Going organic- Part 3

Ian McCubbin, partner in six ACT-based LJ Hooker offices with a combined rent roll of 1,700 properties, says organic growth is by far the most cost effective way to build a property management business.

“The time, effort, energy and money you’d put into building one organically is far less than the cost of going out and buying one,” he tells Real Estate Business.

Heidi Davies, business manager for property asset management at five Queensland-based Ray White offices, agrees.

Ms Davies, who along with principal Dan Sowden handles a rent roll in excess of 1,500, says building organically is more controlled and ordered, and “doesn’t bring with it the growing pains that acquisitions hold”.

“[It] also preserves the culture of the staff without the need to bring in new staff from other businesses that can cause either conflict or a dilution of the office culture,” she says.

Mr McCubbin believes that while buying a rent roll can secure an immediate return and much needed cash flow, the approach can be highly problematic.

First and foremost, since you haven’t built the rent roll yourself, no amount of due diligence is likely to reveal what you’re in for when it comes to the landlords.

“If I’m selling to you, I’m unlikely to let you get your nose too far into my [rent roll] trough,” he says. “You might pull the pin and walk away [while still keeping the information].

“I’ll give you what I can, but then it’s a case of having a look at a few files, finding out what sort of percentages they’re charging, seeing if there’s a tenant ledger to see if your tenants are out of control and then making a valued judgment on the little information you have.

“But [the rent roll owner] is only going to show you some nice files, not some nasty ones.” This is in contrast with organic growth, where you have the power to choose who you want to work with.

“By buying a rent roll you’re at the mercy of whoever owned it before you,” he says. “Some owners don’t like finding out that they’ve been sold off to another real estate company.”

In some instances, retention clauses may not help you, Mr McCubbin adds. “[Your success] depends on how well that rent roll has been run by that other company,” he says. “There could be a significant fallout rate and you could be buying a whole swag of problems.”

Much of this fallout can occur after the retention period has ended, he cautions. Mr McCubbin learnt this the hard way when he purchased one of the only two rent rolls he’s purchased in his 25 year career.

The rent roll was bought from a principal who wasn’t retiring and while Mr McCubbin believed his own business was up to scratch, several landlords simply preferred dealing with the previous agency owner and gradually migrated back to him after the retention period ended.

Of course, principals don’t have to choose one approach over the other; they can do a bit of both.

Michael Conolly, head of network property management at McGrath Estate Agents, estimates that across Australia, more than 90 per cent of agents have a desire to build their rent rolls either organically or through acquisition.

The method they choose can simply be down to “the usual forces of demand and supply”, adding that most states have seen a lack of supply of rent rolls.

“For example, just in the last two months, three rent rolls have been sold in Sydney’s eastern suburbs for multiples above 3.5, and one at 3.85. This was not heard of a few years ago, with the average being 3.2.”

GROWING YOUR OWN

So, how do you bolster your rent roll organically?

Firstly, you need an “action plan”, says Vasili Hadzellis, franchise services manager at Richardson & Wrench.

“Ask when planning would be? What does growing a rent roll look like for your business? How many properties [do you want] under management? By when? Do you have the resources needed? Do you need to invest in resources ahead of time to support the growth goals? Have you identified what your sources of new business will be?

“You need to be clear, focused and 100 per cent committed,” he says.

Determining what these goals are depends on several factors, including the number of staff you have, the systems you have in place, and how large you want your business to become.

Working capital is another important consideration, Michael Conolly adds: “Considerable investment has to be made into staff, software, occupancy and marketing and usually for a considerable amount of time before you reach ‘break even’.

“If your marketing budget is below $15,000 per annum for your property management business, then maybe you should consider buying rent rolls.

“[Consider buying] also if you are not prepared to constantly be investing in the growth of your rent roll.”

The size of your sales team, the “power” of your brand and your property managers’ skill level should also be considered, he says.

TEAMWORK

To generate properties under management, your sales and property management sections need to work together closely.

“Sales agents are in close contact with investor clients and are a valuable source of new management leads,” says Mr Hadzellis. “Property management isn’t the poor second cousin any more; sales and property management teams have to be co-dependent to ensure they are providing a total solution for their clients’ property needs.”

Mr McCubbin’s office has a systemised approach to ensure this happens: “For every listing that comes into any one of our offices, [we] put together an investors’ pack, which includes a leasing appraisal. This is then taken to the open home inspection.

“If somebody walks through the door and is looking to invest, there’s a letter in there saying what the estimate of the rent will be, and some information about our property management services.

“The salespeople are [therefore] doing some of the property manager’s job, but the property manager is helping the salesperson to hopefully get a sale to an investor.

“It’s a two-way street.”

But the two roles shouldn’t be confused, he cautions. While a salesperson might stick their neck out and say the property will rent for X, a property manager might also stick their neck out and say it will sell for Y.

