PM Debate - Organic growth versus acquisition

SARAH LATHAM
Director, Latham Cusack Property Services

ORGANIC GROWTH
Organic growth versus rent roll acquisition is a familiar question often raised by real estate business owners looking to grow their rent roll.

In the past I have been directly involved in the acquisition of numerous rent rolls, as well as nurturing organic growth.

When deciding to start our own boutique property management business, Latham Cusack Property Services, my business partner and I felt that growing organically was the best fit for us.

To begin with, it’s cost effective. Compare the outlay of employing a business development manager versus the initial cost associated with purchasing a rent roll. Sure, if you want to grow your rent roll fast and be guaranteed immediate cash flow, acquisition may be the answer, but you need to consider the effects of integrating a sizeable rent roll into your existing property management team.

This might include:

• Losses – Retention clauses may not help if the relationship between previous agent and owner is damaged, or the relationship is so strong that after the retention period has expired, those owners re-join the original agency
• A change in the team’s culture by the addition of new staff
• The additional workload within those first months of bedding down the properties
• Inconsistency in pre-existing processes and procedures
• Changing the tenants rent payment method and allowing for months where the tenant’s continue to pay the previous agency
• An increase in or new debt if the acquisition isn’t purchased in cash
• How well do you know the rent roll you’re buying? There are inevitably hidden pitfalls, which may surprise you once the deal is done

Employing someone totally dedicated to growing the rent roll is beneficial in that their salary is generally commission-based. Their strengths should be sales-oriented and your business development manager should not be a property manager who can be easily distracted with day-to-day management.

Growth is gradual and more controlled with organic expansion, and integrating properties into pre-existing, stable portfolios is more easily absorbed by the property manager.

TONY BRASIER
Managing director and chairman, PRDnationwide

ACQUISITION
The major value of a residential agency business is its rent roll.

The value fluctuates from market to market as well as due to the economic circumstances at any given time. In recent times, rent rolls have been selling for 10 to 15 per cent less than they were five or six years ago.

Whereas the majority of rent rolls were selling for $2.50 to $3.50 per one dollar of management revenue, there have been sales fluctuating between $2 and $3 per dollar.

In a low interest rate environment, this represents a great opportunity to expand existing portfolios at what will prove to be excellent value in future years.

To organically grow a rent roll takes a great deal of time and requires specific property management sales skills that are generally difficult to find. It is far easier to grow a property management business off the acquisition of a small- to medium-sized rent roll.

Consider the main advantages of acquiring a management rent roll:

• Banks will lend money to acquire rent rolls against the value of that rent roll
• The profit from managing an acquired rent roll, together with the sales revenue generated from that rent roll, should more than service a principal and interest bank loan
• On average, 10 per cent of the properties on a rent roll get sold each year – a rent roll of 200 can produce 20 sales. An average commission of $8,000 reflects sales income of $160,000 per year
• Organic growth of the portfolio can be built faster off the back of an acquired rent roll
• They are relatively liquid assets that trade in the market regularly
• In tough markets the cash flow provided by a good rent roll can sustain the business
• On retirement, an agent can sell his rent roll in one line or parts, providing flexibility on maximising the return

A good strategy combining purchasing rent rolls with good organic growth can lead to building a strong, relatively liquid asset that will provide quality recurring income for a residential agency and, ultimately, an excellent retirement solution.