What is your rent roll worth? Interview with Dean Yeo, part 1
What are the right questions to ask when purchasing a rent roll? How can you prepare to sell one? What is your rent roll worth? If you’ve ever pondered the big questions of Property Management, well we know someone who can answer them.
Dean Yeo is a social media influencer and keynote speaker, and expert rent roll broker for Real Estate Dynamics (RED). We caught up with him recently to get his take on how the Australian Property Management market is performing, and to learn how much a rent roll is worth.
Because Dean was such a font of wisdom, we found it difficult to shorten the interview for this editorial. To make it a little easier, we’ve cut this into two parts, with this first piece focusing on Dean’s insights into how to calculate what your rent roll is worth, and advice for Property Management professionals in the next twelve months. The second part of the interview reveals Dean’s wisdom for anyone thinking about buying or selling a rent roll (or part thereof).
When you’re talking about rent roll valuation 101, what’s the magic formula for calculating the value of your rent roll?
You’re talking about calculating your AAMI—which stands for Average Annual Management Income. This is the base figure we use to calculate what your rent roll is worth before we factor in things like location, types of properties, and so on.
To get that magic AAMI number, you need to know your three key figures. They are:
- What is your average weekly rent?
- What is your average management fee across all properties?
- How many properties do you have under management?
Then calculate that figure as follows: Average weekly rent x average management fee / 7 x 365 = AAMI.
Multiply that figure by the number of properties you have under management to get your total income for your rent roll. It’s a simple as that.
Are there any other factors that can affect the value of your rent roll?
In terms of calculating its value? Besides the location of properties, factors like whether they are furnished or not, whether they are units or houses, how old they are, how much maintenance they need—all these things can affect the value.
What about a situation where you have one landlord with half a dozen properties? Does that affect the value of it?
The issue with having these sorts of landlords is that if they leave, the agency loses a significant chunk of income. That’s a risk for the buyer (of a rent roll). The way we could typically manage that situation in a rent roll brokerage is to draft up different retention terms, or possibly a lesser multiple offered for these specific properties.
How does a retention clause typically operate in a rent roll sale?
Right, so when you buy a rent roll, you’ll pay 100% for it on settlement. But usually, only 80% of that money will go directly to the vendor. The remaining 20% sit in their solicitor’s trust account for 90 days. That way, if anything happens over the first 90 days, such as a number of managements are lost for reasons out of the buyer’s control, the buyer may claim that retention money. It’s a way of mitigating risk for the buyer.
Banks love it and buyers love it, but sellers hate it, obviously. Now, in the situation you mentioned where there is a landlord with multiple properties on the rent roll, we would mitigate that risk for the buyer by increasing that retention period to four or perhaps even as much as six months. An alternative to a longer retention period might be to sell those managements at a slightly lower price, or possibly a lesser multiple offered for these specific properties.
The retention money isn’t that easy for buyers to claim though. They have to show written proof of how they lost it, and show that it wasn’t due to their own neglect. If it can be shown that they didn’t service their landlords or touch base in the first 90 days and they left because of it, well that’s just too bad.
What’s your best advice for agencies looking to increase the value of their property management business?
Give your BDMs more education. They need to understand where your break-even point is, and how your management fee makes you money. Your weekly rent is going to be more or less dictated by the market, of course. But your management fee—that’s what they need to be able to go in and bat for.
Better still, if you’re an owner, be your own BDM. If you’re looking for a blueprint for both, well, there’s rarely anyone who will be better at selling the business than the owner or principal of an agency. There’s rarely anyone who’s more committed either.
Those kinds of owners will also have their finger on the pulse of how their business is doing. They’ll be able to tell me what their figures are. They’ll have their head in amongst it, and they’ll know what’s going on. That’s what I’ve seen work, and be successful.
On the other hand, principals and directors who don’t know their financials and say it’s all a bit of a headache so I’ll throw some more money and people at it—they’re the ones who tend to get in trouble.
Is there something you wish all property management professionals knew?
Know your four numbers. Know how many properties you have producing an income. Know how much your average weekly rent is. Know how much your management fee is ex GST, and know your extra fees. If all you knew were those four numbers on a weekly basis, you’d be in the top 10% of Property Management professionals. And to get into the top 5%? Know your break-even number as well.
You’ve been helping people buy and sell rent rolls around Australia for some time now. What are your observations on how the market has been performing in the last twelve months?
Rent roll prices have weakened a little in the last twelve months, but not by a lot. If they were $3 a year ago, they would only have dropped to about $2.80 today. The interesting trend over the last year has been on the buyer’s side. We’re seeing a lot more pickiness, particularly with respect to the location of properties under management in a rent-roll. Buyers are less willing to buy a Property Management portfolio with properties spread out over any great distance.
We’re also seeing that a lot of those agencies that rely more heavily on sales commissions for income are under financial stress right now. There are fewer sales to go around, and with fewer sales happening, that’s brought a lot more focus on Property Management.
When we went through the GFC [Global Financial Crisis] previously, we saw a similar pattern. Agencies that didn’t learn from those mistakes then are now repeating them and taking heavy income cuts. Sometimes I might end up helping them sell part of the rent roll that generates income because that’s the position in which they find themselves to get through these lean times again.
And do you have any predictions or thoughts about how the next twelve months will play out?
Last year there was a lot of think tank talk among thought leaders in the industry about rent roll values declining. Brisbane suffered a bit this year with an oversupply of apartments and units, but otherwise, that prediction didn’t really pan out. I think Property Management is generally a more stable and slow-moving beast, for better or worse.
Nonetheless, the time has come for principals and directors of agencies to stop dropping commissions for landlords just to win more business. They’re in a race to the bottom, which doesn’t help anyone. They’re approaching a threshold so low that they will barely break even.
The other piece to it that’s a lot more exciting is the impact of technology on real estate. I think we’ll see that as innovations like AI and automation and machine learning become more and more commonplace in real estate software, we’ll be able to automate so many more menial tasks.
The critical part still to come here is an upgrade to how we think about—and how we use—technology. If principals and property managers can be brave enough to let technology work harder for them, they’ll free themselves us up to do more of what matters. I’m talking about the face to face stuff, prospecting, and relationship building. After all, Property Management isn’t transactional. It’s relationship-based.
Want to read the second part of our interview with Dean Yeo?
We discuss all things buyers and sellers of rent rolls should consider before heading to market in Buying and selling a rent roll: what to consider.
Still hungry for more information about buying and selling your rent roll?
Check out Buying a rent roll: what to consider.
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