Typical Asset Management Fees in Real Estate
This article is part of our passive investors guide on real estate syndications, available here.
The long-term, strategic outcome of increasing the return on investment of each commercial property is what a real estate asset manager is primarily concerned with.
A real estate asset manager’s objective is to maximize the property’s value and ROI for each real estate asset and the owner’s entire portfolio. A property management firm acts as a contractor you would engage for your real estate investments; the asset manager will likely be a full-time employee.
The typical fee for commercial real estate management will vary based on many factors, including the type of properties being managed, where the property is located, and whether they’re also aiding in additional roles at their firm.
An asset manager can play a vital role in your real estate investing success, but what should you pay them, and how are they compensated? This article establishes the typical fees that an asset management team might command for your commercial real estate.
Asset Management in Real Estate
Real estate asset management is necessary for success in real estate investing. People investing in real estate often manage their investment portfolio themselves, although larger firms and more seasoned investors leverage the aid of asset managers to look after their investments.
Real estate asset management can enhance a property’s value and ROI. But what is the process real estate asset managers follow to do that?
Real estate asset management focuses primarily on these things:
- Finding ways to add additional income and to add value
- Minimizing expenses
- Managing risk
- Building out cash flow projections and keeping in close communication with property managers to ensure they’re executing the business plan
Asset managers ensure the property is performing by monitoring specific key performance indicators (KPIs) to ensure property management is doing what they need to be doing in the daily operations.
When you consider all the operational and maintenance expenses that go into the daily operations of a property, asset managers excel at finding ways to optimize those items in pursuit of higher cash flow. But there is a fair balance between optimizing costs, maintaining excellent service, and attending to any issues that arise at the property. These are things that real estate managers excel at.
Critical real estate asset management elements include risk mitigation and planning for contingencies if a property is not performing to its pre-acquisition projections.
With real estate asset management explained, it’s time to examine the typical fees involved in this profession.
Related Read: Real Estate Syndication Fees Explained
What are the Typical Asset Management Fees in Real Estate?
Asset managers can aid in lowering costs, maximizing rental income, and minimizing risks and liabilities related to your commercial real estate.
Asset managers oversee the overall investment portfolio and the cash flow from specific assets. The asset management fee is charged to the specific real estate partnership, typically between 1 and 3 percent of the property’s total monthly gross income.
But real estate investors firms or syndicators will usually retain an asset manager as a full-time hire and pay them on a salary and performance basis. In the US, a real estate asset manager can expect an average pay of $62,489 per year. However, experienced asset managers can far exceed that average pay rate.
Investors must carefully read all declarations and paperwork to ensure they know any performance-based fees associated with each transaction.
Besides these typical asset management fees for real estate, there are some other fees that you may need to pay an asset manager for their services and efforts. These additional asset management fees in commercial real estate investing are discussed in the next section.
Other Fees the Asset Management Team/Sponsor Might Have
There are additional fees that a real estate sponsor or asset manager may charge in a partnership. They can also include the following:
- The Acquisition fee
- The Disposition fee
- The Construction Management fee
The Acquisition Fee
Finding potential real estate investment properties and vetting them to ensure they are sound investments requires an immense amount of time, due diligence, underwriting, modeling, and soft costs.
For that time and risk, acquisition fees are typically assessed as a percentage ranging from 1 percent to 3 percent of the deal’s total cost (purchase price + rehab + closing costs), of the appraised value, or simply of the purchase price.
The Disposition Fee
The preparation to get a property ready for sale and the market analysis to assess whether now is the right time to do so is why the sponsor would charge a disposition fee. The disposition fee is usually about 1% of the exit sales price.
The Construction Management Fee
Managing the construction or capital improvements on the project is not a straightforward task by any means and is a full-time job in itself. You are tasked with managing volatile material costs, multiple contractors, perhaps working with the city for permitting, and much more.
This fee can be anywhere from 5-15% of the total construction budget. This fee helps cover the costs of overseeing the construction, operation, and performance of the value-add improvements.
In the next section, we cover the disposition fee in a little more detail.
What is a Disposition Fee in Real Estate?
When an asset is sold after the holding period, a sell-on fee known as a disposition fee is paid. The fee is a portion of the property’s sale price, usually at a rate equal to or lower than the acquisition fee. Most often, you’ll see a 1% disposition fee. If the property performs poorly, an asset manager may, in some circumstances, forego the disposition fee. It’s also important to note that every deal is different, which means that not every deal has a disposition fee.
At this point, it is essential to mention that the investor’s role in a conventional private equity property real deal is passive, and they are not responsible for any ongoing management. Let’s look at the passive investor’s role in more detail.
A Passive Investor's Role and Responsibilities
In commercial real estate investing, the passive investor places money with the sponsor, expecting a risk-adjusted return. The passive investor, referred to as a limited partner ( LP) in a real estate partnership, has limited liability and no active role in the deal.
Most real estate investors find this a favorable arrangement since they may utilize the asset manager and sponsor’s connections, deal flow, experience, and expertise to enter into deals that they would probably not be able to do so independently.
Frequently Asked Questions about Asset Management Fee Real Estate
A typical asset manager’s fees are typically calculated as a percentage of the property or properties gross income.
An asset manager could charge a fee of 1%-3% of the gross income of the assets they manage. However, this charge should decrease or increase depending on the size of the assets.
Multifamily Asset Management Fee – Conclusion
Having your asset manager and property manager work hand in hand is required to achieve a streamlined execution process. The asset manager is the eyes and ears of the real estate sponsor and an extension of that sponsor and has the best interest of all the investors involved in a particular deal.
With one goal in mind, to optimize the property’s value and produce the highest possible returns for investors.
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- Investopedia, “Asset Managers in the Real Estate Market: Reading into the Role“
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