Often I am asked;
“What should I earn as a real estate business?”
“What should my net profit margin be?”
“What should I be getting as a return on my investment?”.
My answer is always “it depends.”
It depends because every business is different and every business has the potential to provide a different return. The right question should be, “what should a real estate business like mine earn?”
There are so many different variations of the business models in the real estate industry:
- Multiple Office
- Lead Generation & Telemarketing
- Management Structures
- Independent or Franchise
They are all factors that will vary the nature of the business. But when I talk about business models I often refer to the 3 R’s of real estate and use this to frame some of the strategic discussions.
How much risk is inherent in your business?
Do you have debt from acquisition or have you grown your business organically?
Are you a startup putting it all on the line or a mature business where your fixed costs are offset by your PM income every month [a great indicator of risk is your FCCR = Fixed Cost Coverage Ratio – how much of your fixed costs are offset by your PM income … 100%is great.]
Where is the reward coming from within your business?
When will the day come you can cash in that asset you have grown?
The net profit margin will always be higher if you have a principal selling and not taking a commission or salary.
A PM only business will typically have a higher net profit margin than a sales only business with no selling principal.
Or, will the reward be the disposal of a rentroll grown over the years.
How reliant is your business on a principal or key person in the business?
Maybe it is not a principal but a salesperson or a division that the business is reliant on.
Monitoring your profit by person and by division will help you focus on this.
So what is the perfect business model in real estate? I think there is no perfect business model – it has to suit the principal, the location/market and the stage in the business life cycle. But, there certainly is a sweet spot for each principal that finds that point where the right level of risk, reward and reliance overlay to suit them, at that point in time and at that stage in their business life.
Where’s your sweet spot? Maybe you need to make changes in your business to get you there. Need a hand to identify your sweet spot or don’t know how to get to it – we would love to help!