Here’s a little known and even less talked about industry secret that any principal or would-be principal should know; creating real wealth in a real estate business has absolutely nothing to do with selling property.That’s right, it’s not a mistake - no matter how many houses you sell, it will not equate to real wealth in your business.
You see, there’s a big difference between cash flow, income and wealth creation. Selling property only generates the first two and here’s the reason why.
The true wealth in real estate is created by building a business that is worth something. The reality is the sales you do don’t factor into the value of a real estate business. Even if your office sells a lot of property, if that’s all it does it will generally only be worth somewhere between $50-70K to someone else - basically the depreciated value of the shop-fit and the lease. And not many of us would term that real wealth.
The value of a real estate business is actually based on how much of its turnover is predictable and does not rely on any particular person to generate it. If you or anyone in your team is a great salesperson, you clearly can’t be sold as part of the business. Sales by their very nature are unpredictable and dependant on the individual, which is why the sales value is almost irrelevant to the value of the business.
So the obvious question is; how is real wealth created?
Income from things like loan broking and other add-on services are factored into the value as they are generally predictable and often passive, like trailer fees on mortgages. But the single biggest factor in the value of most real estate businesses is the rent roll.
This is the industry’s biggest irony. Most principals fear property management; they know little about it, they don’t want to know much about it, and they would generally prefer not to have to deal with it, at all, ever. It’s much more mundane than sales, and all those pesky tenants, well - who wants to deal with them?
Add to that the fact that property management is generally cash flow negative if you grow it from scratch and the temptation is strong to leave the whole thing to one side.
Many principals start up their offices focused on getting their own sales, and adding one or two other salespeople. They may have the vague idea that at some point in the future they will think about property management. Sometimes that day never comes and when the time comes to sell up, they realise in hindsight there was little point to owning their own business.
Be honest with yourself about what your intentions are; if you’re only looking at how much income you can generate by selling, it’s probably best stick to selling in someone else’s business. There are risks to owning your own business and if you know before you start there’s no upside, there’s little point in taking the first step and risking the downside.
But if you do want to build a business, the reality is that having a rent roll is critical to a stable cash flow, particularly in tough times. It’s an asset you can build which has real value. And actually, property management is not nearly as difficult as you might think. If you’re joining a franchise, your franchisor should have solid systems for you to follow which will make it even easier.
A responsible franchisor will not only be challenging you to create wealth, they will support you in making it happen. With solid systems you will not need to rely on other people who may or may not act in your best interests; you will truly be in the driver’s seat on the road to wealth creation.
