New Business: Does this sound viable to you?

[Kristine..]

G'Day All

I am posting this in Caveat Emptor but it may end up in Coffee Lounge however I am at the mercy of the Moderators!

As you know as well as being an accredited Mortgage Broker (www.meadowgatemortgages.com.au) I hold the full Victorian Estate Agent’s Licence. Essentially I have been involved with real estate in one form or another since 1975.

My premises in Chirnside Park are only used infrequently (remember Pie and a Pint at Meadowgate Drive back in January 2004? http://www.somersoft.com/forums/showthread.php?t=13965&highlight=Pint Alack! The fish and chip shop is now closed and the building (Shop 11) up for sale. No more deep fried Mars Bars! ) and recently I have been thinking about the general quality of property management which modern investors are now wanting and expecting of their property managers.

There are a couple or three property management agencies in Melbourne which operate exclusive management services, that is, they do not involve themselves with sales. These agencies fill a market need and manage significant rent rolls.

I also have experience as a Body Corporate manager, although Body Corporate management companies are not estate agents and are not under the Estate Agent’s Act, so that is a different field again.

I also worked for almost two years as a Buyer’s Agent at a time when that was thought to be a good idea but nobody wanted to pay for the service.


So where is this heading? Two thoughts running here:

Firstly: Is there any forum member who would be interested or perhaps knows someone who would be interested in discussing the concept with me regarding setting up a property management agency, based in Chirnside Park but managing properties across the metropolitan area and including the Yarra Valley and perhaps further afield (sorry, Horsham is probably a bit too far for effective management)?

If you / your referral would like to have the conversation please email me [email protected]

Secondly: As investors, would you use an agency which would:

(a) Source the property for you at a nominal fee eg 0.5% of purchase price or $1,000 flat fee or whatever, then

(b) Be able to facilitate appropriate, competitive structuring and financing for the purchase at no cost to you, then

(c) Move on to letting and managing the property for the usual letting and management fees?

It seems to me that many Estate Agencies still uphold the old fashioned view: Sales are paramount and the property management pays peanuts in comparison per transaction so is usually not given the status, consideration and resources it deserves. Property Managers themselves shift from one agency to another in search of support and recognition, thus disrupting corporate knowledge and continuity of service and causing inconvenience to the landlords and to the tenants.

However, if you are an active investor (as distinct from an accidental investor) the management of your portfolio is of vital importance to your financial wellbeing and the Sleep At Night Factor.

So to summarise:

(a) I would be interested in exploring a business plan with someone prepared to become involved in a start up business to provide top quality property management services across a broad geographic area

(b) Would you as an investor consider engaging an Estate Agency which offered buying services / financial services / property management services under one roof, which deployed their staff in that activity exclusively (no sales) and which charged the usual fee for services (excluding the mortgage broking which is paid for by the lender)?


Just a thought at this stage, but as you all know each stage in our progress starts with a casual thought, moves along to the discussion stage, then the planning stage, then action then finally the glorious Pie and a Pint stage!


I really enjoy my involvement with the supermarket, and it has been a God send after the couple of years pouring money into the bottomless pit called property development. I painted six houses in 2004 and ran from one end of the year to the other, and 2004 came after two years of renovation and very limited cash flow.

Counting money in the vault has been a healing process but now the dust has settled and I am raring to get back into what I love best: Property, property and more property. Those of you who have met me know I was born to talk and sitting in the vault I have no one to talk to.

The mortgage broking business is going well as a stand alone business but being able to combine all three aspects of my favourite subject – property, money, investment would be nirvana, so if there is anyone out there interested in the concept please contact me. Perhaps I could organise a ‘discussion evening’ at the shop, share a glass of water and a crispbread (well, I am on the lose 25 kilos program, too, remember) and have a general conversation as an opening gambit.

OK, look forward to any comments and replies.

