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July 4, 2014

Buying management rights

By KIERAN CLAIR

If you’re the type who likes to mingle with neighbours, tackle a few odd jobs and keep a schedule, management rights might be just your kind of thing.

The key is to get good information on what you’re buying, and the right advice on making it work.

Michael Wolf is a business development manager with RNR Strata Sales, a company that sells management rights.

He says there are several different types of complexes that qualify.

“It can be an apartment building, it can be a townhouse complex, it can be a block of strata-titled villas. It can even be a retirement-style accommodation complex,” he says.

He adds most are located in the sunshine state of Queensland.

“They are very common on the Gold Coast, Brisbane and the Sunshine Coast, and to a lesser extent in some regional locations. They’re also down in Sydney, but it doesn’t have as strong legislation as Queensland.” Melbourne is also seeing some high-rise projects with rights now.

A typical complex with management rights

A typical complex with management rights

“Generally, the onsite management industry hasn’t gone to places like South Australia and Western Australia.” Mike Butler, a director at management rights broker RAAS Rights, says there are basically two types of management rights – permanent rental and holiday management rights.

Top tips
Two management rights advisers give their top five tips on getting into the business.
Frank Higginson, director at Hynes Legal

Frank Higginson

Frank Higginson

  1. Use experts
    You don’t go to a GP for brain surgery. While that’s a slightly wider differential than what happens with lawyers, you need to use someone who has done plenty of management rights – use your local lawyer at your peril.
  2. Know the term of the agreements
    To quote a very well respected industry valuer ‘certainty equals value’. The longer the term, the more certain your tenure is as a manager. Confirming the term is one of the key legal due diligence issues.
  3. Understand the by-laws
    There should be some standard industry protections contained in these around the use of lots for competing purposes. Otherwise, you need to understand what the rules of the body corporate are going to be, as you’ll be the primary observer of them.
  4. What is the body corporate like?
    Have a very good look through the minutes of both general and committee meetings. You need to get a feel for the personalities in the scheme, as these will be the key relationships in the business.
  5. Educate yourself
    Don’t go in blind. Do your resident licensing course as soon as you can, and if possible even get through the full licence training. Attend as many industry seminars as you can. You’re about to invest a lot of money in a business – the more you know about it and the property market in general, the better.

Sam Hodgetts, CPA and partner at McAdam Siemon

  1. Use qualified advisers
    Not just any accountant/solicitor/finance broker/agent will do. You need someone who is across the

    Sam Hodgetts

    Sam Hodgetts

    legislation specifically relating to management rights. Your advisers need to be involved in the industry on a daily basis.

  2. Use the correct business structure
    It’s important to establish the correct business structure for your situation prior to contracts. There’s no ‘one size fi ts all’ in relation to business structures.
    You need to consider your individual current and future situation to get it right from the outset. The potential legal and tax costs associated with the incorrect business structure can be enormous.
  3. Understand what you’re buying
    Understanding your business and the commitment prior to purchase is vital to its success after settlement. Understand your caretaking and letting agreements and the tasks you’re required to perform on a regular basis. Educate yourself on the letting side of the business and the time and knowledge required.
  4. Obtain your licence as early as possible
    Simply completing the licensing course and requirements will give you a sound base knowledge of the industry and the letting/sales side of the business. I suggest participating in the licensing course as soon as possible for all new potential management rights owners. It’s also important to use an industry recognised specialist trainer, as the training quality and standards can vary.
  5. Management rights is a relationship-based business
    Good communication skills and customer service skills are essential to a successful management rights business. If these skills aren’t your strong point, build them up to a suitable level or look for a different business opportunity. Associate with other experienced managers in the industry to leverage off their knowledge and experience.

“In holiday management rights, however, you can make more money, but you do have to work harder. It’s more a 24/7 type of operation,” Butler explains.

The concept was originally created in Queensland where unit project developers were, almost by accident, creating an income-generating business in parallel with their unit projects. Butler says the rights also provide added value to the developed units.

“They (developers) realised there would be a positive effect on the development, if in fact they incorporated an onsite management concept into the development.”

HOW DOES IT WORK?

When you buy management rights, the price is made up of two components. The first is the manager’s unit, which attaches to the rights. Its value is assessed at the market price, based on other sales within the complex.

The second part of the figure is the business that generates income and operates from the manager’s unit.

This has two income streams. One is the caretaker’s agreement with the body corporate, where you’re contracted to maintain the common areas of the complex and ensure the building complies with various building and safety codes as per any relevant statutes.

The second income stream comes from managing a rental pool of units.

This is formed by arrangement with the individual owners.

“The letting rights basically allow the manager, through a restricted letting agent’s licence, to become an onsite letting agent and do letting of the units to individuals in the marketplace,” Wolf says.

WHAT DO THEY COST?

The buy-in prices are diverse, according to Butler. He currently has listings from $440,000, with a net profit of $45,000 per year, through to $5 million with a net profit of $750,000 per year.

“A price range that we’re always looking for listings is around $1 million to $1.5 million aggregate price.”

The business is valued using a multiplier on the net operating profit (NOP). The NOP is the most recent year’s income less actual expenses, and excluding depreciation, borrowing expenses, interest on borrowings, and wages to the proprietors or payments to any persons for work which could reasonably be undertaken by a two person resident management team. The NOP is then multiplied by a determined figure, or ‘multiplier’, to give a value for the business.

“There’s clearly tiers in this game where, if they’re making below $100,000 a year, the business will be sold on a multiplier of around three and a half to four times.

If it’s between say, $120,000 to $250,000, it’s going to be… 4.25 to 4.5, and if it’s over $300,000 we’re going to be above five times multiple,” Wolf says.

