In 2020, a portion of the rental market moved out of big coastal cities such as San Francisco and New York, and moved to mid-size cities and suburban communities. However, rental listing company Zumper took a look at rent trends in the first quarter of 2021, and saw a slight shift back to what they call those primary markets, as well as a rise in rent prices in markets such as Miami and Austin.
These back-and-forth shifts in the rental market may have you thinking about your long-term plan and looking at property management businesses for sale. You may be thinking of buying a property management company and expanding your reach into new markets, or simply getting out of the business. You may just want to know the value of your company so you’re ready for sudden market changes.
Wherever you are with your company, we’ve got you covered. Here are some helpful tips to help you value a company—whether it yours or someone else’s—and how to acquire or hand off a property management company.
How to Value a Property Management Company
Whether you’re buying or selling, knowing the value of what’s in front of you will help you shop around for the best deal. If you’re buying, you know what a reasonable offer looks like for the company you’re interested in. If you’re selling, you can compare the worth of your company with the offers on the table.
Here’s how to find the value of a property management company.
Tally Up Assets
Assets include everything the company owns, such as equipment and buildings. If they invest in properties, their assets will include the properties they own, as well.
Is the company turning a profit? If so, what is the profit margin? If it’s below the 20 percent average, dig into why. This could be a red flag, or simply untapped growth opportunities for a business that conducts its operations more efficiently.
Look at Debt-to-Income Ratio
Debt-to-income ratio allows you to compare the amount of money coming into a company against the amount of money they owe. A good debt-to-income ratio is about 4 percent. Businesses with anything closer to 6 percent are carrying too much debt, which makes it hard to find a lender should you need one. Still, the reason there’s debt in the first place. If you’re taking on debt to expand your business, that’s a completely different story than debt you opted for to help cover a cash flow shortfall.
Determine Overhead Costs
Look at the kinds of costs the company has on a monthly or yearly basis. Office and equipment rentals, software licensing fees, staff costs; all of these contribute to overhead. If a company looks like they’re carrying around a lot of overhead, it’s not necessarily a deal-breaker, though. There could be an opportunity to find ways to save money.
Assess the Potential for Future Growth
Is the company in a high-growth area for rentals, or has the market stagnated? What are the development plans for the community?
Are there opportunities to grow the business with existing properties? Adding fees for additional services, for example, is one way to grow the company financially.
Pro tip: Look for your municipality’s Comprehensive Annual Financial Report (CAFR) to identify areas that are heating up due to new development projects or other factors that can influence the health of the local rental market.
Compare With Industry Standards
Measure your company, or the company you’re interested in, against industry standards for your market, as well as competitors. You may track this on your own and compare your portfolio to reputable sources of data—or by using property management software. Buildium’s Analytics & Insights, for example, gives you leasing benchmarks for your specific rental market for companies of your size. There’s a lot to learn from the data that you gather from your normal operations.
How to Buy a Property Management Company
According to Glenn Russell of Coastal Group Inc., “buying a property is like looking at a diamond. You have to keep turning it and look at every angle.” The same holds true for property management companies. Before you decide to buy, make sure you look at all the angles of the business, and then make sure you have your money in place.
Look for Property Management Companies That Fit Your Current Business Model
Does the company you’re looking to buy manage the same kinds of properties you manage already? If they do, you’ll have an easier time integrating their owners into your system. If you’re branching out into new property types, be prepared to take on new processes that require new skill sets.
Ask yourself how many units you’re willing to take on, as well. Assess the resources of the company, as well as your own, to determine if you can handle taking on the workload.
Get a clear understanding of the kinds of services the property management company provides and what their owners expect. If, for example, they provide more boutique services and their owners are very high touch, you have to be prepared to provide that same level of service, or risk losing owners right off the bat.
Look for Issues with the Properties
Issues include properties with high vacancy or turnover rates. They may have residents with outstanding rent payments. There may be a high number of properties that need major renovations. If the buildings are problematic with no plans (or funds) to make capital improvements, you could find yourself having paid for a portfolio that you actually don’t want.
Look for Corporate Liens or Other Financial Issues
Tax liens on companies are attached to the business itself, and not the owner. If you buy a company that has a lien on it, you are responsible for paying it. So, it’s important to do your homework before you decide to buy.
Determine How You’d Like to Buy the Company
Before you even start looking, it’s a good idea to figure you how you’re going to finance the transaction. You can pay cash up front or spread payments out over time. The money can come from you entirely, from a loan, or from investors.
Weigh your options and determine the best course of action for your financial situation.
Plan for Integration
Once you’ve bought a company, you’re going to have to integrate their processes with yours. Here are some items you’ll have to consider right off the bat:
- The team that you’re inheriting and how you’ll need to set them up for success
- Differences in rent collection, leasing, and maintenance processes
- Missing fees and services that you currently provide
- Different owner relations and communication processes
- Different resident relations and communications processes
- New software solutions for potentially mixed portfolios
Getting a plan in place beforehand will help make an acquisition go smoothly (or at least more smoothly). Think about how and when you’ll make process changes, and how you’ll communicate them with owners, residents, and staff.
How to Sell a Property Management Company
Offloading a property management company isn’t as easy as putting a “for sale” sign in the window. There are financial steps to take and different selling situations to consider. Take a look at these steps before you decide to sell.
Ask Yourself: Is This the Right Time to Sell?
It may be that you’re simply done with property management and you’re ready to sell. And that’s fine. But no matter the reason for selling, you want to make sure the market is in your favor. Because the difference between selling one year and the next can be significant to the price you can get.
Determine How You Want to Sell
There are three types of sales you can make for your property management company.
- In the first, a buyer hands you cash and you break from the company completely.
- The second is a sale with terms, where you get a larger payout spread over several months, and the new owners can rely on you to help train them for a certain period of time.
- In the final model, the buyer pays you in stock and hires you to an executive position within the company.
Tie Up Financial Loose Ends
If you have a lien or collected debt on your company, and you’re able to pay it off, do it. Completing this ahead of time, will make your company more attractive to buyers, as well as their lenders or investors. If you don’t, this kind of item will naturally often be revealed later in the negotiation process and come up as an instant dealbreaker.
Notify Owners of the Sale When Appropriate
At some point, you’ll let your owners know that you’re selling. When you let them know depends on your relationship with them.
If you’re only just starting to think about selling, but haven’t put any wheels into motion, you will most likely want to hold off. There’s no need in putting it on your radar if you haven’t even decided to follow through, or if you find you can’t get any interested buyers.
Further along in the process, when you have interested parties and it’s a sure thing, you’ll want to let them know. Keep them in the loop throughout the entire transition process so they don’t feel like they’re completely in the dark—and you keep their business for the company that’s taking over.
The next few years may see big changes for your journey as a property management company, or they may not. But whether you decide to buy, sell, or remain where you are, it’s critical to know the value of what’s in front of you. Knowing the recommended steps and doing your due diligence will go a long way in avoiding buyer’s (or seller’s) remorse. And even if you don’t make a major financial transaction, you’ll still have a keener view of the market and value that you offer.Read more on Scaling