Buying and selling a rent roll: Interview with Dean Yeo, Part 2

In the first part of our interview with Dean Yeo, we learnt his rent roll valuation secrets and got his take on how the property management market is performing. In part two, we cover what you should be looking for if you’re buying a rent roll, and how to prepare to sell one.

Missed the first part of the interview? Read What is your rent roll worth.

Let’s talk about the advice you give to people looking to buy and sell their rent rolls.

Sure.

Imagine you were a prospective rent roll buyer. Would there be any other red flags or factors that you should be aware of before purchasing a rent roll? What should a buyer be looking for?

Yeah, okay. So some of the red flags you’d find would be things like how many managements are churning on the books each year. About 15% churn might be acceptable, although this number varies between regional markets.

Another flag would be the percentage of tenants on your books that are on periodic tenancies. You’d be looking for less than 10% of leases on periodic tenancies. Then there are some other things you’d want to keep an eye on. These might be how many properties have tenants in arrears, how much maintenance do they have going on, things like that.

And what sort of numbers do you think are acceptable for arrears and maintenance?

Well it’s important to remember that when you look at the arrears on a portfolio it’s a snapshot in time. From what I’ve seen in the rent rolls I’ve brokered, <3% arrears up to seven days is standard.

With maintenance, what you’re looking for is how many outstanding maintenance requests there are. I mean, if there are 100 properties, there could be as many as 50 maintenance jobs happening on a monthly basis. And that’s not a problem. When it becomes a red flag is if you have say, 200 outstanding maintenance requests for a portfolio of the same size.  

Another red flag buyers should watch out for is the kind of Property Management processes and systems in place in the agency they are buying from. If they use old-school systems that are very manual to manage, that signals a lot of work for a buyer. It also signals a lot of inefficiency, and a lot of potential hassles down the track. So that's why that’s a bad sign.

Is there any other advice you’d give to someone considering buying a rent roll in the next 12 months? How do they get started on that journey?

If it’s in Queensland, for example, the first thing I’d tell them to do is make sure their whole rent roll is on Form 6 management agreements. The reason I say this is because you’re more than likely going to need a valuation done of your own rent roll by your bank prior to purchasing a rent roll.

Following the changes to Queensland legislation, any management agreements not on that form are considered worthless from the bank’s perspective. Basically, the banks are therefore turning around to buyers and saying, ‘Well if we had to do a fire sale and sell your business, we wouldn’t be able to sell anything not on that Form 6.' This is because the banks wouldn’t have the time or energy to upgrade them.

The other piece of advice I give to buyers is that while they’re getting all their owners onto the Form 6, to up their management fee and extra fees. People do expect the price of services to go up over time. The price of coffee goes up, and the price of petrol goes up. The price of Property Management goes up too. The Form 6 can be a good opportunity to make that happen for your business.

And how much preparation does there need to be in terms of how you get your staff ready to take on a new rent roll?

Perhaps one thing buyers tend to overlook when purchasing a rent roll is the human element. You know, what does the property manager who is taking on another 75 properties think about this acquisition? They’re not going to be getting paid any more to manage all these extra properties, but their workload could potentially increase.

But if you could turn that around with better technology that makes it less of a hassle to manage those properties, that might be a different story. So purchasers should be considering that investment if they haven’t already - for everyone’s sake.

On the other side is the property manager who managed the portfolio being sold. What will you do there? You’re not going to manage a 200 property rent roll without people. How do you match everything together and get the best result for your business? How do you align the data, the systems, and the people? That’s where a lot of the work is, as far as the buyer is concerned.

What about selling a rent roll? What advice would you give people who were preparing to sell? Is there ever a time you’d advise people not to sell?

Not really, no. Many people have asked when they decide to sell whether other vendors soup up their rent roll to get it ready. And perhaps it would be nice if they did at times, but the reality is that they don’t. Most of the time, people who are selling need to sell, because they’re retiring, or they’ve gotten sick, or they’ve split up a marriage or partnership. All those things.  

If anything, I think people need to start thinking about succession and exit strategies before they get to the point of putting their rent roll up for sale. It’s just too easy to get stuck in the minutiae of the minute by minute, day by day running of the business.

So many people don’t make the time to lift up their heads and have a look at where they are currently. But they need to, because it will help them with that transition when the time comes. And it does eventually come. Getting that exist strategy together will also help the business that eventually takes on your properties in the future.

Last question: do you think there’s a blueprint for rent roll growth? What are the characteristics you’ve observed of agencies that succeed?

Besides the advice I gave you before [in the first part of this interview] about making the business owner the BDM for the agency?

Yeah.

Well, I think, along those lines, most agencies are fairly small, and what I’ve seen is too many are trying to put BDMs on too soon. And also in addition to that, some are putting on BDMs that maybe don’t have enough experience. Sometimes they simply don’t have the right processes in place to help a BDM grow the business.

That’s not to say they are all going to be like that. But few will be better at selling and prospecting than the owner of the business.

Absolutely the key to success is where an agency owner has their finger on the pulse of their business. They can tell me what their financials are, what their break-even point is, and what their business strategy is. And typically, I’ve seen that happen more often where the owner is also the BDM for the agency.

On the other hand, principals and directors that say ‘Oh, this is a bit of a headache for me, so I'll just throw some more money and more people at it,’ are the ones who get into trouble. They don’t know enough about their financial position. And they just leave problems without getting to the bottom of the issue. They’re rarely going to be the ones who are growing the business. If there’s the opposite of a blueprint for growth, that’s probably what it looks like.