Butler believes this value calculation is one of the first tests as to whether your adviser is a management rights expert or not.

“In management rights transactions, specialist financiers, valuers and accountants only consider the most recent 12 months’ financial figures when verifying financial results – unlike when dealing with most small businesses where the previous three years’ figures are perused.”

If you only have a set amount of money to invest, you need to apportion how much of that you’re willing to dedicate to the value of the income-generating business and how much will go towards buying the manager’s unit. “Anytime you’re putting a very disproportionate amount of the aggregate price into the unit, then you’re really looking more at the lifestyle choice and you’re a legitimate high return business,” Butler says.

INVESTOR SNAPSHOT
Steve and Sharleen’s complex

Steve and Sharleen’s complex

The good life

Steve and Sharleen think they may have found an escape hatch for the daily nine-to-five grind the rest of us are caught in.

With their two adult children off to begin lives of their own, 58-year-old Steve and 47-year-old Sharleen decided they could go for something a little smaller than their suburban home.

“We’ve just downsized from a four bedroom, three-storey house to a two-bedroom unit without kids, which is beautiful,” Steve says.

The couple took the plunge and bought management rights for a 21-unit complex in Brisbane’s southern suburbs and Steve says it’s the easiest payday the couple have ever enjoyed.

“It’s two buildings of two and three storeys and they overlook the gardens and the pool. Underneath the complex are two undercover car parks. It’s fully gated and fully secured.”

They paid $170,000 for the business and $380,000 for the manager’s unit, so a total purchase of $550,000. The business comprises the caretaking agreement with the body corporate, which earns them $24,000 a year. The second income stream comes from managing a letting pool of 15 units in the project.

Overall, Steve and Sharleen are making a net income of $50,000 from their investment – but what sort of labour are they responsible for?

“There’s routine maintenance. Scheduled tasks including fire doors, pest control, emergency lighting, hydrants – all of that sort of stuff has got to be done for government regulations. I schedule that and meet them (contractors) onsite and show them around,” Steve says.

“I do the pool, I do the gardens and I clean the complex, and once a month we get the stairwells cleaned. I pay someone to do the lawn mowing too, so it makes it lots easier.”

He says once a year he can ask the body corporate to extend his caretaking agreement by fiVe years, but the total term can’t exceed 25 years at any stage.

“The longer that’s left in the caretaker’s agreement, the better that it is (for its value).”

Steve says once you’ve got your routine in place and you’ve outsourced the more difficult, mundane or specialist work, there’s very little to take up your time in a complex of his size.

“With the tasks that you’ve got here, if you schedule them properly, it feels like being on holidays all the time, although some months you work harder than others.”

Steve says for the right buyer, management rights are a terrific way to earn an income.

“We’re looking at getting into other complexes, like maybe taking on a bigger complex,” he says.

“I think you’ve got to be a little bit business savvy. You’ve got to understand a bit of accountancy and legal procedure.

It would ideally suit somebody who’s been self-employed.”

WHO DO THEY SUIT?

There’s probably a management rights investment for most purchasers, but certain traits and experience do tend to help, according to Butler.

“I always say you’ve got to be a people person. If you’ve spent your entire life raising Santa Gertrudis cattle west of Goondiwindi and you get along with cows a lot better than you get along with people, then probably management rights isn’t for you,” he says.

Wolf says most new buyers have gone through some sort of life change where they’re reviewing their work/life balance.

“Whenever there’s a swing in redundancies, we’ll see greater interest from those sorts of people,” he says.

“Generally you find a lot of purchasers historically have been over 50… where they can set their own hours and they can be their own boss.”

THE PROS AND CONS

Management rights are a solid business with stable performance.

“You actually live onsite, you set your own hours, you can be your own boss, and you’ll have the capital gain of the unit and the business,” Wolf says.

“Generally, it’s not a fluctuating business value, it’s an upward trending business value.”

Best of all, buyers can be more certain there’s nothing going on under the table when they buy them.

“If you’re going to buy a service business or something like that, sometimes the books are just cooked. Here, all the money does go through a trust account and is audited.”

Butler agrees.

“In my opinion, it’s almost impossible to be defrauded. When you sign a contract to buy management rights, the vendor declares what the net profit is and that’s written into the contract,” he says.

“You then hire a specialist management rights accountant who goes in and undertakes due diligence. He visits the office, he looks through the trust account, he looks through the general account and he satisfies himself that the declared net profit is not only the declared net profit for the most recent 12 months, but he also believes that there will be a continuing stream of income into the next 12 months.”

Wolf says that on the negative side of the ledger not all landlords will see eye to eye in a complex and tensions can make the job difficult.

“Sometimes it can be a greater workload in dealing with people on the committee than what may normally be required.”

There’s also the risk of losing units from your letting pool, which impacts your income and the market value of your rights, so make sure you calculate any potential loss when working out what to pay for the rights.

SOME SOUND ADVICE

You need professionals who specialise in management rights, or you could be left with a massive headache, Butler says.

“I have never seen a case yet when a buyer uses the old family lawyer to buy management rights, and it doesn’t go pear-shaped.

“It has very specific requirements in terms of the professional advice you’ve got to get, and if you go outside the group that specialise, it will end up costing you money.”

Wolf adds you need to let your heart’s desire take second billing to your financial savvy when buying.

About Kieran Clair

Kieran Clair is the Editor of Australian Property Investor. He had almost 23 years experience as a registered property valuer, freelance writer and commentator before joining API in 2013. After three years as an award-winning journalist with the magazine, he was appointed Editor in 2016.