The recurring revenue revolution

April, 2021 | Thought Provoker

It's changed the way we do things forever; welcome to the subscription economy.

We seek new subscribers and then do everything we can to retain them. Think Spotify, Netflix, Apple One and Office 365, the heart and soul of the fastest growing and most valuable companies globally. The one thing they have in common is that the subscription economy drives them.

It's a new way of doing business that drives consistency in revenue, profit, and overall saleable value. The concept is to increase the customer's frequency, then increase the size of that spend.

The challenge for most Real Estate Agencies is they are so focused on driving sales. Sales is exhilarating, thrilling and ego fulfilling. With so much focus on the big lumpy revenue, there's usually only a focus on the profit and loss statement's revenue side, yet little focus on the firm's saleable value or balance sheet.

Firms of the future are chasing different metrics. The key is to drive monthly recurring revenue (MRR) and overall annual recurring revenue (ARR) for fast-paced sustainable business growth. The goal is for your ARR to be above your annual recurring expenses (ARE), so you can produce an annual recurring profit (ARP).

Property management is the recurring revenue model for an estate agency, it's our subscription business model, and it's time it gets the attention it deserves.

In every stage of growth, there is a sweet spot with maximum profit. A business is either in profit mode or growth mode. Growth mode is expensive; it's investing well ahead of the curve into infrastructure (people and systems) to increase capacity and serve more customers.

Welcome to the game of subscriber retention. We change the game when we think about landlords as subscribers. No one's locked in; everyone can vote with their feet and choose an alternate service provider. The secret is to look at the critical areas of risk and do something about them.

Critical areas of risk in PM include:

- Vacancy.

- Maximising rental return - through tenant selection, alignment of lease end dates to peak tenant demand.

- Customer interactions with tenants - Entries, exits and routine inspections.

- Maintenance - both pro-active and reactive maintenance.

- Safety and Compliance - insurance, smoke detectors, minimum living standards.

- Maximising return - tax depreciation schedules, rent reviews and capital expenditure projects.

- Problem-solving - tribunal representation and legislation risk mitigation.

- Client interaction with landlords - client briefing forms, workflow across leasing, management and portfolio growth teams.

Each critical risk area is a reason for a subscriber to leave you. PM training focuses so much on compliance, on the 'issues of the day, that rarely do we understand the job we get done for our clients. If the customer can't see the difference, they won't pay the difference. It's time to re-imagine what's possible and to put service front and centre of what we do, to solve customer problems in new and better ways.

What metrics can we use to reshape PM as a subscription service? Start by really understanding your customer and what you do to interact. In 1988 I remember each month spending two days in the car with dad, driving our entire rent roll, looking for car's in carports with oil leaks/engine rebuilds, gutters that were falling off, or lawn that wasn't mowed. It was an era where you had to know your portfolio, one where if the client called you, you needed to have real-world knowledge of their property and its current state. If you are the landlord's 'eyes and ears' on their property, you need to be just that. Set and forget property management is a service standard, and it demands a premium fee.

When we work with any property management subscription business, we dive deep into customer relationships' knowledge and quality. I ask a series of questions, and it doesn't take long to rapidly expose areas of risk, lack of care, or diligence.

Here are a few questions to get us started:

- How many landlords do you manage?

- How many of those landlords live locally?

- How many of those landlords that live locally have you met face to face with at least once since you became their property manager?

- How many of those landlords have we been to their principal place of residence to give them an idea of its value so they know their equity position?

- How many of your landlords would like to grow their portfolio?

- How many of your landlords have tax issues and would like to accelerate their spending on capital expenditure projects to improve their asset's saleable value?

- How many of your landlords are subscribed to your landlord's first program?

- How many of your landlords do you have client profiles for, including all contact details and preferences, from communication to expenditure?

- How many multi-property landlords do you have?

- How many of your multi-property landlords have had an annual review to assist in their portfolio growth?

- What's the average management fee %?

- What's the average management fee $?

- What's the average case value per client? (includes all fees, management and leasing etc.).

Why is all of this so important? It's the way forward to go deeper with our existing customers and define a service worthy of the fee.

We get it so wrong when we hire a business development manager and provide little to no direction. 

The client doesn't understand the term BDM. Who's business are they developing, the landlords or the real estate offices, or both? We need to rapidly redefine the functions that the 'BDM' performs. Let's call the BDM role a Property Management Growth Specialist (PMGS). The role of the PMGS is to achieve growth, and you do that through two specific channels - the existing subscriber base and new subscribers.

Let's dive deep into what we do to work with the existing subscribers:

- What does the data tell us about our existing subscribers (landlords)?

- Which subscribers have an appetite for growth? Capital expenditure? Would like a market appraisals on their principal place of residence to know their equity position? Have additional properties in their portfolio they'd like us to manage?

You get the picture. Then the firm needs to get clear on how it attracts new subscribers. Review every new subscriber you've won in the last 12 months and ask one simple question, how did you meet them?

There are only a few channels that deliver consistent growth:

Your existing sales team. They meet 1,000's of buyers each month. How many of them are investors? Or intend to be? And what do you do to identify them, then assist them both in the real and digital worlds?

Strata meetings. Medium to high-density dwellings have strata managers, and all landlords either attend or have someone attend in their place at each strata meeting. The strata managers know all the owners and appoint the building manager.

Builders, developers and architects. Every local council website lists in order all development applications. Is the property being built to sell or built to rent?

