your W2 or some other field you’re coming from, it’s because you can come to folks like me that have an established company and figure out a blind spot in my company, which every single company has a blind spot. Every single company is great at doing something good at doing something and horrible at doing something. If you’re great at doing the thing they’re horrible at, they might want to partner with you and that’ll give you into seeing the entire process. So that’s why I think that that is a better strategy and ultimately I think that when you’re starting off and you’re doing a single rental or duplex, sometimes I think it’s more challenging. I’m not saying that you can’t be successful that way. In fact, it actually mirrors very well to what I said earlier, which is you get to learn the entire process.
You actually get to learn property management and you get to learn asset management and you get to learn the differences. So you know how to identify a good property management company or you know how to do vertical integration. So I didn’t learn the property management from doing a duplex or a quad, so I had to really cram. It was like you’re taking a test in school and you stay up all night and cram the night before your test and that’s what I had to do to learn property management. I don’t think that was a very good exercise in my life, looking back on it, I actually hated it. But it’s a different path and everyone has a different path. There’s no right or wrong way. I just think when you’re starting off and you’re trying to get the yield, which essentially is going to allow you to leave your W2 or maybe grow your portfolio, it can be challenging with a smaller unit count just because it doesn’t allow you the leverage to bring on other folks.
But that doesn’t mean that it’s not a good way to learn. So Ash, as a rookie investor starting to prioritize asset management, what are the three things or five things that I should be doing monthly or quarterly? You talked a little bit about the insurance, looking at what your insurance premium is, things like that. What are some of the other things? If you just have a really small portfolio you should be looking at, the first thing you should be looking at is the market as a whole. So how is the US performing? What legislation is coming out? This is something you want to pay attention to, whether or not, it doesn’t matter what side of the fence you’re on politically, you should always just be aware of what legislation at a national level is being discussed. Then from there you want to drill down and get to your specific market.
So start at a national level, look at the trends, compare your local market to national level standards. For example, unemployment rate, population growth, job growth, and then you want to look at state level. So at the state level, what’s going on at the state level and a lot of people will make the error in picking a state that is very landlord friendly to only end up in a county that is very tenant friendly. So that’s something that you have to be very mindful of to not only understand state legislation, but you have to understand local municipalities. So your county and your township. Number two as an asset manager is you should understand the day to day and you should understand what the property dictates, what the market dictates and how that fits with your business plan. So now you’re going to put together the pieces, right?
So you had this business plan, you may have forecasted that you wanted to hold this duplex for 10 years, but now the market is dictating that maybe you should look for an exit now maybe you have more rental properties and this is a time suck. Yes, it’s giving you $200 per door, but maybe now you’re going after properties that are giving you $400 per door in cashflow. So now it is maybe not worth your time and you might have another opportunistic situation where you can trade that property for another property. So that is something to consider. And the third piece is an asset manager, which is hands down, the most important piece to being an asset manager is communication. So I said before that really owning rental properties is you’re running a business and real estate’s attached to it. Well I believe the statistic is over 90% of businesses failed to a breakdown in communication and this is no different.
So you need to make sure that all of the key decision makers and the influencers who are going to help execute your business plan are aware of any changes, whether that’s something you see at the national level, you should have a conversation whether that’s something you see in practice started to happen, it’s a two-way street. So maybe you as the property manager or if you’re hiring someone else as a property manager is starting to see something that you now need to communicate with other stakeholders that you have, whether it be investors, whether it be a maintenance person on the site, you never know. But communication is so important and I think a lot of people are scared to communicate because they don’t want to give off the sense that they’re going to sell the property. Let’s say for example, you’re working with a third party property management company, but third party property management companies are well aware that people transact on these properties all the time. So a safeguard you could put in place is you could offer a stay bonus and that would allow that exposure that your staff might leave if you’re going to sell, that would hopefully disappear. And that way you’re all on the same page helping you maximize the value when you go to sell. That’s interesting. I’ve never thought of that or heard of that doing that. Stay bonus,

Tony:
We do have one final ad break to take, but guys stick around when we come back we’ll hear more from Ashley Wilson. Alright, welcome back to the Real Estate Rookie podcast. We have Ashley Wilson here talking about asset management, how to best optimize your investment. So Ashley, can you tell us about how asset managers way risk versus reward?

