ROI for MR - seeking your comments

Published: 18 November 2007.

We’ve revised the format of Management Rights search results in the interest of improving usability for prospective MR purchasers. Previously these results displayed the first sentence of the Broker’s description text below the headline on MR listings. We’ve replaced this with a summary of the listing’s Net Income, Remuneration, Manager’s Unit Value and Letting Pool.

As these listings represent a largely unemotional, business-related investment, we believe this new format provides more relevant details to purchasers and gives them an improved insight into the listing before they click in for more detailed information.
As an MR broker or purchaser, we’re looking for your feedback here. Do you agree this new layout is an improvement?

We’re also considering applying some sort formula to every MR listing providing an annualized ROI value so purchasers can see, at a glance, the total value proposition of each listing and compare apples-with-apples.

Perhaps something such as:

Estimated ROI = 
100 /((Price – Mgr’s Unit) / (Net Income + Remuneration))

The above equation would establish the actual purchase price after the manager's unit value has been removed from the equation, and divide this value by annual takings (net income & remuneration) to establish how many years the property would take to pay itself off, then divide 100 by that number to calculate the annual ROI.

Is the above formula sufficient? Do you think providing this % with every listing would be of assistance to you in quickly comparing many different listings with many different prices, pools, incomes and assets? Or do you believe such a value is over-simplifying the intricate details surrounding each listing?

Please share your thoughts on this by responding below. Our choice to proceed with this feature will be determined by your feedback.

Reply from: Terry McMiles

12:21pm Sunday, 23 September 2007

Hi Guys,

This is really an interesting subject, and I for one have an absolutely opposite point of view to most of the Industry on the way Management Rights should be marketed. (As you will notice from my website).

I can understand your motivation in attempting to highlight pertinent facts, but I am far from convinced that it does any favours for sellers or even potential purchasers.

For a start, I believe it is a grave mistake to think that a Management Rights business is "a largely unemotional business related investment". Only passive investments can be "unemotional" and Management Rights is very much an active investment. The on-site Managers will "live the investment" 24/7. The high turnover of Management Rights Businesses (many selling each 2 to 3 years) supports anecdotal evidence that buyers who have based their decision to purchase mainly on "the multiplyer" can very soon become unhappy in the business. Many "want out" within months of taking over as they start to realise that there is more to this type of Business than just buying something that has a high return on investment.

I would agree with your new format, if it were for businesses where an investor could afford to put a Manager in to run the Complex as then it would be a passive investment. But for most, this is only an option in businesses selling from approx M$2.5 upwards. The majority of businesses offered on the Property Manager Website are in the low to mid area of the marketplace where buyers will in fact be on-site 24/7 and very much actively working in their investment. It is pure folly not to give major importance to your emotional needs if your investment, your business AND YOUR LIFESTYLE cannot be seperated.

I believe that oversimplifying listings to risk them being graded based purely on the multiplyer or ROI is a real disservice to both buyers and sellers.

Being an independent operator and still relatively new to the Management Rights Industry, I do not have the volume of listings (I 'd like more listings if any sellers out there agree with my philosophies) that affords me the luxury of handing potential buyers a list of a dozen in their price bracket, with just Price, value of Unit, salary & total net income listed and say to them "pick one of these". . . . . having just a limited number of listings to work with I actually feel the need to analyse each listing & highlight their unique points of difference

so that buyers can give full and proper consideration to what will be (with business, investment funds & home combined) the singlemost important investment decision of their lives. . . . and I can guarantee, that if lifestyle and your relationship with your partner are of any importance to you, that every aspect of the purchase must be factored in to ensure that the right decision is made.

Is the residence adequate? (not every couple can live and work within the confines of a 2 bedroom Unit 24/7 without someone going "nutso")

Is permanent or Holiday letting best for your personalities and lifestyle preferences?

Do you have the sales & marketing skills to lift an underperforming business? Or are you better to pay a higher multiplyer for one that you just need to retain the status quo?

Can you comfortably handle the day to day maintenance and caretaking duties? No point in caretaking acres if you hate mowing lawns and pruning shrubs - even if the ROI is attractive.

If the building or complex is looking tired, are you comfortable you can articulate the need to refurbish to a committee that may not share your (more than likely correct) views? Or do you take a lesser ROI that may come with a more immaculate complex?

I am against oversimplifications, I feel that the buyers need to base their decisions on "the total package" and I feel that sellers who have built their businesses and relationships within it so that it all "runs like clockwork" are perhaps entitled to aknowledgement of these very pertinent facts and not just have their listings graded by numbers.

Thanks for the opportunity of contributing to debate on the subject

Terry McMiles

Licenced Independent Broker.

