Advanced Thinking Concepts for Investing in a Property Management Firm in Uganda

As the Ugandan economy continues developing, the property market will grow. Many of the property sector investors however will probably not have time to manage the properties themselves on a day to day basis. They will increasingly rely on property management firms.

Before considering property management in Uganda as an investment option, the investor needs to however be aware of the following:

THE CONS

1. Legal hurdles.

You should be aware that in Uganda, owing to the poor land tenure system, combined with administrative inefficiencies and corruption, property purchase and construction is often fraught with legal difficulties. It is not uncommon for individuals to obtain illegal planning permits for construction of properties in say gazetted zones like wetlands and forest reserves. Subsequently rectifying this irregularity has often resulted in long drawn out legal processes and the owner and thus the property manager often lose revenues during the non occupancy of the disputed property.

2. Reputation.

Property management firms like any other businesses need to exhibit a high degree of integrity for potential clients to handover the properties. In Uganda there have been some high-profile court cases involving property managers, including one of a leading property management firm whose managing director conned a potential purchaser of advance monies paid. There was a significant reputation loss. If you are considering investing in this sector, you should therefore ensure you maintain the high standards of professional ethics such as separating client and office monies as well as maintaining good accounting records, otherwise your reputation can easily be dented.

3. The property market bubble.

Whilst the global credit crisis continues depressing property values in places such as the USA and the UK, In Uganda this is not particularly being felt for a myriad of reasons. In the commercial sector, malls and shopping centres continue to spring up in the capital city Kampala and its suburbs to cater for the growing middle class and increasing population as a result of rural- urban migration which is currently estimated at 3%-5% per annum.

In the residential sector owing to a general shortage of housing there is always demand for property and as such the property values continue to rise. The shortage of housing is primarily because just like many cities across sub Saharan Africa, rural-urban migration to Kampala has resulted in significant population growth not matched by construction and thus causing a shortage of housing, particularly for the low and middle level income earners.

The main risk of the property bubble in Uganda would arise from political instability which would lead to collapse of the sector.

4. Competition

The competition for property management in this sector is as follows:

At the top end of the market are international property management firm affiliates like Knight Frank. In addition there are ISO certified companies like Amalgamated Property Consultants (APS) as well as large and reputable property management companies such as Crane Management services which is under the Ruparelia Group of companies.

At the lower end of the market are property brokers who also double as property managers for their clients. These typically cater for low-income earners’ housing.

In my model, I advocate that the property management investor will need to develop their niche as follows:

1) A firm that is an affiliate or franchise holder of an international property management firm. In Uganda, as far as I know, international property management firms like CBRE and Colliers have no local representation except for Knight Frank. There is therefore an opportunity for the investor to ensure that their firm gets affiliation to these international firms. This will give them instant brand recognition and the perceived quality and reputation already associated with the international firms. In addition they will benefit from the referrals if clients of the international firm seek a local representative in Uganda. I can expect that this affiliation has contributed to the success of Knight Frank Uganda.

2) A firm that has some brokers on its payroll. Brokers in Uganda tend to act independent of any firm, are semi illiterate and lack sufficient working capital to deal with potential clients.If the firm therefore guarantees them a daily allowance say of shs. 10,000 to cater for meals, transport and communication for their activities, they are likely to refer future business to the firm, particularly if they are unable to handle it themselves.

THE PROS

Excellent return on capital

In my model I expect that the investment will be returned in about 6 months. The reason for this is manifold:

a) The property manager’s advertising will emphasise property management as their core business. This is such that the firm can develop inside knowledge of the sector as well as establish itself as a reputable leader in the sector. When they have developed a good reputation, clients can then entrust them with property sales, which tend to be more lucrative than property management.The property management side is therefore in business terms called the “loss leader”.

b) A significant part of the marketing budget will go to the brokers rather than traditional avenues of marketing like TV and newspaper advertisements. This is because the Ugandan real estate sector is highly informal and as such a significant portion of the illiterate/semi illiterate but wealthy persons will usually revert to the brokers who just like them are often illiterate/semi illiterate. It therefore becomes critical to have these brokers as a linkage to such clientele.

In my model, I expect returns will be as below:

Capital Investment(A): Shs 35, 149, 155

Profit per year (B): Shs. 58,803,380

Return on Investment/Capital (years to get capital back) (A/B): 0.6 years

FINAL WORD

The basics you must get right before investing:

1. Property management software. You must invest in good software to provide you with real-time client accounts and reporting. This will give the client the assurance as to your integrity. I cannot recommend a particular software but a Google search should yield one.

2. Maintain a good contact data base. Property management requires liaison with several bodies including city council authorities, land authorities, utility suppliers, repairs and maintenance personnel, lawyers and brokers. I expect that a good property management software system will have a robust Database Management System at its heart. I will reiterate, include a good lawyer and accountant on this contact database.

3. Become an affiliate of an international property management firm. If you cannot afford one with an international firm such as CBRE or Colliers then go for a locally reputable firm like APS.

For over 8 years I have worked with several clients providing audit, accounts, tax and advisory in sectors ranging from agriculture, mining, entertainment, financial services and technology. My client portfolio in Uganda, The Bahamas and The Channel Islands, United Kingdom has equally been diverse and this experience has given me a “well rounded” view of

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Investing and Property Management

I have had lots of people over the years ask me, in my opinion, what is the most important thing about investing in real estate? Everybody always assumes its price, location or timing the market correctly. After over 1300 real estate transactions primarily to investors worldwide, I can say without a doubt that property management is the single most important piece of the investing puzzle. In real estate, you can make a mistake on price, pick an iffy neighborhood, or hire a bad contractor and still be profitable. Hire the wrong property manager and you can lose your shirt overnight! Don’t get me wrong, location, price and rehab are huge factors in real estate investing and are very important. With the right property management company in place though you can make a mistake or experience a down turn in a market or neighborhood and still realize a good return on your investment through positive cash flow. A good property manager protects your investment in the long-term.

