To buy a property management rent roll or to build a portfolio from scratch?

In this article, we will explore the pros and cons of both approaches and shed light on why each option can be a great strategy for a new or emerging property management business.

Buying a property management rent roll

Benefits:

1. Instant income: one of the most significant advantages of buying a rent roll is the immediate cash flow it provides. When you acquire an existing portfolio of properties, you start generating income from day one. This can be especially appealing if you are looking for a quick return on your investment.
2. Established client base: a purchased rent roll comes with an established client base. These clients are already familiar with your business, making the transition smoother and reducing the need for extensive marketing efforts.
3. Market presence: acquiring a rent roll can boost your market presence and credibility. It demonstrates that your business is growing and can attract more clients and investors.

Downsides:

1. Initial cost: buying a rent roll can be costly, especially in competitive markets. The price may include goodwill, which reflects the existing relationships and reputation of the previous property manager.
2. Quality of rent roll: not all rent rolls are equal. Some may come with problematic tenants or properties that require significant maintenance. Due diligence is crucial to ensure you are acquiring a high-quality rent roll.
3. Client retention: while some clients may stay on after the acquisition, others may decide to leave. Retaining clients can be a challenge, and your ability to do so will impact the profitability of your purchase.

Building a portfolio from scratch

Benefits:

1. Control and customisation: starting from scratch gives you full control over the types of properties you want to manage, the neighbourhoods you target, and the clients you work with. You can tailor your portfolio to match your expertise and business vision.
2. Lower initial investment: building a portfolio typically requires less upfront capital than purchasing a rent roll. You can start small and gradually expand as your business grows.
3. Brand building: creating a portfolio from scratch allows you to build your brand and reputation in the industry from the ground up. You have the opportunity to establish a unique identity and differentiate yourself from competitors.

Downsides:

1. Time-consuming: building a property management portfolio takes time and effort. It may require extensive marketing and networking to attract clients and property owners.
2. Income delay: unlike buying a rent roll, where you generate income immediately, starting from scratch may lead to a delayed income stream. It can take time to secure clients and properties.
3. Market competition: in competitive real estate markets, breaking into the industry as a newcomer can be challenging. Established property management firms may have a stronghold on the market.

Location and market considerations

The decision to buy a rent roll or build from scratch can also be influenced by your location and the prevailing market conditions.

Location: if you are in an area with a high demand for property management services and limited competition, building a portfolio from scratch may be a viable option. However, in densely populated urban centres or highly competitive markets, purchasing a rent roll might provide a quicker entry.

Market conditions: market conditions, such as property vacancy rates and investor activity, can impact your decision. In a hot rental market with low vacancy rates, acquiring a rent roll may be advantageous as you can tap into existing income streams. Conversely, in a market with ample rental properties and strong investor interest, building a portfolio may offer growth potential.

Why each option is great

1. Buying a rent roll is great: buying a rent roll is an excellent strategy if you have the capital and want to establish a robust income stream quickly. It’s ideal for those looking to expand their business’s reach and credibility swiftly.
2. Building from scratch is great: starting from scratch allows you to create a property management business tailored to your preferences. It’s ideal for those who value control, brand building and gradual growth.

Cost comparison:

As a person who has been in this position before, the best advice I can personally provide is this: do your research thoroughly. Let’s just look at a completely hypothetical situation here.

First, you need to calculate the ‘approximate value’ of the purchase. In doing that, you’re talking about calculating your AAMI, which stands for Average Annual Management Income. This is the base figure we use to calculate what the rent roll is worth before we factor in things like location, types of properties, and so on.

To get that magic AAMI number, you need to know your three key figures. They are:

1. What is your average weekly rent?
2. What is your average management fee across all properties?
3. How many properties do you have under management?

Then calculate that figure as follows: Average weekly rent x average management fee / 7 x 365 = AAMI.

Multiply that figure by the number of properties you have under management to get your total income for your rent roll. It’s as simple as that.

In the hypothetical example: if you are to looking to acquire a portfolio with 100 properties under management, each generating a weekly gross rental amount of $700 per property, with an average management fee of 8 per cent, the equation would look like this:

700 x 8% divided by 7 = 8 x 365 = $2,920

2,920 x 100 = $292,000 total gross annual income

The seller of this portfolio may be seeking a 3 x multiplier (which wouldn’t be unusual in most cases), which means that the approximate purchase price for this portfolio would be $876,000.

That’s a decent chunk of change in my opinion.

So, what’s the alternative?

A good (perhaps great) BDM may set you back $80,000 per annum in salary + any perks, bonuses, car allowance, etc. Let’s ball park that as an outlay of $110,000 including super.

Now a good (perhaps great) BDM should be signing 10 to 20 new managements each month. Not unrealistic at all.

Once you get to around month four to five, you’ll need to onboard a PM to handle those managements if you expect your BDM to maintain their performance levels, and then add another PM by end of year one (if not beforehand). So, at the end of year one, you should theoretically have 120 to 240 new managements.

In review of the financial outlays for the organic approach:

BDM = $110,000

PM 1 = $65,000

PM 2 = $65,000

Set up costs (subscriptions, etc.) = $40,000

Total approx. outlay = $280,000

To summarise, the decision to buy a property management rent roll or build a portfolio from scratch depends on your individual circumstances, goals and the market conditions in your area. Both approaches have their merits, and successful property management businesses have been built using each strategy. Whether you choose to invest in an existing rent roll or embark on the journey of building your portfolio, thorough research, due diligence and a clear business plan are essential for long-term success in the property management industry.

Shane Lowe is the CEO of Real Estate Training Australia (RETA).