Don’t wait until you sell your rent roll to make a profit from it
At the 2022 STAFFLINK Conference, Dean Firth (Head of Business Banking at Macquarie), spoke about the hugely variable level of profitability across Property Management Agencies in Australia.
“Some are operating on profit margins in the 20’s, some are in the single digits, and some are operating on a profit margin of the mid 40s.”
On the other hand, we have spoken to many Selling Principals and Real Estate Owners who are happy if their PM department ‘breaks even.’
Not because they are unable to make a profit, they just don’t see it as a priority.
Should a Property Management department do more than just break even?
While having a rental portfolio is a multiplier when it comes time to sell your business – many Real Estate sales principals do not prioritise making their Property Management Departments profitable.
They see them as a future asset and long-term retirement plan, rather than a short-term focus.
Many are happy to break even, while others are even happy to absorb any losses incurred, reasoning that to make it profitable would not be the best use of their time.
But a profitable Property Management department can create a reliable revenue stream for Real Estate businesses.
This revenue stream can be invaluable during times when the heat comes out of the market.
Although we are not doom and gloom about the long-term prospects of the Australian Real Estate Industry, it is undoubtably in a tough moment.
An alternate revenue stream during tough times
The Australian Real Estate industry is often said to run on a seven year cycle – and we are “either at [the bottom] or approaching the bottom of this property cycle”, according to John McGrath, founder and executive director of McGrath Estate Agents.
If your Sales department is the only source of income, your business is naturally more exposed to market fluctuations.
A profitable rent roll can help you diversify your business and insulate against any potential downturns in your Sales department’s profitability.
Who wouldn’t want an extra source of income to help stay afloat during the rising and falling tides of the sales market?
You’ll also create a portfolio which has a strong history and is more appealing to buyers if and when you do decide to sell your rent roll.
The value of a Rent Roll
When Real Estate owners and Selling Principals see their rent roll as a future asset and long-term retirement plan, they’re not wrong.
When they sell their business, it is the rent roll which contributes overwhelmingly to the value of their business, and the price that they will receive for it.
Macquarie Bank’s Dean Firth confirmed as much at STAFFLINK Conference 2022.
“About 96% of the value that comes from the sale of residential Real Estate businesses is attributable to the rent roll”, he revealed.
This means that if you sold your business for $1million, around $960,000 of that price is for the rent roll.
So if you decide to sell your rent roll, how does its profitability affect its value?
“When someone asks me ‘what is a rent roll worth?’ What I’ll tell you is they’re worth what someone’s prepared to pay, and they’re trading somewhere between 4 and 5 times. It depends on the size, it depends on the geography.”
“But most of all it depends on the profitability of the business. [If you’ve got two similar rent rolls] you’re going to pay more for the one that is producing more profit for the business.”
“It’s simple, and it’s logical – what is most important is you’re actually thinking about the profitability that comes from the business.”