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As in many industries involving finance or real estate, there are a myriad of terms in use—many of which tend to get abbreviated by those who use them frequently. The same goes for multifamily real estate syndicated investment, so, this week we thought we’d take a look at two such terms (assets under management and net worth) and explain both what they mean but also the key differences between them.
These two terms are more commonly associated with traditional financial institutions, but are also very relevant to real estate investment and can have important implications for investors in this space.
What is “assets under management (AUM)” in multifamily real estate investment?
In real estate, AUM refers to the total value of all the properties that a real estate investment company manages on behalf of its clients. This can include commercial properties, residential properties and other types of real estate investments. AUM is typically expressed as a dollar amount and is used as a measure of a company’s size and success in the real estate industry.
For example, if a real estate investment company manages $1 billion in properties, its AUM is $1 billion. Similarly, if a real estate private equity fund manages a portfolio of properties worth $500 million, its AUM is $500 million.
Why is AUM important in real estate investment?
AUM is an important metric in real estate investment for several reasons. Firstly, AUM is a key performance metric for multifamily syndicated investment companies to use to evaluate the success of their investment strategies and compare their size and performance with that of their competitors. This can be especially important for syndicates which are raising capital from investors, as a larger AUM can be seen as an indicator of its ability to successfully manage investments and generate returns.
For example, a multifamily real estate investor with a large AUM may have greater resources and expertise available to identify and manage profitable real estate investments.
What is “net worth (NW)” in real estate investment?
Net worth describes the financial value of a person, company or entity. It is a measure of wealth and is calculated by subtracting liabilities (debts and financial obligations) from assets (what a person or entity owns).
In the context of real estate, net worth therefore refers to the total value of an individual’s real estate assets minus any outstanding debts or liabilities associated with those assets. This wealth can include the value of investment properties, primary residences and any other real estate holdings an individual may have.
Net worth is typically expressed as a dollar amount and is used as a measure of an individual’s overall financial health and wealth.
As an example, if a HNW individual has:
Assets:
Real Estate Portfolio (multiple properties): $5,000,000
Stock Investments: $3,000,000
Business Ownership (shares in a successful company): $10,000,000
Luxury Cars (collection of high-end cars): $1,500,000
Art and Collectibles: $2,500,000
Cash and Savings: $2,000,000
Total Assets: $24,000,000
Liabilities:
Mortgage on Real Estate Properties: $2,000,000
Personal Loans: $500,000
Business Loans: $3,000,000
Total Liabilities: $5,500,000
To calculate his or her net worth, we can use the formula:
Net Worth = Total Assets – Total Liabilities
Net Worth = $24,000,000 – $5,500,000
Net Worth = $18,500,000
So, based on the example above, this high net worth individual (“HNWI”) individual has a net worth of $18,500,000. This means that his total assets (including valuable properties, investments and businesses) amount to $24,000,000).
After subtracting total liabilities, the net financial worth is an impressive $18,500,000.
In short, as a wealthy individual, this person has substantial assets that significantly outweigh debts, indicating a strong financial position.
Why is NW important in real estate?
Net worth is an important metric for multifamily real estate investors for several reasons. Firstly, an individual’s net worth can be a key indicator of their financial health and can help them set financial goals and plan for the future. It can also be used to assess their ability to withstand financial shocks, such as changes in market conditions or unexpected expenses.
For real estate investors, net worth can be an important consideration when evaluating potential investment opportunities. Investors with a higher NW may be more likely to qualify for financing and may be able to take on greater levels of risk in their real estate investments. Net worth can also be a useful tool for evaluating the potential returns on real estate investments, as it can help investors determine the level of risk they are comfortable with and the types of investments that may be most suitable for their financial goals.
What are the differences between AUM and NW in multifamily real estate?
Whilst AUM and net worth are both measures of financial value in the context of real estate investment, there are important differences between the two:
Ownership
AUM refers to the value of properties that a multifamily real estate syndication manages on behalf of its clients, whilst net worth refers to the value of an individual’s real estate assets that they personally own. AUM is, therefore, a measure of a company’s assets, whilst net worth is a measure of an individual’s assets;
Purpose
The purpose of AUM is to evaluate the size and success of a real estate investment company, whilst the purpose of net worth is to assess an individual’s financial health and wealth. AUM is typically used as a performance metric for real estate investment companies, whilst net worth is used by individuals to track their personal financial progress.
Risks
AUM is a measure of the value of a multifamily syndicated investment company’s assets, which can include a mix of different types of properties with varying levels of risk. Net worth, on the other hand, is a measure of an individual’s personal real estate assets and liabilities. Whilst net worth can be used to assess an individual’s ability to withstand financial shocks, AUM is a broader measure of the level of risk associated with a real estate investment company’s portfolio of properties.
Investment opportunities
Investors may use both AUM and net worth as factors to consider when evaluating potential investment opportunities. A real estate investment company with a large AUM may have more resources and expertise available to identify and manage profitable investments, whilst an individual with a higher net worth may be able to qualify for financing and take on greater levels of risk in their multifamily real estate investments.
Timing
AUM can fluctuate in view of changes in the real estate market and a real estate investment company’s investment strategy. Net worth, on the other hand, is typically more stable over time and is less affected by market fluctuations.
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CPI Capital understands that AUM and net worth are both important metrics in the context of multifamily real estate investment, but they serve different purposes and have different implications for investors.
Indeed, it is important not to confuse AUM with someone’s net worth. There have been cases where some sponsors advertise their AUM as their net worth to portray a level of wealth and success but, because someone manages a company which has an AUM of $100 million, this does not mean such sponsor is worth $100 million or has a net worth of $100 million.
For example, CPI Capital has an AUM of $208 million, However the ownership’s net worth is not anywhere near this amount.
In any event, when considering multifamily real estate there are many other factors such as the level of risk associated with the investment, the quality of the asset management and the potential for investment returns which have to be considered. By evaluating these factors carefully, we can make informed decisions about such investments and aim to achieve the financial goals for our passive investors.
Yours sincerely,
August Biniaz
CIO, Co-Funder CPI Capital