Ashley:
Okay, so I like to say asset managers are their number one goal is to maximize an investor’s return. So whether that’s your personal return or that’s a partner’s return or a group of people’s return, that’s your number one goal. How you are going to do it is by way of working with a property management team, which could also be yourself and maximizing the NOI on the property. So just to step back a little bit, with rental properties, the way that multifamily evaluation occurs, and this is five units or more, so under four units, it’s a different process. It’s very a simple process, which is essentially four units typically get measured on what’s called the comparative sales approach. So that’s basically taking two assets that have similar characteristics and taking one that sold for XML and saying, okay, well this is a similar property in the same school district with the same specs.
So it most likely will sell for the same process or same amount, excuse me, with commercial real estate. So units that are five units or more, there are three ways in which the property can be evaluated. The first is comparable sales approach, which actually rarely happens. It’s a great technique that brokers will use to have you increase your offer, especially if you don’t really know how to evaluate it on the way that I’m going to tell you is the tried and true method, but it’s a great way of brokers saying, well, that property traded for a hundred thousand a door, so this property should trade for a hundred thousand a door. When really when you do the analysis, you’re getting more like 80,000 a door. And I’ll tell you in just a moment what I mean by that. The second method is called the replacement value approach.
The replacement value approach. Think of insurance companies, insurance companies analyze value based off the fact that if that property would burn to the ground or something tragic would happen to the property, what would it cost to build that property again to the same specs. So that’s replacement value. The third, and this is the tried and true method that I was alluding to earlier, is called the net operating income approach. The net operating income approach takes the income, your total income, and that’s comprised of your rents coupled with, for example, other incomes. So let’s say it’s parking fees or let’s say it’s washer dryer income or pet rent. All of those fees are your income and you subtract your operating expenses. Operating expenses are, for example, your utilities or the cost to what we call turn a unit, which is essentially just getting a unit ready for someone to come in.
I want to differentiate turning a unit though from renovating a unit, renovating a unit. Let’s say for example, you’re going to put in a whole new kitchen. That renovation gets categorized under what’s called capital expense. Capital expense does not get included in the net operating income calculation. It goes what’s called in the industry below the line. So what you’re going to do is you’re going to take your total income minus your total operating expenses, so your day-to-day expenses, and you get what’s called your net operating income. After your net operating income comes CapEx comes, it also deducts your mortgage. Insurance gets deducted above the line, so it’s included in your net operating income calculation. So are taxes, but your mortgage goes below the line because mortgages vary based on the person who bought it, capital expenses. They also can vary based on the person who bought it because let’s say for example that I want to replace a roof, but Ashley Care, Antonio own a property and they don’t want to replace the roof.
So I made that decision. It’s a one-time expense. It does not get included in the net operating income. The net operating income then gets divided, excuse me, by what’s called the trading cap rate, which is essentially the return in that market for that particular property and that yields the entire value in a five cap market. So it’s based on cap rates as opposed to what I talked about earlier, which are rate caps. A lot of people get that confused, but what I’m talking about now is cap rates in a five cap rate market. The best way to think about it is it’s a multiple by 20 because five goes into 120 times. So if you take the NOI in a five cap rate market, then it’s the NOI multiply by 20 gives you the value of the property. So for example, a $10,000 annual NOI multiplied by 20 is a $200,000 evaluation.
So that’s how you come up with the evaluation for a commercial property asset managers. Then knowing that calculation and knowing that’s a tried and true method, they can control the value the property. That’s why people love commercial real estate so much. That’s why they love multifamily because there are really three ways that you can control the evaluation. You can increase the income, you can decrease the expenses, or you can do both. So ways that you can increase the income or you can do renovations and then you can charge more rents, you can do a better marketing campaign and create more demand, but you still have the same supply. So in turn, basic economics dictates that that will increase the rents. You can also charge additional fees. So for example, let’s say you own a 20 plex and you have no covered parking, you could install carports and start to charge for carport parking because it’s now covered parking.
Let’s say you charge $20 a spot. So this is a way that you can create monthly income that will help increase your NOI ways in which you can decrease your expenses are you can renegotiate contracts. Let’s say for example, you have a landscaper who charges a thousand dollars to mow your lawn every month and spruce up the gardens. If you can negotiate a 10% reduction and get it down to $900 a month, that will translate to $1,200 increase on your NOI over the course of a year. So it’s a hundred dollars increase because you’ve decreased your expenses by a hundred dollars multiplied by 12 months. So you can see that there are a lot of different levers that you can pull as an asset manager to really maximize value. And that’s the way that you go from making a couple hundred thousand, excuse me, a couple hundred dollars to hundreds of thousand.
