What are management rights?
A traditional management rights business has three core elements:-
- The ownership of real estate in a community titles scheme / body corporate (which usually includes an office or the right to use an office).
- A contract for caretaking of common property with a body corporate (i.e. gardens, swimming pools, pathways etc).
- An authorisation to let lots for owners in the scheme as their letting agent – together with a number of letting appointments from those owners who choose to let through you.
There are a multiple variations though. Some management rights do not include real estate. Some are caretaking or letting only. Some are supervisory (in that the work is done by contractors paid for by the body corporate but supervised by the manager) and some where the manager does all the work.
The financial returns from management rights businesses are very identifiable which is something that cannot be found in many business environments.
The operation of a management rights business can be applied to all styles of property developments - from the traditional unit, townhouse, villa or resort style developments to more recent innovations such as corporate letting, student accommodation and retirement villages.
The purchase of a management rights business includes the right to obtain a resident letting agent licence. The licence permits the collection of rent and the management of properties within the community titles scheme in which you reside and is relatively easy to obtain. The necessary education requirements can be completed through correspondence or attendance at a course run by an accredited training provider.
Management rights remain regarded as an incredibly safe investment proposition, but they remain a very ‘people focused’ business. If you get on well with people, the management rights industry may well suit you.
What is meant by caretaking?
A major element of any management rights business is an agreement with the body corporate to look after the common property. This is property that is accessible by all owners. It does not include the maintenance of individual lots.
It is always important to know what is expected of you and to understand the true nature and extent of your duties. Most disputes that arise between bodies corporate and resident managers are related to issues about the performance of the caretaking duties, and most of these come about from differing expectations about the role of each party under the caretaking agreement.
The body corporate will pay you a fixed remuneration in exchange for your caretaking services, which is usually paid monthly in arrears. Because your relationship with the body corporate is that of an independent contractor (and not as an employee), you will usually need to add GST to that salary. This means you then have to deal with your own tax and superannuation needs out of that remuneration.
What is meant by letting?
A typical management rights arrangement includes an agreement with the body corporate that authorises you to conduct a letting business within your community titles scheme. You need to be licenced under the relevant state law to be able to let lots for owners as you are acting as a real estate agent. The type of licence you need depends on what real estate functions you want to undertake.
Owners are free to use their property as they see fit. This means that owners are not required to let their unit. They may choose to live in the unit or leave it untenanted. They can use the letting services of an outside letting agent. Most prefer to deal with a resident manager because there is a common interest in the betterment of the complex as a whole.
Payment for the letting services comes from each owner who uses those services. You must enter into a separate contract known as a letting appointment with each owner who wants to let their unit through you, which details the basis on which you will act for that owner. There is a standard statutory form for this which should have some additional conditions added to it to cover matters the statutory form does not.
You may earn additional income from tenants or guests by providing additional services. Generally, the scope for additional income streams is greater in holiday or short term buildings. Additional services may include things like cleaning, linen, repairs and maintenance, equipment hire and sales of tours and theme park tickets.
What are they worth?
Market value is sometimes defined as:-
“The amount which a willing buyer and a willing seller in an arm’s length transaction after proper marketing would agree to where the parties had each acted knowledgeably, prudently, and without compulsion.”
Real estate is usually valued by reference to similar sales. In a unit complex there is almost always other comparable sales to compare your unit purchase price to.
The management rights business is not that simple. There is no public database of sale prices and each management rights business is different in some respect. What you are paying for in goodwill with a management rights business is the right to earn the income derived from it for the remaining term of the management rights agreements. The value for that right is usually reduced down to a multiplier (i.e. 4 times) the net profit of the business.
As a simple example, a business netting $100,000 on a 4 times multiplier is worth $400,000. Another (and perhaps more traditional way) to look at that calculation is that you get a 25% return on your business investment.
That methodology doesn’t reference the real estate component, and some buyers look at the investment return on overall basis which includes the real estate. If there was a unit involved with this mythical business at $400,000, the return on investment would be 12.5% (100,000 return from a total investment of $800,000 - which also doesn’t include acquisition costs of roughly $48,000 (which come in at about 6% of the purchase price)).
Ultimately, you need to shop around and see what is out there to compare what is in the market at the time you are looking. If you are in any doubt you can get a valuation as part of your finance approval process to ensure you have not paid more than what a valuer considers market value.