EPMEPM: Productivity

The Mathematics of Property Management

TIME FOR A MATHS REFRESHER WITH BOB WALTERS to ensure you fully understand your business’ performance.

THE PROBLEM WITH NUMBERS AND AVERAGES IN PROPERTY MANAGEMENT
There  is a lack of reliable data about  the property management industry in Australia. Sure, there  are various surveys done from time to time, but how reliable is the information in these surveys?

And, sadly, not everyone tells the whole truth about their businesses. I have recently carried  out some research into the property management industry through my client base and through the membership of LPMA (Leading Property Managers of Australia).

Here is a summary  of my observations.

AVERAGES
The questions here are ‘who is average’ and who wants to be ‘average’? Australia is a big country geographically; demographics and business sizes are very diverse, so it is hard to define what ‘average’ looks like.

NUMBER OF PROPERTIES UNDER MANAGEMENT
When it comes to the number of properties under  management, how many properties do you really manage? Are lost managements hiding?

My advice for business owners is to drill down on the rent roll numbers showing in your property management software. Check your Management Fee Ledger to see what properties are not generating fees each month. Maybe lost managements that you don’t know about are sitting there.

PROPERTY MANAGEMENT BUSINESS PLAN
According to my research, more than half of Australian real estate businesses did not have a written business plan for their property management department! That is a cause for concern in the industry.

SEPARATE PROFIT AND LOSS ACCOUNT FOR THE PROPERTY MANAGEMENT DEPARTMENT
Seventy-nine per cent of businesses had a separate Profit and Loss Account for their property management departments. A good result!

PROPERTY MANAGEMENT PROFIT
Twenty-one per cent of offices did not know what their property management profit was. It was good, on the other hand, to see that 79 per cent of business owners knew what profit they were making from their rent rolls.

The average percentage profit on gross annual revenue of researched offices was 21.81 per cent. My comment about this is that if you are not making at least 20 per cent profit on gross annual revenue, why would you want to be in the property management business?

Could it be that the business is merely a babysitting service for the real estate sales business? Or that the business owners don’t care about profit and are just using the rent roll as a retirement nest egg?

That’s fine if you are not motivated by profit in operating your property management business, as long as you know why you are in the property management business. Property management is more fun when the bottom line is healthy.

PROPERTY MANAGEMENT BUDGET
Seventy-four per cent of researched businesses had a budget for their rent roll. However, that still meant that approximately one in four businesses did not have a budget.

BUSINESS DEVELOPMENT
Net growth
The average net growth over the past 12 months across researched offices was 33.7 properties.

Business development strategy
Half the researched offices had no business development strategy in place. Some offices reported difficulties in maintaining momentum in the growth of their rent rolls and challenges with business development staffing.

Business development managers
Sixty per cent of offices do not employ a business development manager.

Property managers handling new business
Based on my research, the problem is that (on average):

  • 20 per cent of their time is spent on repairs and maintenance issues
  • 20 per cent of their time is spent on inspections and reports
  • 25 per cent of their time is spent on leasing properties
  • 20 per cent of their time is spent on rent arrears and associated issues

This leaves just 15 per cent of their time to be spent on prospecting for new business. So very little business development activity usually occurs and rent rolls grow very slowly or not at all.

REWARDS FOR RENT ROLL GROWTH
I asked the question ‘Do you pay your property management staff a commission for gaining additional properties to manage?’ It was disappointing to see 24 per cent of offices not paying their staff any commission for additional properties.

The biggest percentage (36 per cent) paid a new business commission based on the dollar value of the management gained.

Popular reward schemes
Some of the most common new business reward schemes I have seen include: weeks rent, an amount payable for increase in properties managed, or even a set amount per property. But these schemes unfortunately lead to sub-optimal behaviour, such as doing anything to get the business, including discounting. In the case of a payment on an increase in properties managed, this may inadvertently penalise your team member for non-preventable losses.

There are a lot of business owners around Australia who will happily pay three times the annual management fee revenue to buy someone else’s business relationship – that is, buying a rent roll.

Using Sydney rental values as an example, if you are prepared to pay $5,000-plus to buy someone else’s business relationship, how much would you pay for one established by your own team?

My suggestions for incentives

  • Incentives should be achievable
  • The incentive scheme should be completely transparent
  • Incentive payments should be made quickly (as soon as the management is secure)
  • Awards should be public to develop a competitive environment
  • Achievements should be celebrated by all.

PREVENTABLE LOSSES FROM THE RENT ROLL
I asked the question ‘Do you provide any form of monetary penalty on property management staff who lose a management through poor service or a mistake?’

Seventy-one per cent of business owners do not penalise their property management staff for a preventable loss in property management. Business owners, how can you correct bad behaviour without some type of consequence?

Landlord clients rarely change managing agents for reasons other than unforced errors. These unforced errors are normally caused by a lack of training and the absence of documented systems and processes.

KEY PERFORMANCE INDICATORS
One in three businesses researched have no clearly defined KPIs for their key property management employees.

My final message to business owners: You really need to understand the maths of your rent roll and your business as each metric can affect others; and to maximise both your happiness and your financial returns you really need to make everything really count.

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Bob Walters

Bob Walters is one of Australia’s leading property management trainers and business consultants. If you are interested in becoming a member of the Leading Property Managers of Australia (LPMA) visit www.lpma.com.au.

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