And when you get larger millions of dollars of appreciation or increase in value. So in terms of ways in which you can grow your wealth, the best way to grow your wealth is to be a really good asset manager because this is the differentiator. It’s not even just the increase in cashflow, but it’s the increase in value in the property that you’ve just created almost out of thin air by just really focusing on the details when it comes to operations. Ash, what a phenomenal breakdown. Thank you for that. One piece that I want to add to this is as the asset manager, you gave all the things that they can do to increase the value of the property, but what information do they need from the property manager each month to actually follow through with these plans they have in place? One thing I like to do before getting a property, I like to say the work starts as you get an accepted offer as opposed to when you have the keys in hand.
One of the things that you can do is when you first get a property under contract and you’re going through what’s called your due diligence period, so you’re confirming all your assumptions, you’re looking at the financials that the seller gave you and you want to go through it with a fine tooth comb, you want to go through every single line item and then you’re going to develop a plan and you’re going to fine tune your numbers and hopefully you’ve offered below what you could have offered. You could have probably offered a lot more now that you see all the opportunity that I was just talking about. So in terms of your question, then, when you have the property now in your name or in an entity name, that’s probably for a different episode, but when you move forward with purchasing the property, now what you want to do is you’re going to trust but verify.
So you’re going to come up with this strategy, you’re going to share this strategy with your property management team, or maybe it’s just you, maybe you’re starting off, you’re going to then come up with a business plan, let the maintenance team know. Let everyone who’s involved in the process know this is our strategy, this is what we’re going to do. And the reason I say that is you don’t want someone coming in, if you need to replace a balcony for them to give you an estimate for a balcony that’s going to last 30 years. Maybe your plan is to only hold a property for five. So you want something that will last for 10 years. You don’t want to spend extra money, you don’t need to spend. And what you’re going to do is you’re going to look at your financials every single month and you’re going to analyze them very thoroughly to tweak every single line item.
Now this takes time, it takes a lot of time. In large multifamily, I can tell you the average time to turn a hundred units or more and create this value is between two to three years, which is why most people, if you are considering doing passive investing, most offerings are between a three to five year hold period. In one aspect, it’s due to how long it takes to execute what’s called a value add strategy. So you’re creating value, that’s where that term is birthed from, but it’s also because it’s a good runway for trying to exit the property based off of market cycles. So market cycles typically tend to be between eight to 10, sometimes even up to 12 years in their full cycle. So this three to five year period gives you enough runway to figure out when is the most opportunistic time to sell, not on the value that was created, but on that term I said earlier, which is cap rate because cap rates fluctuate.
So in terms of when you are looking at the overall asset and what you’re trying to do, you’re trying to time your renovation over the whole period. And if you’re lucky, you can get it done sooner and then the market will coincide with your execution. For me personally, I can typically get it done between 18 and 24 months, but that’s also because we have been doing this now for over six years. We’ve really figured out how to do it very strategically. We know what we’re going to do the first 30 days, we’re going to focus on the next 60 days or 30 to 60, 60 to 90 and so on. And what’s interesting is the faster you can do it, not only the faster you can get return on your money and start to double your money and then reinvest that money, but the faster you can do it, the faster the timeline starts for what’s called your trailing financials.
So when someone’s looking to purchase a property, they most often use debt, and a lender lends off of trailing financials. Historically it was trailing 12 months financials, but because of covid, it disrupted that. And now what they look at is the history of even three months of financials. When you want to get the best type of loans, so the cheapest cost of debt, you need what’s called 90 and 90. So 90% occupancy for a minimum of 90 days or greater. So if you can renovate your property, basically flip it on steroids, so we’re not flipping houses, but we’re flipping multifamily, if you can flip it within that very quick period of time, you start your timeline of the 90 and 90, so 90% occupancy with a high NOI, and then the lender’s going to lend off of that. And the reason why it’s beneficial for a buyer is because the cheaper their cost of debt is, the more they can spend on the property.
Lemme say that one more time. The cheaper their cost of debt is, the more they can spend to purchase your property. So if they only have to pay 5% on the money they’re borrowing, they can pay more for your property than if they’re borrowing at 10%. We see that in residential all the time. We’re seeing that right now. So many people refinanced on their own personal home that if they were to take out a loan today and the interest rates are 6% as opposed to the refinance rate, they got at 3%, they wouldn’t even be able to afford the home that they’re in today. That’s most Americans right now. So think about that on a commercial that if you have a cheaper cost of debt, you can pay more for the property. So as an owner trying to sell the property, you want to time the market where the interest rates are low because then someone’s going to pay more for your property and you can make more money.

