Purchasing & Financing Management Rights

Firstly, you will need to ensure that the agent you choose is a specialist in Management Rights (like us!!) who will be able to answer any questions regarding the property, the industry, the operations and financing of the business.

An experienced agent will also be of great assistance when it comes time to go to contract and can guide the purchaser through to settlement, and should also be there for you after settlement to assist with any queries or information that may be of assistance to a new owner.

In order to match a property to the purchaser’s needs, it is necessary for the agent to know :

  • The amount of funds you have available to invest in the purchase.

  • The number of people to be accommodated in the Manager’s unit. In the Cairns - Port Douglas area the majority of management rights buyers are couples and two bedroom units are more common than family units with three bedrooms.

Funding Your Purchase

Having selected your desired property using the above criteria,it is time to approach your bank to seek the finance to complete your purchase. Because of the long and successful track record of the management rights industry, the major banks are all keen to assist in financing the purchase. However, again it is important to deal with the personnel experienced in Management Rights.

A specialized broker in financing Management Rights is Cairns Finance specialists NQ Lending

The National Australia Bank, ANZ Bank, Bank of Queensland and Suncorp are keen to lend for Management Rights and have specially trained staff familiar with the industry to assist the purchaser.

How Much Will The Banks Lend?

How much will they lend is the burning question, and this is dependent on 2 factors:

  • The freehold real estate value of the manager’s apartment

  • The valuation of the management rights business itself

For the purpose of this exercise we estimate that in North Queensland the manager’s apartment represents 40% of the total purchase price with the business being 60% of the total purchase price.

  • The banks will view the manager’s apartment as being the principal place of residence and will provide a housing loan of 80% of the valuation of the apartment over a term of 30 years.

  • The financing of the business will be a business loan of 50% - 70% of the business value over a term of 15 years at the business rate.

Additional to the purchase price are the entry costs, such as stamp duty, solicitors and accountants expenses. These expenses come to roughly 5% of the purchase price. Some banks will also lend this additional 5% which can bring the total borrowings up to 75% of the purchase price - see example.

Additional collateral can be provided depending on the security offered.

The following estimates assume the cost of the Manager’s Apartment is 40% of the total price, and the Management Rights business is the remaining 60% of the total purchase price.

Price
         Borrowings
Purchase Price
$1,000,000
         Entry Costs (@ 5% Of P/Price)
$50,000
Apartment (@ 40%)
$400,000
         Apartment (@ 80% Of Value)
$320,000
Business (@ 60%)
$600,000
         Business (@ 65% Of Value)
$390,000
+ Costs (@ 5% Of P/Price)
$50,000
         Total Borrowings Allowed
$760,000
Total Cost                      
$1,050,000
         Deposit Required
$290,000

How Much Should You Borrow?

How much you should borrow is another question of concern to some buyers who may not be used to borrowing large amounts. Remember living expenses are low when operating management rights. You are working from home with many living expenses attributable to the business - it is surprising how quickly the borrowings are reduced.

The greater the borrowings, the higher the purchase price and the higher the net profit. Do not be afraid to borrow providing you have the income to repay the borrowings. Remember, the net return of the business is usually 25% to 30% while the cost of finance is around 7% -THE DIFFERENCE IS YOURS.

Valuations Are Critical

One should keep in mind that the banks lending the funds for your purchase have a much greater exposure to the property than you, but it is because of the excellent track record and success of management rights businesses, that the banks accept this high degree of exposure.

The banks will insist on a valuation of the property and a Due Diligence examination of the accounts of the business before they will extend the finance. This ensures the quality of the business.