When I am presenting at industry conferences or hosting principal workshops, there is always one question I am asked: ‘How much should my business make?’
Usually when people ask this question they are really fishing for a benchmark profit percentage.
It is a question that is hard to answer; hard, because every real estate business is different. It is near impossible to compare a sales-only business with a property management-only business, or a selling principal business with a non-selling principal business. There are always different components of the business that can be benchmarked, but it is vital to first understand the differences between business models.
Instead, I like to turn the question around and share the characteristics of the businesses that I see achieve above-average results. In my experience, I see above-average results coming from businesses that tend to have the following.
1. LARGE RENT ROLL COMPARED TO COSTS
The important thing here is the relativity between the fixed income you generate from the business (usually property management) and the fixed costs you incur irrespective of performance. The greater the proportion of your fixed costs covered by your fixed income the better. This reduces the risk within your business and, because your profit breakeven is lower, you don’t have to sell as many properties before you start to make a profit.
In an ideal world, your rent roll is big enough to generate income every month equal to the fixed costs of the business. Although this is rare, it does happen, and when it happens it is a nice place to be.
2. MULTIPLE PRINCIPALS
The key with multiple-principal businesses is that you have more than one person with a vested interest in the success of the business. This could be a husband and wife team or unrelated parties in business together. Not all principals need to be equal owners for this to be the case, and in recent times it has become more and more common for older principals to be supported by others with a minority ownership interest.
Given the many hats a principal needs to wear in business, this works because it enables you to share the hats around. You may have one principal responsible for PM and one for sales, or one has the job of selling while the other looks after the back office.
3. AT LEAST ONE SELLING PRINCIPAL
Irrespective of whether a selling principal takes a commission on their sales, having one selling principal reduces the reliance you have on your sales team and creates an opportunity for some higher profit margin sales.
Also, don’t discount the value a business enjoys by leaning on the profile and activity of a strong selling principal – someone who is not going to just up and leave when they negotiate a few extra commission percentages with an agency down the road.
4. CONSISTENTLY PERFORMING SALES TEAM
The more consistently your sales team performs, the better the profits. Having no baggage in the team and everyone contributing to the profit every month makes a massive difference to the results. For example, if you have one person on a retainer and not making sales, you need one other person to make a sale per month just to pay for the retainer agent.
One way I like to focus on performance is by tracking the average number of sales per salesperson per month. If anyone is not making a sale each month they are not contributing to profit. Getting everyone to consistently meet baseline performance expectations flows straight through to the bottom line.
I see net profit percentages of real estate businesses range from 0 per cent (or negative) to around 40 per cent.
To my mind, 40 per cent is only achieved when the business is reliant on a selling principal who does not take a commission from the business for the sale. If you are a sales-only business achieving 20 per cent net profit percentage you are doing well. I think the industry benchmark here is closer to 18 per cent.
One of the best profit percentage businesses I work with achieves around 27 per cent net profit percentage, but one of the best dollar profit businesses only achieves 16 per cent net profit percentage and it has about 10 per cent of its total income coming from property management.
There is no one-size-fits-all. If you are going to compare yourself to others, make sure you are comparing apples with apples.
Footnote: To ensure you are comparing apples with apples, when I mention net profit percentage I am talking about profit before owner’s drawings (but after a commission on principal sales) and before tax, expressed as a percentage of total income.