During the past decade a whole new generation of companies have emerged. These companies have created a new industry. They are the money managers, and the money management industry. They manage other people’s money in everything from the stocks, bonds, real estate, etc., and your own day to day financial needs. Money managers come in all forms. There are specialized advisory firms for institutions, professional money managers for individuals, mutual fund families for everyone, managed accounts at securities firms, etc.

How good are they? That depends on how they treat your money. There are three types. Money managers who:

1. Treat your money like it was theirs.
2. Use your money to create fees.
3. Just don’t care, because they make a fee for doing nothing.

When it comes to who is advising your real estate money, how do you know which type you have? It’s not hard to determine which type you have. To find out, you need the answers to two questions. Those answers tell you who your manager is working for, you or them. The questions and qualifiers are:

1. Is the real estate currently earning a reasonable return on investment (ROI)? ROI must:

• Be based on lessees paying market rate rent for leased space.
• Identify and account for all leasing costs and obligations that affect income.
• Be based on identifying and accounting for all operating expenses.
• Have fixed market rate debt service.
• Be supported by financial statements that follow Generally Accepted Accounting Procedures (GAAP).

2. Will the real estate earn more money in the future? Future earnings must be:

• The result of distilling qualified facts as the basis for projections.
• The study is not static (without adjustments for input) in nature.
• The study is done by a third party with no financial motivation for a certain conclusion.

Complying with both questions is not easy. It takes time and resources. But that’s what a good real estate manager does.

In times past, earnings (cash flow) were not an important issue for the real estate investor. You could buy real estate that was earning or loosing money. Real estate cycles were of shorter duration. Therefore, if you could only hang on, it was just a matter of time before a bull market would come along and correct all the mistakes made in the buying and management process. That’s many of today’s real estate money managers were buying properties with a 5% capitalization rate. Unfortunately, these conditions no longer exist. Holding onto a pretty property is no assurance of it becoming a successful investment.

Determining whether the real estate is earning a reasonable yield is a very difficult assignment. Yield is predicated on finding the best Net Operating Income (NOI) that represents a particular property. Since there is no standard that exists for deciding which income or expense numbers to use, this is not an easy task. Analyzing past earnings, lease rollovers, and occupancy costs are critical for finding the most representative NOI. Once you have this number, you divide it by the purchase price for determining yield. Under no conditions should that yield be less than the cost of debt service (negative spread).

Finally, earnings and yield need to happen today, and not in the future. Tomorrow’s successful investments will come from the acquisition of today’s successful real estate. When you find a real estate money manager who subscribes to the two questions described above, then you will have found a real estate manager who is treating your money like it was theirs.