Thanks

Kristine (Trump)

 

[Peter Parker]

Kristine, I know you want to operate from your premises, but if you moved to Perth and charged a flat 10% all inclusive management fee, I'm sure landlords would beat a path to your doorstep and you'd have smashed the cosy PM cartel over there through such unheard of low fees

Secondly: As investors, would you use an agency which would:

(a) Source the property for you at a nominal fee eg 0.5% of purchase price or $1,000 flat fee or whatever, then

(b) Be able to facilitate appropriate, competitive structuring and financing for the purchase at no cost to you, then

(c) Move on to letting and managing the property for the usual letting and management fees?

Many would, but I'd do a. myself, have Rolf for b. so would only be interested in c. The remainder of this posting will discuss things I'd ask a small specialist PM before engaging them.

You mentioned your aim of managing IPs over a wide area. Probably due to the distance to my IPs, I'd prefer my PM to be close (within 5km) of my IPs. However if I had a good relationship with a PM and I was to get another IP within 10km, then I'd still use them. But if selecting a new PM, and I had no recommendations, I'd only chose one from those nearby.

A couple of years ago, I was inconvenienced by having an IP with an agent that said they were getting out of sales and specialising in PM. They moved to an office in a light industrial part of town, well off the main street. A few months later they closed down and they sold their rent roll to someone else.

This coincided with a period of vacancy, and resulted it being empty for a couple of weeks more than needed (it's in a top location, so is normally a quick renter).

I also didn't like the lack of a 'main street' location of this agency. Thus there would be reliance on newspaper advertising (which is passed onto the landlord) rather than no-cost walk-in exposure, increasing costs for me. On one hand leading a low-profile office might be cheap (irrelevant in this case as you own it) but if its exposure is poor for tenants it may be false economy.

As a specialist PM, are you able to get cheap access to list vacancies on the major RE sites? As a landlord I'd want this as well as a high-profile location. If the PM only had their own site, I'd regard a listing there as being fairly low value unless site traffic was high.

I don't know your office, but does it have at least 2 other agents nearby so you can benefit from walk-in 'comparison shoppers' and reduce costs to owners? From a prospective renters point of view, this means a handy location and a changing window full of properties, so it's worth them checking frequently. But from an owners point of view, you don't want anything staying vacant too long!

I don't know if this happens in practice but are there synergies between sales and PM departments that you'd lose by not having a sales arm?

Another aspect is paying rent. What can you offer that makes it as easy for the tenant to pay as possible? As a tenant I currently use a payment book and go to a bank branch once a month, but if I worked full time this would be impossible. It's very old fashioned, and surely in this day and age you'd provide 24/7 web and phone payment options.

Peter

 

[paulie]

Good luck with your business ambitions Kristine, I hope it works out.

I thought spiderman points, especially about the synergies you would be missing out on with real estate sales and property management very valid, although with your experience and work background I am sure you are going to come up with viable points of difference for local and not so local investors to use your services.

Thought I would throw in my two cents on Spiderman's statement of
but if you moved to Perth and charged a flat 10% all inclusive management fee, I'm sure landlords would beat a path to your doorstep and you'd have smashed the cosy PM cartel over there through such unheard of low fees

I couldn't agree more. Even though the property management departments of some of the real estate companies I have worked for, were run by hardworking well meaning property managers who did their best, I always felt the prices charged versus service received was too much (average annual charge works out in the 11.5% - 14% of total rental income), hence I always found it difficult to cross promote from sales to our property management teams, instead I use to promote the benefits of taking over the role yourself, where to find information and little tricks of the trade i picked from experience and websites likes this one.

BUT seriously, would you move all your properties over to a company charging a flat 10% fee?

The really interesting thing about real estate business's in WA is that they are only as valueable as their rent roles, Sales commissions do not enter into the equations when it comes time to sell the business other than as good will, and typically real estate business's in WA sell as a mulitple of 2.8 - 3.5 times the annual rent role income. Hence every rental pulling in $300 per week, earning 12% as income = $36 X 52 weeks = $1,872 multiplied by 3 times earning multiple = $5,616. wow. For every average rental property you add to the business you add $5,000 value to the resale value of the business!

Let's see if we can get Kristine to Perth!



