If you’re serious about building wealth in a real estate business that will become a saleable asset down the track, property management is not an optional extra. When you’re planning this part of your business, one of the key decisions to make is whether to buy an existing rent roll or build your own.

Let’s look first at the option of building a rent roll. Realistically, it’s hard work to start with nothing. You will need to invest in this growth with a dedicated employee or alternatively grow the rent roll yourself which will take attention away from the other areas of the business. Building a profile and reputation in property management will take time - initially you will have negative cash flow and the growth in income will be inconsistent.

Acquiring a rent roll in your area might not be an option so sometimes the choice is already made for you, but if it’s possible, buying an existing rent roll could fast-track your property management success. There are a couple of reasons why; although it’s normal practice to borrow to fund the purchase, you get immediate cash flow from the rental commissions. You’re also buying ready-made goodwill, theoretically making it easier to further grow the business off a solid base.

Peter Maloney, owner of the established and successful agency Maloneys’ in Canberra, is about to buy his fourth rent roll. After almost 20 years in the industry he believes the first step is to carefully consider your business’ capability to manage the rent roll you’re looking at, and how your overall profitability will be affected. He advises to make sure you have the staff, the space and the systems to handle the new managements. Next he says the price you are paying is only for goodwill, so you have to make sure that’s what you’re getting.

“Look at who’s selling and why. You don’t have to like the seller, but you have to respect them. What are their personal plans after the sale? It’s ideal if they’re retiring and leaving town - you don’t want them starting up again in six months. Make sure you sign up the landlords on new agreements at the same rate and see if you can bring across any good property managers as part of the deal.”

“Keeping the same staff will increase the retention rate as landlords will feel less of a change” Peter says.

He points out the main concerns when buying a rent roll all relate back to retention. You need to make sure there’s a decent retention clause, meaning if you lose the management for any reason during a specified time frame you don’t pay for it. The terms of a retention clause is negotiated between the vendor and the purchaser, with a percentage of funds held back by the purchaser. This clause will also ensure the vendor does everything possible to make sure the handover is clean - it’s in their interest after all.

Michelle Delaney, Ray White Property Management Executive advises to look closely at the quality of the management and the tenancy base - take particular note of arrears, court hearings outstanding or coming up, repairs and maintenance. See if routine inspections have been carried out as required and paperwork is in order.

“One other major area that might give you a good idea or what type of relationship landlords have with the agency is to look at properties that are for sale, particularly if they are listed with other agencies. This will give you an idea of leakage from the rent roll - high leakage will indicate poor relationships” Michelle says.

“Look at the composition of the rent roll - how many landlords are there compared to the number of properties? If you have individual landlords with a large number of properties you are more exposed to churn. Try also to get the software that’s been used, and consider the integration process, how time consuming and expensive it’s likely to be” Michelle adds.
The key is to look carefully before you leap when buying a rent roll. It’s not true that any rent roll is worth buying as long as the price is right. If it’s below par, the cost involved in cleaning it up teamed with the risk to your reputation along the way may just simply not be worth it.

There are many instances where buying a sub-standard rent roll has ended up costing a principal dearly. One recent story involved the purchase of a poorly managed rent roll with many tenants in arrears. Over time, the new principal also discovered various illegalities including tenants that had been signed up without the landlord’s knowledge or approval. One of these tenants trashed a property and then abandoned it owing several weeks rent, just a few months after the rent roll was purchased. The landlord was underinsured and blamed the new principal for their loss, despite his property managers having taken all of the proper steps possible. The office concerned narrowly avoided a major public relations disaster only by devoting significant time, energy and money to solving the problems, only to lose the management anyway.

A quality rent roll remains an excellent investment. It pays for itself within just a few years while providing instant cash flow as well as a potential source of sales leads. It’s one of the most effective ways to kick-start property management in a new real estate business, providing you do it right.

This entry was posted on Thursday, May 28th, 2009. Categories: Property Management, Real Estate.