Reply from: Nick Buick

2:34pm Sunday, 23 September 2007

Terry you make an excellent point and one I'd not considered until now. I've regarded MR as a purely investment-based purchase rather than an emotive one because it's a business / investment being purchased... But you're right: its also a lifestyle that's changing hands and this needs to be communicated in each listing also.

In looking around at the websites of brokers who aren't members of TPM, I see a lot of listings advertised purely by numbers. Some MR sites don't even include photos. So this sentiment (misconception?) appears to be quite common. I assumed this was the direction we should therefore move toward but in light of your comments I'm thinking its perhaps its a good thing TPM's listings don't follow this lead.

That said, I think offering the net income, unit value in the summary is still more useful than the opening sentence of the description (which, out of context, generally doesn't offer much). What do you think?

Thanks for taking the time to raise this view Terry... Broker's and Managers are in the front-lines here so we value your suggestions on how to best service the industry.

Reply from: Terry McMiles

3:08pm Sunday, 23 September 2007

G'day Nick, it's a bit tragic that both of us are working on a Sunday Afternoon eh! . . . . never mind, keeps us of the streets.

I have just one problem in disclosing net income on a website, and for me it's the matter of privacy. Many Complexes are identifiable by the photographs and descriptions . . . . perhaps not so much to buyers but definitely to neighbouring owners of other Complexes and on-site owners. If you are not a bonafide buyer of management rights I just feel that you are not entitled to know what your neighbours income is.

With me, once a buyer identifies who they are and that they are in fact potential buyers for the complex they enquire about, I ask them to sign a simple confidentiality form and I am then very happy to give them the full income figures and a further written report covering special features and potential to improve etc. . . . . the more informed a GENUINE buyer is the better.

I don't mind disclosing the Unit Value as this is easily available to virtually anyone . . . it's just that I prefer to keep my Clients income information away from anyone who is just a "sticky beak".

I take the same approach on the Hospitality Properties and even the Investment Units in a managed Complex that I sell too, and I can report that I have never had a complaint about not disclosing income on my website from anyone who is a GENUINE buyer. Anyone else, we don't have to worry about.

Terry McMiles

Reply from: Nick

4:15pm Sunday, 23 September 2007

Heh it is a bit sad working Sunday... but it’s my most productive day of the week - 16 sweet work-hours and not a phone call in sight :).

RE: Net Income: The site traffic has increased 50% in the last quarter and the number of listings is also growing. The reason for my questions is to identify ways to improve usability for people searching for MR. We need to ensure they can continue to easily sort through the growing database to find suitable rights for sale.

I've found every listing / manager / broker has different requirements for just how identifiable the building can be and this is something we've always had to keep in mind while developing the software. We don't have any plans to make this sort of data mandatory and its very unlikely we ever would - I'm just doing a bit of research at this stage. Thanks again for your view - I'll keep this in mind.

Reply from: Denis Hale

4:40pm Thursday, 11 October 2007

Nick & Terry,

Thank you for your well written comments and I find this industry is really going through some changes. When I first started in Management Rights in 1992 I paid approximately 30% of my investment in purchasing the unit. This of course gave you the best return on your money with the majority working for you. This ratio continued until the end of the nineties and then real estate values just rocketted out of sight.

Manager's now find themselves paying 50-60%+ of their investment to buy their unit, greatly reducing the ROI, and in some cases to a point where you have to think is it worth it.

I am, and have been concerned for quite sometime as to how much do you pay for Management Rights and what is a reasonable multiplier. If you buy right; you can sell right. The other thing you must not loose sight of is; you are buying a business, and as Terry said earlier, the average stay is 2-3 yrs. My concern is the increasing value of the manager's apartment and the subsequent reduction of your ROI, where will the future be for the industry. The top end of the market will always survive, but I do hold some fears about the bottom end of the market. How much do you pay for MLR's when the unit is $800k and the net is $60k? This widening gap between the Rights and the Unit is a worry and something that will not just go away. Having the unit attached to the rights in smaller complexes will cause problems in the future. This will in some cases make the complex unsaleable as the unit value rises and the income stays put due to owner occupiers moving in.

It's now not a viable business to buy. Consideration should be given to having the unit split off if possible. This gives the manager the opportunity to dispose of the Caretaking and Letting Rights and the unit as separate items. Some of these businesses have changed dramatically over their lifetime and at one time had the majority in the letting pool, but with the advent of the First Home Buyers Grant, owners moved in. If you can have any imput into the preparation of the Agreements, then just a few simple words like,"may live on site," may be just what you need to improve the flexibility of the Agreement.

