Where’s does the money go in my Real Estate business?

You’ve worked hard, you’ve invested a lot of money into your business and you’ve sacrificed time from your family & friends to make it a success.  So why aren’t those hard-earned dollars hitting the bottom line the way you would expect, EVEN IF the rent roll is growing in numbers the profit may not be there. So, where is the money going?

Don’t know where the profit is?

Well, you’re not alone. One of the most common ‘pain points’ we see in Property Management Businesses, around the country, is a lack of profitability.  There are so many Rent Roll businesses that just aren’t making any profit, but that isn’t the worst thing, most owners don’t even know it! So, are you profitable? What is the percentage of profit you’re aiming for? And how are you measuring it? 

Let’s look at how you can find and measure your profitability and assess it for yourself at any time. To start with you are going to need two numbers, your TAMI and your AEPP.

How can TAMI help you understand profit?

TAMI stands for Total Annual Management Income and is a calculation of your Property Management Fees, Letting Fees and all other Sundries for the year. You can find these figures in the few lines of your Profit & Loss statement. Take this total and divide it by the number of properties you manage in the rent roll. 

Your TAMI is what you generate on average per property and is likely to be a figure about 15-20% higher than your average annual management income (AAMI) which is another important metric.

What is your Property Management department costing you?

For that we need to look at your AEPP, this stands for your Annual Expense Per Property. To get this number, separate your expenses and isolate all the costs relating to running the Rent Roll.

Take your annual property management expenses and add back in any Property Management cost of sale items so that you have the total expense base relating to the Total Income. Divide this by the number of properties you manage.

This will give you the breakeven per property, it’s what each property is costing you, on average, to provide your level of service to clients and customers.

How can you make money out of the Rent Roll?

You can use these 2 numbers to calculate your profit margin per property or across the rent roll. More importantly, armed with this knowledge you can set minimum standards for the new business you or your BDM’s are chasing.

As an example: If you have worked out that it costs you $1,000pa to manage a property, you can now set a profit you want earn, let’s say 20%. This means that any new properties added to the rent roll need to generate and TAMI at or above $1,200 pa.

So, your standard for any new listing becomes $1,200. Knowing this figure, you can set a meaningful target for your team to help you achieve the profit you are after, rather than just how many properties they bring in each month. Even better, use both numbers!

How you can help your BDM easily understand profitability?

For your team, a suggestion might be to use the AMI figure. A BDM can quickly calculate the annual management income by taking the weekly rent of the property (say $350), multiply by 52 weeks and then multiply that by the fee (say 7%). In this scenario it equates to $1,274.

This figure is simple for your team and great for you, because remember the AAMI is 15 -20% less than the TAMI, which will give you a further safety buffer in your business.

Surely there is more to it than that?

Your right, you can dive in to so much detail that is specific to your Rent Roll. There are considerations such as the geographical spread of your properties, vacancy rate, market rent and any number of internal and external influences that will all influence expenses. However, for now you can easily calculate the TAMI, the AEPP, to work out your profit and set goals for your team. 

What can you do right NOW to increase your profit?

One thing you could do to make a difference in your Rent Roll profit NOW is to analyse your current listings, one by one and work out which properties are making you money and which ones are costing you.  Those that are costing you, or are falling below your desired return, need to have a strategy put in place to align them with your cost and profit expectations.

At Real Estate Dynamics we help Property Management businesses BUILD, BUY & SELL through our Rent Roll Coaching, PM Training and Business Brokerage all across Australia.