“Neither of them should do that,” Mr McCubbin says. “By having the information there in writing from a property manager and not a salesperson, the average punter is going to say, this is from a professional property manager, not this dude here trying to sell the house.”

“Property managers know what they rent for, salespeople know what they sell for.”

Landlords should not be the sole focus, he adds. “Take care of your tenants because they become advocates for you, and the day they move out and buy a house, and a couple of years later when they buy a rental, they come back to you.”

THE BDM APPROACH

Organic growth is perceived to occur slowly, but this doesn’t have to be the case if you get out there to actively look for new properties to manage.

More and more agency principals are now employing business development managers (BDMs) to focus on doing just that, with the property managers themselves rarely having time to do so.

“You’ve got no time to do any significant prospecting,” Mr McCubbin says. “So, we [decided] we’d set up BDMs in a couple of our branches. Their job is to purely go and seek new business, bring it into the business, sign it up, then hand it over to a portfolio manager.”

“The skill set, mind set and head set required of each role is quite different – one being more process driven and the other more sales focused,” adds Mr Hadzellis.

Mr McCubbin’s BDMs are involved in several activities. “You get into things like letter box drops,” he says. “The easiest way to do that is if you’ve just leased an apartment in an apartment block, go out and stick a letter in everyone’s letterbox saying ‘Just leased, tenants waiting’.

“When the landlord goes to clean out his letterbox, because the agent he uses hasn’t got him a tenant, we get the call.”

“From time to time we [also] run investment seminars, particularly in cooperation with our project marketing business,” he says. “We might release 100 units, we’ll build them and sell them, and six to eight weeks out from settlement we might run a seminar.”

Finding good quality BDMs, however, is not an easy task, according to Mr McCubbin – a view supported by the real estate recruitment firms that Residential Property Manager spoke to.

Darren Gorrel, NSW state manager at real estate recruitment specialist Gough Recruitment, explains that agency principals want a BDM to have both sales and property management skills, even though the two aren’t generally complementary.

BDMs need strong sales and presentation skills, must be able to close the deal and must be able to go out there and find the business. “You have to be proactive in order to justify your desk and your computer,” he says.

Nevertheless, it’s not impossible to train a property manager to become more sales focused, according to Mr McCubbin.

“What we’ve tended to do is to promote from within, so we’ve looked at a couple of our key [property management] people and said, get rid of your portfolio, you’ve now become the hunter and gatherer,” he says.

Getting them to change from being a “nurturer” – someone more attuned to maintaining relationships rather than finding them – to a ‘hunter-gatherer’ isn’t impossible if you pay close attention to how your staff operates.

Ms Davies’ offices have also enjoyed some success with a BDM, although she stresses he’s not a property manager. Instead, the ex-sales person “sits and lives with the sales team 100 per cent, who supply around 70 per cent of the leads”.

ACCEPTABLE GROWTH?

Defining an ‘attainable’ rate of organic growth is difficult, as it depends on the principal’s resources and plans.

“I don’t think there is an industry average,” Mr Hadzellis says. “It really does depend on what the numbers look like for growth… considering also that there will be natural losses, which means you have to replace those – plus some.”

Numbers alone tell the story, he says: Achieving 1,000 managements in three years requires 28 properties to be listed and let in each month, while an agency that wants 300 managements in the same period would need to add eight managements per month.

“You also need to factor in natural losses, so these numbers would be inflated in certain months,” he says.

The five offices handled by Ms Davies are growing at a net rate of between 10 and 15 new managements per month, without stress to the business. Based on local (indicative) rent roll multiples, “in real terms, this is an asset growth of between $30,000 to $45,000 per month” she says.

Meanwhile, according to Mr Conolly, recent surveys suggest the average net growth of property management businesses across Australia is approximately 33 new managements per year.

“This is just an average, of course, so I’m not suggesting this to be a ‘good’ rate of growth,” he says. “As a better benchmark for ‘optimum’ net organic growth, our own corporate-owned offices are on track this year to achieve 80 per cent net growth.

Mr Conolly puts this down, primarily, to having a well executed strategy, a strong brand, a large sales force and a specialised BDM team – as well as continuing investment in the business.

Building up to the 100 managements mark is usually the fastest period of growth due to low churn, having a property manager who has abundant time to focus on growth, and also the first wave of referrals into the business when it commences through the principal and any new agents.

It’s during the next 100 additions, however, that principals face the prospect of a ‘flat line’.

“This occurs usually somewhere between 100 to 200 managements because some principals fail to see that once the portfolio reaches a certain level, the property manager is no longer able to spend the time and energy prospecting and building new relationships,” Mr Conolly says.

“Also, churn at this level is starting to take away just as many managements as the property manager can gain, and this is a true recipe for ‘flat line’ growth.

“You need to constantly be reinvesting in your property management business for it to continue to grow.

“And, yes, this means you will not always have linear profitability growth but, rather, rising steps of profitability instead.”