Paulie

 

[Peter Parker]

The really interesting thing about real estate business's in WA is that they are only as valueable as their rent roles, Sales commissions do not enter into the equations when it comes time to sell the business other than as good will, and typically real estate business's in WA sell as a mulitple of 2.8 - 3.5 times the annual rent role income. Hence every rental pulling in $300 per week, earning 12% as income = $36 X 52 weeks = $1,872 multiplied by 3 times earning multiple = $5,616. wow. For every average rental property you add to the business you add $5,000 value to the resale value of the business!

Let's see if we can get Kristine to Perth!

I can see a Perth PM Get Rich Scheme coming up here:

1. Buy a struggling agency with a small rent roll
2. Offer super-low 'honeymoon' PM fees (say 7%) to get landlords to switch (would appealing to tenants of self-managed IPs help if an inducement was offered?)
3. Are reasonably good at your job
4. Get a stack of business from landlords
5. Sell the agency (on the basis of the increased valuation due to the bulging rent roll) for an obscene profit?

(these steps are optional)
6. License the system to others
7. Write books/did seminars
8. Retire young on a mix of IPs, licence fees and book sales and maybe become a media celeb

Something to do when the Perth market finally levels??

Peter

 

[Kristine..]

Hello Peter and Paulie (gosh! There's a folk group in that!!)

Thanks for the comments. All feedback welcome, and not just on my half-baked ideas but on property management in general. What do we really want from our property managers? It's a very broad subject.

Peter, I heard John McGrath speak some years ago and he (at that time) had never had a shop front and therefore had never had a display window, had always rented upstairs office space and considered that a corporate image was more important than a 'retail' image. This applied whether for sales or for rentals.

Over the years, my new tenants have come from these main sources in rough order:

(i) From the sign boards at the front of the property

(ii) From the internet (increasingly - either tenants see the actual property then look it up on the internet, or see it on the internet, go for a drive, and ring the agency while sitting in the car outside the property)

(iii) From telephone enquiries to the Agency

(iv) From the Agent suggesting the property to an existing tenant wanting larger / smaller / or the house they were currently renting was not going to be available for rent after the expiration of the current lease

(v) From walk in enquiries to the Agency.


So I tend to agree with McGrath's estimate of the value of a shop front in a busy (expensive) retail strip: Not much.


Ralph Waldo Emerson's famous line Build a better mousetrap and the world will beat a path to your door. comes to mind.

If the service you offer is good to very good, people will find you.

Jan Somers relates a story about property managers squeezed into a tiny shack of a building on the outskirts of a country town yet managing several hundred properties. The owner and staff were dedicated professionals, it didn't matter where they were, they offered a great service and everybody knew it!


Regarding paying rent, anyone with internet banking just pays and that's that! The technical details are just technical details - after all Australia Post has many payment schemes available, too, so if any tenants didn't have a cheque book they could pay the rent by any number of means. They could even buy a Postal Order and mail it!


Paulie, that's interesting regarding the 'Flat Rate' concept.

I pay a (bulk) discounted rate to my managing agent, 5.5% letting fee and 7.7% managing fee. Apparently they charge 6.6% and 8.8% to new landlords.

If there is a change of tenancy each year, I am paying a whopping 13.2% in fees and taxes. That's a large slice out of my rental income.

Agencies which charge a letting fee do so because the landlord could say 'Thanks very much for finding me a good tenant, see you later goodbye!' and manage the property themselves.

Equally some landlords prefer to let the property themselves but pass the ongoing management over to an agency.

A Flat Rate is certainly worth considering. I wonder if any agency is actually charging this way?

Peter, your idea of buying a small rent roll is a not unusual practice.

Estate Agents retire, or change businesses, or decide that their rent roll is too small to justify a property manager and other resources being assigned to it; rent rolls frequently change hands. One of the local agencies sold their rent roll a few years back to another local agency with a larger rent roll so that the first agency could concentrate more on sales particularly house and land packages. They had trouble attracting suitable property managers and their 200 or so properties were more nuisance value to the principal then they were worth.

