Investing in a Management Rights Business instead of your home

Published: 21 February 2008.

By Terry Mc Miles, Independent Broker

Many home owners during the past months of re-occurring interest rate hikes have despaired at the rising cost of servicing their mortgage. Some have even put off the purchase of a Management Rights business because of their concerns that interest rates may continue to rise.

This is the exact opposite of what they should have done (or should be doing).
Interest rate rises are a direct result of inflationary pressures in our economy. In Management Rights, to some extent you have refuge.

Rather than having a home mortgage where every rates rise hurts, at least if you own a Management Rights business:

Your caretaking income is adjusted for inflation, and;
So is the income from your permanent letting pool.

As inflation takes hold rental values increase, so returns to the unit owners increase and compensate for rising interest rates. A by-product of this is that the resident manager's commissions also increase.

So what happens when interest rates start to drop?
In South-East Queensland you really don't have much to worry about. Demand for accommodation is high as a result of us being in the fastest growing population area in the Country.

When inflation again starts to be controlled and interest rates begin to decline, continuing demand pressures will keep rents stable even though they may not rise as they have done during this past year of interest rate rises. This of course means that as your borrowing costs start to decline again, your higher income level from the letting pool will at least remain stable.

Another good reason to buy a permanent management rights business, and there is absolutely nothing to be gained by waiting.

Reply from: Nick

10:23pm Thursday, 21 February 2008

Hey Terry that's an interesting point. I'm assuming Manager's can actually expect a triple benefit here from current interest rate rises:

Inflation adjustments increase remuneration; and higher rental prices from the letting pool - as you point out - but also; As rates rise make general home ownership less desirable, the size of letting pools should increase with less owner occupiers and more investors. Fair comment?

While we're on the topic of interest rates - do any MR finance brokers reading this have any advice to our readers in relation to fixing rates and what the best strategies might be to weather the rate storm ahead? We just fixed all of our properties this week at 8.25% - with rates expected to exceed 10% by the end of the year, it seems like the smart move where I'm sitting - would love to hear some professional opinions on the matter.

Reply from: Mark Harvey

10:48am Friday, 07 March 2008

A number of articles have been written in recent times regarding the positives in purchasing Management Rights in the current economic climate. While I may be biased I believe it is always a good time to buy Management Rights, with the assistance of the good people at PCS Finance of course.

The positives that have been mentioned include that the industry can have built in saftey barriers of Cartetaking Income being adjusted for inflation and Letting Pool income will also be increased in line with inflation. It also has been said that while interest rates increase people are less likely to be able to purchase owner occupied properties which keeps tenants in the rental market. Also to a lessor extent the interest you pay is included on your Profit & Loss as an expense which brings your net income down therefore you pay less tax. At a seminar I recently attended it was suggested that owners will be looking for longer tenancy agreements, with up to two years mentioned which should give the Letting Manager of a permanent complex more confidence in his business investment. For the Holiday Manager they might look forward to higher occupancies as the travelling public look to local holidays rather than affording the overseas holidays due to tighter purse strings. Also for the Holiday Managers the ancilliary charges remain constant and do not reduce regardless of any price war to attract holiday makers.

Now that you have decided that there is enough positives to purchase Management Rights there is the age old question of, do I fix or go variable with Interest Rates. A crystal ball would be another positive here. If you look at some of the fixed rates on offer, at time of writing, for the three to five year terms they are still on a par with the current variable rates. (retail and commercial) This would indicate that the powers that be in the Banks believe rates will come back within two years. If you are going to fix then maybe it should not be for more than two years. As for rates not coming down, well history shows that they do. Rates are currently at thier highest level for twelve years we are told. Between two high points there must be a low and we have just come from somewhat record low rates.

When it is all said and done to fix or not to fix is a personal choice. If you fix then you have a degree of certainty for that period. Should you stay variable then you just have to moniter your cash flow to cover the bumps.

If you are Management Rights then your owners will direct you when rents should rise thereby increasing your commissions and the Body Corporate salary will be CPI'd. You have just received a payrise without going cap in hand to the boss like I will now have to after another interst rate increase.