Obviously, the next question is “how do I find a good property manager”? Here are several tips on picking a good management company. This does not necessarily mean you; someone else will be managing your property.

Get a referral. Typically, when you invest, there are people in your peer group or circle of influence that are investing in the same market you are or know of someone who is also investing in that market. Ask them who they are using, who they used to use, and why they switched. Find out what they like about their management company but more importantly find out what they don’t like about them. The management company may do a great job of placing tenants but are lacking in the communication department; without communication, you’re sunk! Access to your management company is very important for the investor’s peace of mind. There is nothing worse than leaving a message or sending a couple of emails and all you hear are crickets in the background. At first, you assume they are busy and will get to you soon. After a while, though, investors start wondering why no one is responding and that’s when panic sets in. Did the tenant leave? Did the management company run off with my money? DID MY HOUSE BURN DOWN? Generally, none of the above is true but a good property manager will respond within 24 hours of your inquiry.

Ask the management company that you are considering doing business with for references. Ideally, I believe you want 5 to 10 references from previous clients as well as current clients that have been using the management company longer than 1 year. If they are not willing to provide you with any past clients, pass on them. When you get the references, CALL THEM. Ask them the same questions about what they like and don’t like.

Get a list of policies and procedures from the management company. You need to know how they handle marketing of the properties for tenants, late payments, evictions, maintenance calls, inspections, accounting, owner disbursements, etc. A good management company will have this information readily available.

Find out if the management company is licensed in the state you are investing in. Most states require that the property manager is a licensed real estate broker and are held accountable to their state real estate board. There are many “property managers” out there that are not, but have taken this opportunity to increase their income while investing is hot. Though they may be cheaper, DO NOT USE AN UNLICENSED MANAGEMENT COMPANY! You will have no recourse to police them.

Find out what software program the management company uses. There are a few good property management software programs that are web-based such as Buildium and PropertyWare that give the property owner a portal login so you can access your account via the web 24 hours a day. A good property management company will log all tenant calls, maintenance concerns, payments, late notices etc., into the software program. This is beneficial to both parties as a majority of an investor’s questions or concerns can be addressed by logging into the software program and looking at the info at hand there. This eliminates a lot of phone calls between the property manager and the owner. It also helps the owner to narrow down questions or concerns by addressing specific information found in their portal.

The reason for investing is to get paid. You need to know when the money comes in, where it’s at, what your expenses are, and when you get your payments. Most management companies reconcile accounts 1 month in arrears. Rents collected in 1 month are disbursed the following month for the simple fact that not all expenses come in time to get an accurate accounting to disburse rent proceeds in the same month. Each management company is different but should be able to tell you to the day when to expect payments on a monthly basis. You also need to know when to expect the quarterly or annual accounting needed for your tax man. Again, a good software program makes this much easier for the management company to keep track of and share with you.

To me, the fees that a management company charges are important but not as important as the previous items in this list. I have seen it over and over again where somebody picks one management company over another based solely upon fees. 3-6 months later after dealing with terrible tenants, bad accounting practices and more, the few hundred bucks they saved cost them literally thousands of dollars. Here is a brief run down on the fees you can expect to pay.

Monthly Management fee: usually 7-10% of collected rents depending on the market you are investing in. Higher rental amounts usually equate to lower monthly fee percentages and lower rents are higher percentages. A few companies will have a set monthly fee of somewhere between $50-$100 dollars per month.

Leasing Fee: usually 50-100% of the 1st month’s rent; again depending on average rent amounts. Most property management companies employ commissioned leasing agents that are usually paid a percentage of this fee up to 50%.

Set up Fee: this is charged for the time it takes to set up the new accounts, generate bank accounts etc., usually around $100 dollars.

Vacancy Fee: some management companies will charge a flat fee per month on a vacant unit. Their reasoning is that a vacant unit still requires someone to keep tabs on that property usually on a 1-2 week cycle to verify that the property is secure, yard is in good order, rental signs are in place and visible etc. I have found that only about 50% of property management companies charge for this service. Unfortunately, I have also found that half of the ones who don’t charge for this are not checking the properties periodically and sometimes a small issue turns into a bigger more expensive issue down the road.

Advertising Fees: most good property managers do not charge extra for the marketing of the vacant units to potential renters as they are paid when the properties become occupied and the advertising expense is covered by the leasing fee. Some property managers will give you the option of extra paid advertising if you have a property that is tougher to rent than usual.

Maintenance Fees: most management companies use maintenance as a profit center; some more than others! Due to the volume that some management companies do they are able to procure vendors at a much lower rate than what you could get on your own thereby allowing them to make a profit on certain maintenance items. Yard mowings are a great example of this. A large management company may be mowing 100 yards a season and can negotiate a volume deal at $15-$20 per yard to them. They, in return, “sell” this service to you at the market rate of $25-$30 per mowing. It is still a good deal for you as you are hands off and would expect to pay the same price if you were only contracting to have 1-2 yards mowed. On the other hand, some management companies go to excess on other maintenance issues such as repairs after a tenant has moved out. Typically, the security deposit should cover most items necessary to make a property re-rentable unless a bad tenant was placed and they have trashed your property. Some management companies use this as a way to increase their profits by over charging for these repairs. I recommend having a 3rd party inspect and/or bid any repairs that seem excessive to you.

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