Despite last year’s record price rises, market supply pressures and squeezed margins have left many businesses worse off at the end of financial year 2022 than the year before.
According to Macquarie Business Banking’s national real estate segment head Domonic Thompson at the end of December 2021, fifty-seven per cent of real estate businesses were demonstrating sub-20 per cent profitability for the financial year.
Given the strength of last year’s market, Mr Thompson opined that agencies might need to consider where in their business they can identify areas of improvement, particularly now that the market is cooling.
It’s a point on which Managed App’s Matthew Wilson agreed, noting that with demand for rental properties showing continued strength while sales growth slips, an agency’s rent roll might be an area of focus for padding profitability.
“The market has dramatically shifted on the sales front, so if agencies don’t look at other ways to stay profitable they can’t and won’t continue to operate,” Mr Wilson warned.
“A key factor into a business success for FY23 is the rent roll as a way to increase revenue into the business,” he added, offering a few tips to take into consideration for the current financial year.
1) Keep your revenue streams separate
With most agencies lumping sales and property management earnings together, Mr Wilson said that it’s hard to get a handle on how each entity is performing.
“Before you do anything, report on these earnings separately,” he said.
In the current market, a business’s rent roll should not be a loss leader, so having a clear picture of how your property management arm is performing could be key for identifying ways to make changes.
2) Audit then reduce your operational costs
“A lot of agencies haven’t done this in a long time, or don’t even know what their operational costs are,” Mr Wilson said, noting that agency owners should be prepared to take a broad view of their offerings.
“Look at your tech stack: Are you doubling up on tech that your business doesn’t use or need, and can you look at implementing one piece of tech that can do the job of three pieces of tech your business currently uses?” he asked.
3) Increase your fees
Mr Wilson acknowledged that while it may seem like a race to the bottom when it comes to straight-up management fees, toggling what you charge for some other services may be key in reducing your margin pressure.
“Do you charge a fee for relet, have you thought of incorporating a routine inspection fee, or even something as simple as a small monthly admin fee?
“If you are running a modest rent roll of 150 properties and charged a small $5 admin fee every month that’s an additional $9,000 in revenue a year for your business,” he noted.
4) Investigate other revenue sources
Don’t quit if you think that getting more money from your landlords will be like getting blood out of a stone. There are other avenues for boosting revenue you can explore.
Mr Wilson offered the example of examining how your referral systems work.
Think of ways you can partner with a local business to offer incentives to everyone involved.
“A tax depreciation preparer would jump at the chance to be marketed to your database of 350 landlords, and likely be willing to offer a reduced fee. If they can knock $50 off, split the cost between a $25 referral fee for your business and a $25 reduction in the cost of the report for the landlord as an incentive,” Mr Wilson suggested.
If you’ve taken these four steps and feel your rent roll is performing to its full potential, now might be the moment to look at scalability, Mr Wilson suggested.
“There are two ways you can increase market share: organic growth or acquiring a rent roll,” he said, noting it might be time to set one of these tasks in sight. But, of course, they both come with challenges.
“Acquiring a rent roll provides a quick way to increase your market share but you are paying for that privilege,” he said, noting that the cost of acquiring a rent roll can range from anywhere between 2.5 per cent to 5.5 per cent of the annual management income.
On the other hand, if you’re set on growing organically, be prepared to put in some hard yards to make your agency the preferred choice.
“Competition is fierce and as such an agency needs to look at ways to stand out from their competitors,” Mr Wilson noted.