Tony:
Ashley, so much good information. It feels like we’re just kind of, it’s the tip of the iceberg here in terms of how to really do this the right way. I guess, what final advice do you have for rookies that are listening that are new to this in terms of how they should be approaching their investments?

Ashley:
I think that sometimes it can be very overwhelming to get all this information, but if you feel that it’s overwhelming, stay in that room. You don’t want to be in a room where you feel that you already know all the information. You constantly want to be challenged. You want to surround yourself with people who are pushing you and challenging you on things you’ve never heard of before because the second and third time you hear it, it’s going to be so much easier to digest. So for example, if this content was too much, keep listening to this type of content because you’ll get more familiar with it and next thing you know, it’ll be second nature. So whether you’re listening to BiggerPockets, rookie podcasts or other podcasts from BiggerPockets, if you’re reading certain books from BiggerPockets, if you’re listening to BiggerPockets YouTube channels, find speakers that constantly challenge you so that you can get in that room and you can execute on that level and just take it one step at a time.
I did not know all this information 10 years ago, even five years ago, I probably didn’t even know 50% of what I just spoke about today. It is taking me years to learn this information and to be honest with you, at the time there weren’t as many resources that are available to folks today. So whether you’re driving and listening to a podcast or you’re waiting for an airplane to travel for work, you can listen to another podcast or a book on tape while you’re working out. There’s so many different opportunities to absorb information and then get in rooms that are talking and doing what you want to do, whether it’s a coaching program or it’s a bootcamp or whatever venue meetup groups. There are so many different opportunities for people to get involved in. And it’s all about just taking one step at a time and making sure that you are pushing yourself to be uncomfortable, because I promise you that it’s only a matter of time until you’re comfortable with the information and then that means you’ll be comfortable taking action.
Ashley, thank you so much for this episode. What a great breakdown on asset management, especially for a rookie investor. Asset management can sound pretty professional and large scale, but you really need to do this for your first property and continue on, and especially putting the systems and processes and the habit of the asset management now instead of waiting until later on down the road is going to be so beneficial. So Ashley gave us a great starting point today. If you want to learn more about Ashley, we’ll link her information into the show notes and you can check her out. You can also find her on biggerpockets.com by searching her name, Ashley Wilson. Thank you guys so much for listening. If you really love this, we would like for you to follow us in your favorite podcast platform. And if you’re watching on YouTube, make sure to like and subscribe. I’m Ashley. And he’s Tony. And we’ll see you guys next time.

Tony:
This BiggerPockets podcast is produced by Daniel ti, edited by Exodus Media Copywriting by Calico Content.

Ashley:
I’m Ashley. He’s Tony, and you have been listening to Real Estate Rookie.

Tony:
And if you want to be a guest on a BiggerPockets show, apply biggerpockets.com/guest.