Self-managed landlords. They advertise their properties on various portals, advertise with signage and on tenant forums.

Suppliers. Maintenance is one of the largest lead sources for letting businesses in the UK. Their maintenance divisions also provide services for competitors and thus meet plenty of landlords. The same goes for anyone who provides property related services - think plumbers, electricians, lawn maintenance. Jim's Mowing completes over 1 million property-related transactions per month; think of all the owners they already know?

Past Enquiry. 100's of potential Landlords call your agency every year. Most of these calls are price shoppers, where without serious sales skills, you fail to convert. When you lose an opportunity to a competitor, it's not forever; it's just for now. Pull out the past enquiry register and start calling.

Acquisition. The bankers are keen to change the model. Most property management business are bought and sold based on a multiple of the top-line revenue. Bankers are eager to shift that to a multiple of the EBITDA. Why? Because when you build scale, you can sell that on the stock exchange. Becoming a public listed company provides more capital opportunities than mum and dad business owners. Valuations pay no view to the sales revenue generated from where the landlords live, then the internal sales, where landlords buy investment properties from your existing rent roll through your landlord's first program.

The challenge is most businesses have no formula for how they generate their business.

They view BDM's based on their net growth, and often it has no relationship to what the BDM is paid. PMGS has the opportunity to shift that, where they also become a major lead source for sales, on principal place of residence, plus the sale of investment properties to the existing subscriber base—driving an additional revenue item for the property management service line.

One additional line item here is the value of ancillary revenue. Scale brings opportunities. In the UK, maintenance and financial services such as finance, life insurance, property insurance etc., provide significant revenue streams.

The shift to performance cultures, based on how we serve the customer. We're in the business of solving problems. Problems fixed with a subscription. What I find painful is how a new property manager takes over a portfolio and finds 100's of errors. I hear the stories of routines that haven't been completed for years or properties that weren't achieved, giving a false sense of asset growth for business owners. How could the systems allow you to be so easily fooled? Surely we need a better set of checks and measures? Of annual audits, checks on revenue versus the number of properties etc., to spot omissions and errors before they become too big to fix.

Pro-active firms are changing how they view a property manager and how they are remunerated. There must be a relationship between the revenue the property manager manages and the income they receive. This is why small rent rolls below 300 often struggle to turn a significant profit as costs outweigh revenue until you start playing with scale.

Property management may have a set wage based on the revenue managed, then a performance bonus available when certain conditions have been met. Great examples include:

- Overdue rent reviews remain less than a certain % of the portfolio

- Arrears at less than a certain % of total monthly rent

- A maximum number of preventable lost management per quarter (for portfolios over 150)

- No outstanding routine inspections at the end of each month

- No work orders over 14 days

What we can learn from Real Estate Management (REM) Expose yourself to other sections of our industry, and you'll find incredible insights on what we can do to build better, stronger, deeper relationships with clients. In the commercial and retail space, there's a service line called Real Estate Management. They focus on driving the revenue and saleable value whilst managing both the tenants, risk and capital expenditure on small suburban shopping centres. Think 8-10 tenants in the suburbs.

Each REM representative looks after a portfolio of clients, where they:

- Provide an annual review to the property owner encompassing: capital expenditure projects to improve the asset's value.

- Re-position the asset with a better anchor tenant

- Change the tenant mix to enhance its return

- Or prepare the property for sale.

It's a fascinating business and one that leaves me wanting; imagine if we could just do a 15-minute review with our landlords each year to ensure we connect with their current goals in their pursuit to achieve financial freedom through property.

Or what happens if redefined the role to shift the value of the asset?

Our leading clients in the UK have significant maintenance divisions. One branch network produces upwards of £1m in maintenance work in a month, refurbishing properties with new kitchens, bathrooms, windows, and electrical. This improves the saleable value, increase the rental return, provides a tax deduction and improves the quality of tenant.

Maybe there's just a problem with how we grow and nurture talent. 

If your child come home and said Mum and Dad, 'I'd love to be a property manager when I grow up', what would your response be? And that's precisely where the problem is.

If we don't sharpen the property management space's image, it'll forever be challenging to attract top tier talent. 

Progressive businesses look to partner with universities, which have 1000's of graduates each year looking for work. Imagine you partnered to provide a four-year career path for university graduates. Commencing in leasing, progressing into a property management role, then into PMGS, then into either a larger portfolio management role, into a team leader role, and onto either operational / practice management roles, or switching at some point into a sales-based function. The opportunities are endless, and it's up to us to ensure Property Management isn't a dead-end for career aspirations. If you wish to progress, you can, and it's a safe place filled with opportunity, learning and development.

It's time for a bold new conversation on how we recruit, train and develop our property managers of the future. The training is too heavy on legislation in isolation; we need to light up specific training on vision, service, and the customer's future. 

If we consider our landlords as subscribers, and property management as a subscription service, maybe, just maybe, we have a chance to build a long and enduring legacy. 


ABOUT THE AUTHOR

Josh Phegan is the internationally renowned go-to speaker, trainer and coach for high-performance real estate agents and agencies. He is the number one preferred trainer for Australia’s top 100 agents and top 50 women in real estate.

In 2021 he’s the drawcard speaker at over 200 events in the UAE, UK, New Zealand and Australia.

Are you on the list?
Enter your email address today to sign up for our daily email and weekly tip.