There’s no doubt property management is seen by industry experts as the best way to deliver regular and consistent cash flow to an agent’s business. But what’s the best way to build your property management business – organically or by rent roll acquisition? The answer to this question forms part one of a three-part series by Real Estate Business’ Simon Parker
It’s becoming increasingly apparent that property management is becoming more important to real estate agents.
But it’s not just because selling a property is becoming harder in more markets across the country. Fans of property management highlight how it delivers tangible net worth to a real estate business.
“A vast majority of agency principals are now seeing property management as part of their ongoing profit growth strategy, whether this is by focusing on organic growth or rent roll acquisition,” says Michael Conolly, head of network property management at McGrath Estate Agents.
Conolly’s views were supported in an article published earlier this year by Shaun Bassett, head of residential real estate segment at Macquarie Relationship Banking. Mr Bassett said while property management wasn’t usually given the same level of investment and focus as sales, its ability to deliver regular income and reliable cash flow made it an agent’s best friend when property markets soured.
“As the market picks up and businesses plan for a brighter future, a focus on property management should be core to business growth strategy,” he said.
And even though he estimates 90 per cent of real estate agencies already have a property management division, Bob Walters, managing director at True Property and director of Leading Property Managers of Australia (LPMA), believes the majority aren’t doing the business justice.
“Property management tends to just happen in the office and grows by osmosis rather than by design,” he says.
This may change however as agents see more companies offering property management support services in coming years, says Mark Woschnak, CEO of rent.com.au. “The focus on property management as a cornerstone of a real estate agency’s sustainability over the next five years will increase meaning more education, systems and marketing tools will be used to help property managers equip themselves better for the process of property management.”
SHOW ME THE MONEY
Money talks of course, so is it really worth all the effort to set up an efficiently run property management division?
According to figures published by The Rent Roll Broker, a good property manager should expect to reap a return of up to 12 per cent. To start making a profit, you would generally need a minimum of 150 properties on your books, it says. Increase the number of properties under management and net profit should begin to rise - sharply, in fact, if you can maintain and drive efficiencies.
The company estimates 300 properties under management can deliver a 20 per cent net profit, 600-650 properties a 30 per cent net profit, 1,000 properties a 40 per cent net profit, while operators blessed with 2,000 properties can see a 50 per cent net profit.
“If you conservatively worked on a management fee income of $1,000 per property per annum, you can soon see that we are talking about significant cash flow amounts and profits being generated from property management, once you get above the 600 property threshold,” the company says on its website.
“This should also provide an incentive to build your sales business around your rent roll, rather than building your rent roll around your sales department, so that if the sales market becomes volatile the effect on your agency won’t be anywhere near as severe as if you were relying on a sales only income.”
Conolly warns real efficiencies are only derived from ‘larger’ rent rolls. “The national average for properties under management is about 375, however there is a vast majority under the 200 management mark and at this level it is very hard to have efficiencies.”
He estimates that property management can contribute around 35 to 40 per cent of an agency’s total revenue.
“As we experience softer selling times, agencies will refocus their energies on both organic and strategic acquisitions. This is largely due to the benefit of monthly cash inflow and the creation of a substantial asset.”
And what an asset it can prove to be. Mr Walters estimates that just one Sydney-based property located in a middle-income type suburb can sell (as part of a larger rent roll) for $5,000.
Mr Conolly agrees. “When you wish to borrow money the banks will definitely look at your rent roll. It’s less likely they will consider your sales record.”
Setting up a property management division isn’t easy money, of course.
First and foremost, Chris Goodway, owner of Adelaide-based The Rent Roll Broker, says principals must ensure the property management arm is the foundation of their agency.
“It needs to be given priority in terms of funding, both with equipment and staff,” he says. “If starting from scratch the principal may opt to do the work themselves, but it is important to select a good software package and make sure time has been taken to set up proper systems and procedures.”
If these are taken care from the outset, growth can occur naturally and without undue stress.
Mr Walters says most principals think setting up a property management arm is going to be relatively easy.
He says many agency principals think software packages will provide all of the systems and processes they need to prosper. But as good as these software packages are, Mr Walters says principals must customise the systems they use to suit their company and clients.