This is a great industry with a great furture as we all know that Onsite Mangers are the best. However, times are changing and the Act will have to change to reflect what is actually happening in the market.

I am always amazed when you go to a complex and you find they do not have email addresses and do not want to know how to work them. wouldn't it be simple if every complex had an email address that reflected the name of the property like heritagepark@bigpond.com.au It seems that this is too easy and you have to use some obscure name that has no relationship to the business and when you sell the business the name can stay with the complex. Very easy to do and if you would like this arrangement, then give Nick a call at The Property Manager and he can set you up.

Reply from: Nick

3:59pm Sunday, 18 November 2007

Funny you should mention that Denis. I've had discussions with several other brokers who've also pointed out this issue. But I actually think the housing boom will be a blessing for MR in the long term.

The way I'm reading the situation is this (and please correct me if I'm wrong):

The boom in property has flowed-on to MRs with onsite residences pushing prices up and as you pointed out - also reduced some letting pools as more OOs moved in making them less attractive.

Low interest rates and the first home-owners grant was the catalyst for this... however I'm guessing a correction will take place from this pretty shortly as the same housing boom has now put home ownership out of reach for many. This is compounded by today's higher interest rates which will result in a much larger rental market in the long-term. Ultimately equating to increased letting pools and rent prices making MRs better than ever. Assuming this is the case, now, more than ever, is the ideal time to secure Management Rights to get in front of the bell curve on this and maximise capital growth. What do you think?

Reply from: Denis Hale

7:26am Monday, 19 November 2007

Nick,

Interest rates on 1972 were 10% and I can recall how difficult it was for my wife and I to afford a house, and a very modest house at that. Nothing like the aspirations of modern day first home buyers I can tell you.

To me the only affordable housing for a lot of people will be the Townhouse in a complex.

QRAMA has a submission before the Government to have the regulation forcing managers to live on site changed. At a recent discussion with the Body Corporate Commisioner, I pointed out to her that mangers purchased a business with a rental component to it. This component in some case has reduced to just a few units in the rental pool. The business component has now almost gone from that business and we are left with a manager who has to invest $500k in his house and be forced to live on site to be a caretaker of a property, which of course is not necessary. The cost of Licencing, operation of a trust account and its associated accountancy costs; abiding by stacks of legislative regulations, it doesn't pay him to have a rent roll anymore. It seems everyone wants to live in an close to the city, however the ever increasing rents is making this unaffordable to thousands of couples and families.

There will be huge demands on housing especially Managed complexes and for me I cannot see where we are going to accommodate so many new people to our State. We need thousands of lots to be built and I am sure that management rights will grow enormously and I would rather see larger, rather than smaller developements, or developements where several can be combined under the one umbrella management team to ensure their prosperity into the future.

Regards,

Denis Hale

Reply from: Mara

6:37pm Friday, 23 November 2007

Hello big time fellows,

I'm relatively new to the industry perhaps even very very green to all the problems but as a buyer who wants to invest in this business it has became a very horrific experience purchasing management rights. Firstly, the owner withdrew from the sale , seconld time round we withdrew after realizing the enomous problems faced by the property manager to fix all the problems on site. Not to mention all the drama and tears in my household. Who said buying houses or management rights is not emotional!!! Secondly, I hate the phrase 2nd or 3rd job , if I'm looking for a business shouldn't I be putting in all my effort into a business and not just for a house to live in?

Reply from: Terry McMiles

10:24am Monday, 26 November 2007

Hello Mara,

Sorry to hear your early experiences in getting into Management Rights have been less than enjoyable. Please don't be discouraged, as someone once said, "It is often the last key that opens the door".

It is an emotional experience, and your attitude is also right in wanting to put maximum effort into your business.

I don't believe that any reference to 2nd or 3rd job is in any way attempting to "downgrade" the importance of a manager doing his/her job competently . . . rather it is a recognition that all Management Rights Businesses do not offer full time employment. In these days of electronic Banking, the necessity for manning an office in a permanent Complex is no longer needed for more than a few hours weekly.

Likewise, ride-on & self propelling mowers make yardwork easier & quicker and "Kreepy's" take hours away from pool cleaning.

This allows Managers (especially in smaller, cheaper Complexes) to also do other work without it affecting their ability to do their caretaking/managerial duties well.

It also allows younger people the luxury of entering into this business where their mortgage is covered by the Management Rights income, they can "be there" when kids finish school, and they can still earn some extra income as well.

References to 2nd & 3rd incomes are really just an indication of the reality that there will be plenty of spare time to explore other activities which may be leisure, sport, hobbies or work.