March 24, 2023
Read Time: 5 minutes
This is the biggest lie you will hear from operators.
And it’s actually one of our pet peeves in this industry. It really gets to us. Because it’s something we see time and time again.
Typically, this “lie” is really more of a misunderstanding of technical industry terms by newer operators. But in some cases, it’s an intentional misrepresentation.
So, let’s talk about AUM.
Assets Under Management
I want to break down this term. Because, contrary to what some operators will tell you…
There is a set definition for AUM, and it’s calculated in a very particular way.
AUM is a sexy number. Your AUM is a flex. It’s the operator’s equivalent to showing off your bicep.
Your AUM is a measure of the size of your portfolio. It’s how much “stuff” you own in your portfolio.
If you look at it through the lens of real estate investing, we’re typically talking about the market value of all the properties in your portfolio.
And in real estate, numbers are always big. So you can get to an impressive number pretty quickly.
Here’s where AUM can get a little fuzzy.
What is “market value”?
With real estate, there really isn’t a daily mark to market function.
So if we bought a property last year, what is it worth today? If you’re being conservative… you would typically just say the value is whatever you paid for it a year ago. Even if it’s been a couple of years, your safest bet is the most conservative bet.
However, you can also use the latest appraisal. If you refinanced a property a few years after the initial purchase, you can use that appraisal to measure its market value.
There’s also a quick way to get a rough estimate of the market value, without doing an appraisal. You can take your current NOI, and put the market cap rate on it, and that’s going to get you pretty close. As long as you have the math to back you up on it.
This then begs the question… What cap rate do you use?
This is where operators can really inflate their AUM. A genuine and conservative operator would use the cap rate at which they purchased the property.
But… not every operator does this.
Some will use the current market cap rate if it benefits them. If they purchased with a cap rate of 6%, and now the market cap rate is 5%… that’s going to change the numbers drastically.
You could very easily turn a $70 million portfolio into $100 million. Because $100 million sounds sexier, right? But this is very disingenuous.
Some operators value it off the proforma. Next year’s numbers.
“Yeah there’s stuff we haven’t done yet, but we’ll totally do it. Don’t worry. We can use these numbers.”
Or, if they plan to sell it in five years… they’ll use the value of the property 5 years down the line.
Some operators will do whatever they can to make that number look bigger than it actually is.
Misunderstanding Vs Misrepresenting
With new syndicators, new capital raisers, new operators, who started out as limited partners, passively investing into deals… we often see them presenting those deals as a part of their AUM.
They might put in $50,000 towards a 100-unit portfolio, and then call themselves co-owners.
While they’re not technically wrong… it’s very disingenuous to tout your AUM with assets that you have only passively invested in. Especially if you’re now raising capital from investors as a GP. Because those investors would be under the impression that you have experience managing 100+ units.
We actually had an operator comment about this on this episode’s YouTube video. They started out passively investing in 272 units, and were using that to flex their AUM… because that’s all they had.
They wanted to know what’s so wrong with leveraging their mentor’s track record… and the answer was in the very question they asked. It’s not their track record.
This operator also asked how we built up our track record, if not passively investing and leveraging someone else’s work.
Both Dan & Anthony started with small deals, using their own capital. They did the work, and then did the work again and again… bringing results to the table through their own efforts.
All of this said, you can see how easy it is for operators to make the numbers say whatever they want them to say. And with all of the different ways operators can measure their asset’s value, this can be a very complicated and muddied process.
The solution is clear and simple.
You just have to ask the operator. Have them explain to you their assets under management, and how they got to that number.
From there, you can determine your level of comfort and confidence in that operator, and their track record.
And whenever you see someone flexing some ridiculously big number… take it with a grain of salt.
If you want to hear more about the biggest lie that you’ll hear from operators, check out the episode of Multifamily Investing Made Simple, where Dan & Anthony dive deep into measuring your Assets Under Management.
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