One of the age-old rivalries in real estate that I am always asked about is whether you should be trying to grow your rent roll organically or through acquisition.
To cut to the chase, the correct answer is that they are both good strategies depending on your business and where you are on the growth curve.
understanding the right time to focus on either organic or acquisition growth requires you to appreciate the key differences between the two strategies.
|low risk||v||loss risk|
|Being a strategy that typically involves less of an upfront outlay of cash you can scale up your costs as required. The biggest risk of an organic growth strategy is actually that it doesn’t happen.||The big risk of an acquisition strategy is that you end up paying for a management but then lose that asset [for reasons either in or out of your control]. Of course you are still left with any debt you used for the purchase.|
|slow to build||v||cash from day 1|
|If you are impatient or have a burning need to grow fast, then an organic strategy may not be for you. I have seen aggressive organic growth strategies but growing at an extremely fast rate brings it own additional challenges.||Maybe you are just starting out or maybe you are focusing on reducing your net cash commitments every month, sometimes we just need some cash coming in from day 1.|
|With an organic strategy you choose the properties you take on that fit with you and your model. That is, you can be picky as to whom you work with and the types of properties you want to manage.||When buying a rent roll often you end up with a bundle of properties – some not necessarily perfect for your target market. Don’t underestimate the inefficiencies this can create.|
|smaller team longer||v||bigger team sooner|
|With an organic strategy it often means you, as Principal, remain more involved for longer. This has its positives and negatives as you grow your rent roll but does allow you to lay a solid foundation of systems and processes before the growth really kicks in.||Managing a big team has its own headaches – getting everyone on the bus and facing the front can be hard. However, bigger teams also mean you are less reliant on individuals and as Principal you have a much better chance of ever getting a holiday.|
|lower market share||v||existing market share|
|If you already have a sales team with great presence in the market, you already have a foot in the door and the need to grab market share quickly will not be as urgent.||Sometimes buying a rent roll is not just about buying cash flow or profits – sometimes it is about grabbing market share. If you are struggling to get into an area or want more presence in the PM market to support the sales team, acquisition may help.|
|cost = profit||v||cost = capital|
|To grow organically the main cost is incremental wages for BDM’s, property managers or bonuses for existing team members. Don’t forget, wages are tax deductible!||To buy a rent roll you need to commit cold hard cash – whether funded from cash reserves or bank debt it will cost you either today or tomorrow. Don’t forget, buying a capital asset like a rent roll is not tax deductible [that is you need to pay for the rent roll out of after-tax dollars].|
One of the big factors often ignored when tossing up between an organic or acquisition growth strategy is tax – wages are deductible but the cost to buy a management is not. Don’t underestimate the impact this has on your after-tax cash flows but it also should not be you sole consideration. Often either strategy will be better suited to your longer-term vision.
At the right time for you and your business, in my mind, the ideal is a combination of both.