A rent roll is a commodity like any other. It's like putting in a new bathroom. Will the increased rent be more than the interest on the renovation loan? Then the investment is worthwhile. If rent rolls sell for 250% to 300% times the annual income, and interest on the loan is 10%, that still leaves a good operating margin and the business is up and running.

If the rent income is $50,000 x 2.5 = $125,000 to buy the roll, and interest is $12,500 per annum, that leaves $37,500 rent income on an appreciating asset given that average rents plus letting fees will continue to rise.

Actually, thanks Peter and Paulie, that's a great idea! It's the old idea of starting from scratch, whereby income is delayed while the business establishes, or buying a business to generate income from the first day of trading.


As with any project or investment, as soon as we think of something the idea gathers it's own momentum.


I appreciate the feedback, you have both given me plenty to think about.


Cheers

Kristine

 

[Simon]

http://www.ljpm.com.au/index.php3

This lady started a management only company here in Newcastle and it has gone from strength to strength.

Cheers,

 

[geoffw]

Ralph Waldo Emerson's famous line Build a better mousetrap and the world will beat a path to your door. comes to mind.

I don't agree with him on that. Not now.

In today's society, you need to publicise, publicise, and maybe even publicise some more. In little ways as well as big ways.

In my situation, I'm finding it's not enough just to have a famous food outlet. That helps. But it's a lot of things I'm doing to boost it which are really making the difference between surving and thriving (not that I'm there yet).

There's a heap of better mousetraps out there. On ebay, and on websites all around the world.

 

[Peter Parker]

If the service you offer is good to very good, people will find you.

Depends. In a street full of owner-occupied houses where most people have been there for years, know their neighbours and attend auctions, word of mouth and local gossip is very powerful (as in the Jan Somers' country town PM example).

You can tell if this is the case by observing behaviour after auctions; if after the auction finishes everyone goes home, then 'neighbourliness' isn't high. But if they stick around and gossip in groups for a while, then neighbourliness is high.

On the other hand in a suburb full of apartment blocks and transient renters, it may be less so. Renters moving into an area won't know how good an agency is until they try it. And as they are looking for homes not agents, the reputation of the agent isn't a key factor (assuming they knew it, which they wouldn't in most cases) if they are listing the home they want to rent.

As for landlords, if these are interstate, then local gossip/word of mouth won't necessarily work either. Though with your presence on the forum, you're likely to be an exception Of those landlords that live near their IPs, a larger proportion would likely self-manage than those distant from them.

In the right hands, flat rates offer delightful simplicity for the landlord. But in the wrong hands, they are 'money for jam'. PMs don't need to account for anything and would still get their flat 10% even if they skimped on inspections, etc. Whereas with a smaller base rate plus 'piece rates' there is an incentive for PMs to do more for the extra payment this attracts.

Peter

 

[Puppeteer]

A Flat Rate is certainly worth considering. I wonder if any agency is actually charging this way?

I've got one agency in WA charging a flat rate of 11%, though it is regional (Busselton). If I could find a good agent charging 8-10% flat in Perth, I'd jump ship immediately.

 

[paulie]

Hey puppeter

for a flat rate of 8% - 10% what would you expect from the property manager in terms of services, inspections etc???


cheers paulie

 

[Puppeteer]

Paulie,

The agent I'm paying 11% flat rate to is for full service in a regional centre,. The services are the same as I'd expect from any property manager. It covers all of the costs such as written property condition reports, inspections, tribunual representation, postage and petties, management fee etc.

I'd expect an agent in Perth to come in lower than that, as the market is stronger (ie more properties).

Do you have someone in mind? I am looking for a new PM for my High Wycombe Property.

 

[Ace73]

Sounds like a good business idea Kristine.

Every time we have rented a house/ unit, it always has been via the weekend paper or the internet. Never even knew where the PM office was until we had to sign contracts and in one instance in Brisbane we did all the paper work at the apartment and never once did we actually go to the PM office.
Got to have the capacity to receive rent via internet banking.

Our tenants have always paid via internet banking and have never missed a beat.