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Top 10 Tips for Purchasing Management Rights


Top 10 Tips for Purchasing Management Rights

Management Rights – A Home With a Business!

Management Rights are the on-site management of a Strata Titled property in a Body Corporate or Community Titles Scheme

The No Guff Guide To Buying Management Rights

What are they? How do they work?

Management Rights refers to the on-site management of a Strata Titled property in a Body Corporate or Community Titles Scheme.

Types of Management Rights

Generally broken down into five types:

  1. Resort / Holiday – Offers growth potential through strong marketing and return business
  2. Corporate – Normally city located offering overnight, short and long term furnished accommodation
  3. Permanent – Rental is normally 3 months or longer leases
  4. Mixed – A combination of Holiday and Permanent rentals
  5. Student – Purpose built accommodation, generally with easy access by transport to a university.

The Advantages of Management Rights

An opportunity of purchasing a home and business together with an above average return on investment compared to other owner operated businesses.  All rental income is trust accounted.

You purchase the agreements between the Body Corporate (all the owners) to be the Caretaker/Letting Agent (Resident Manager) of a particular Strata Scheme.

The Agreements

Management Rights usually consist of two agreements:

Caretaking Agreement – with the Body Corporate where the manager or delegate of the Manager attends to co-ordinating the work of other service contractors and attends to pool and spa care, general gardening, lawns and the general cleanliness of common property such as foyers, paths, car parks and the like.

Letting Agreement – allows the manager to enter into letting arrangements with individual owners and normally permits the Manager to be the only onsite person to conduct a business from the Strata scheme.

Term of Agreement:

Accommodation Module (Qld) – maximum term 25 years
Standard Module (Qld) – maximum term 10 years
NSW Regulation – maximum term (new legislation 2003) 10 years

Income Source

Caretaking – the Manager receives a Salary (remuneration) normally paid monthly in arrears. The Salary amount will depend upon the size of the complex. The salary is normally C.P.I. linked increasing yearly. The Body Corporate pays for the day to day expenses of materials, such as mower fuel, tradesman repairs, pool chemicals etc. The equipment such as mowers, brooms etc are usually provided by the Body Corporate or the Caretaker.

Other Income

Additional income is generated from:

  • letting commissions received
  • re-let fees
  • cleaning of the apartments
  • supply of linen
  • PABX hire
  • tour sales
  • equipment hire.

When Purchasing Management Rights

A Management Rights Contract – (Contract of Sale) is usually subject to:-

  • Verification of the previous 12 months net trading profit
  • The net profit is derived as an amount excluding personal borrowings or tax
  • The verification is undertaken by a recognised Management Rights Industry accountant
  • Subject to due diligence by a recognised Industry Lawyer
  • Subject to finance approval by a recognised Industry lending institution.

Settlement – Upon satisfaction of the above, settlement can take 60 – 90 days.

The contract is also subject to the purchaser obtaining a Restricted Letting Agents Licence and Body Corporate approval of the assignment of the Caretaking and Letting Agreements prior to settlement. It is not uncommon practice for some purchasers to obtain a full Real Estate Licence.

How Much Will It Cost Me

There are two components of Management Rights:

  1. Real Estate and associated office (if an office exists)
  2. The actual Management Rights Business

The Real Estate may have a small premium applied to it, as you are purchasing the only Real Estate that can operate a business from within that Strata.

The value of the business will depend entirely on market demand normally a multiplier of 3.0 – 5.5 times the years return, and greater dependent upon net profit, length of agreements and location, supply and demand etc.

Purchasing Examples:

Example 1

Real Estate – Managers Unit $300,000
Nett profit $100,000 x 4.0 = $400,000
Total price $700,000

Example 2

Real Estate – Managers Unit $450,000
Nett Profit $400,000 x 5.0 = $2,000,000
Total Price $2,450,000

Ingoing Costs

As a ball park figure allow yourself 5% of the total price to cover verification, due diligence, bank fees and Government Stamp Duty fees etc.

Note:  There is no stamp duty payable on the business component of a NSW Management Rights contract.

How Much Can I Borrow

Borrowing will depend upon the ability to service a loan, however normally around 60-65% of the purchase price.

Buyers

If you are considering entering the Management Rights industry, register your future interest today.

The majority of correctly priced management rights are SOLD by a quick phone call to a pre-registered and qualified Buyer, naturally subject to normal contract conditions.  Delayed settlements are a fairly common occurrence in the industry at present.

Exploring The Industry

Numerous industry seminars are held throughout any year.  The majority of these will give an insight into how the industry functions and what is required regarding licencing, qualification and finance.

Various industry representatives talk at these seminars giving a description of the accounting checks and balances, the legal due diligence required when buying into the industry and the time frame required to purchase and settle.

MR Sales are involved in numerous seminars, including an independent group ‘RUMAS’ – Resident Unit Managers Advisory Service, and one-on-one talks with individual enquirers.  We are always happy to help provide information and contacts that may help you, intending Purchasers, to join our prosperous and rewarding industry. See the Industry Resources and Article Library found on this site for further information. Phone us on 07 5555 8200 or email us here.

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