How do you grow your real estate business or specifically your property management income?
Here are two ways. First, you could do it through organic growth, attending a seminar every week by different trainers talking about various things you need to know for your business. Though to start with, you’d have to make sure you outstrip churn before growth takes place and you’d need to drive your business development team, just as you would your sales team.
The second way is through a good strategic acquisition. For those who haven’t gone about it before, it can seem daunting, especially if you are adverse to risk and debt. However, with interest rates at or near record lows, now is the time to investigate what opportunities may be available to you.
The main benefit is instant cash flow with the possibility of picking up a good agent or two along the way. The spring bounce in the sales market may provide a momentary relief or the belief of growth for some agencies, but come the quieter months of February and March, these same agencies will be wondering where all the cash is. What this all means is: if you’ve got your finances in order, it’s time to act!
So how does it work? Firstly, remember these two things: 1) the value is attained by multiplying the management fees only, with no ancillary fees, 2) you only pay for what is signed over.
Now, let’s do a back of the envelope calculation on how the debt/leverage can work (note: each institution will have its own leverage comfort levels and multiples that differ depending on the location and quality of the property being managed).
- Purchase of 100 properties under management, with p.a. income of $120,000 and the multiple around your location is about $3
- $120,000 x $3 = $360,000 (the bank will require a valuation)
- Now, if the bank sees fit, they may lend you up to 60% of that total:
- 60% of $360,000 = $216,000 (debt)
- $360,000 – $216,000 = $144,000 (Capital required)
- Interest on debt at 7.5% x $216,000 = $16,200 p.a. (Depending on your institution, there may be some capital paydown required).
Now, to spend $16k per year to get $360k income: looks like there’s plenty of room should you need an additional property manager to come on board! But what if you’ve already got a small management of 100 properties and a property manager in place? Well, if there’s no debt attached to the rent roll, you can put that up as collateral. Again, this could be leveraged so you may not need to come up with any cash. If we work off the same valuations and multiples as the possible acquisition then it could look like this:
|Properties||Value||Debt 60%||Leverage 40%||Total Debt||Cap req.||Int 7.5%|
What does all this mean? Well, you could double the size of your property management business for as little as the interest payments. In this hypothetical, you’ve doubled your income with little extra expense, producing twice the amount management fees alone and creating a business that’s cash flow positive, whilst doubling your asset base. Lastly, we haven’t factored in any ancillary fees from the managements, nor the possibility that you may snare yourself a decent agent or two to drop into your sales team – nice little add-ons.
At Live Bookkeeping, we have seen the benefit and detriment of not having your books up to date and accurate. If you plan to speak with your bank, it’s vital that your current business books represent the real position of your business. This will give them the confidence to back you.
Remember cash is king, but debt can be your friend!