“There’s no system that has a one-size-fits-all approach,” he says. There will always be a range of policies, procedures, checklists and forms that must be tweaked to suit the individual office and its market.
Mr Goodway adds property selection is also extremely important. Principals must focus on bringing in “quality properties” into their portfolio.
“Never build your portfolio on second rate or poor properties, or by heavily discounting fees, just to get the business,” he cautions. “Your agency needs to attract the right clients and properties by reputation, and you can’t do that by being the cheapest in town.”
ORGANIC GROWTH VS RENT ROLL ACQUISITION
Agency principals are confronted by two choices when it comes to building their interest in property management – organic growth versus the acquisition of rent rolls.
Mr Conolly says making the right decision depends on the size of an agent’s rent roll, along with the organic growth strategy itself and the strength of the sales team.
“Most agencies have a healthy flow of new managements from their sales team into the property management business, however this usually is only enough to cover the natural churn within the rent roll,” he says.
“The typical real estate agency rent roll is a bit like a yo-yo,” agrees Mr Walters. You get in as many new properties to manage as you tend to lose through natural attrition. What’s required is a more proactive approach to building your rent roll, he says. “It usually is the snail pace way to growth unless of course you throw money and resources at it.”
Mr Conolly says this usually involves the introduction of a new business consultant to the operation to generate new clients. Yet this approach can end in tears, he cautions. “The main reason for this is that the new business consultant is not trained well enough or does not have enough experience at generating external leads, or is not supported well enough with local area marketing or channel referrals.”
He says organic growth demands that your new business consultant or team cement local area business relationships, are concentrated in set locations - not spread thinly across regions, are supported with the best technology (CRM) and training available, are long-term community focused people, and are managed to produced optimum results consistently.
“If you are not prepared to invest the time and money into this organic growth strategy then it might be best for the purchase of rent rolls to be a larger part of your strategy or to consider a mixed approach,” Mr Conolly says.
Growing the business organically can be tough. And you’ll need patience and resolve. But it is usually the most cost effective means of growing the property management business, says Mr Goodway.
“However, most agents find that they do hit a barrier once they get to about 160 to 180 properties. If starting from scratch with a new agency, this could take a couple of years to attain.”
Macquarie Relationship Banking’s Mr Bassett says while organic growth may be slower to demonstrate the same results as buying a rent roll, you don’t need to take on large debts to do so.
As he pointed out in his article, growing organically also has other pluses “in that you have complete control over the type of properties, tenants and landlords you bring on, and it has lower associated costs, focusing on the skills of your team to bring in the new business.”
Even if you’re keen to acquire a rent roll, your desire can be thwarted by the law of supply and demand.
Put simply, in some markets there aren’t enough rent rolls to go around.
“It is an interesting fact that more than 80 per cent of agencies across Australia are looking to grow their rent rolls by either organic growth or acquisition, or a mix of both,” says Conolly. “However, in recent years only five per cent of rent rolls have been on the market for sale. So while there is a definite healthy appetite for the purchase of rent rolls, supply is extremely low.”
He says agents should act quickly if they hear rumours of a local rent roll becoming available.
“If you are starting a new agency then the smart move would be to buy a rent roll prior to launch or as soon as possible. This will greatly assist you with cash flow and market exposure,” he says. “An even smarter move would be to make sure it is at least 200 managements or more.”
But they can be expensive.
“The average multiple for a rent roll in Australia sits at 2.9, [which] is a multiple based on management fee income only,” says Mr Conolly. “That said, higher multiples are being achieved in areas like Sydney metropolitan where it is not uncommon for multiples of 3.5 – 4.0 to be paid for quality rent rolls.” As highlighted earlier, this could mean individual properties being sold for around $5,000 a piece.
Yet building instant economies of scale is often an overlooked benefit of acquiring a rent roll, says Mr Goodway.
“Providing you are sensible in the structuring and staffing of the department, the rule of thumb is that the more properties you have, the more efficient you can become with staffing and systems and therefore more profitable.”
Yet buying a rent roll shouldn’t be considered in isolation. The best approach combines both methods, he says.
“The strategy for purchasing should always go hand in hand with a strategy and plan for continued natural growth.”