You can fast-track income growth by purchasing a rent roll but are you aware of the potential pitfalls? It is wise to seek advice from a specialist in this area before seeking finance for a rent roll acquisition. Story by Jess Wheeler.
There’s nothing like having additional revenue in your business, and in real estate the classic standby is having a rent roll. Other revenue streams for a modern real estate office include financial services such as mortgages and insurances – offering upfront and trail incomes for the life of the loan are becoming accepted as the norm.
In addition to being a welcome diversified income for the real estate office, a rent roll provides another link to the local community and today’s renter could also be tomorrow’s buyer, so in these uncertain times a rent roll income stream can become very useful.
Although, a rent roll isn’t for everyone. There is the risk of legal problems, the cost of staff needed to administer the rent roll and just the general need for resources, technology and organisation required. When it comes to looking after a rent roll, good systems need to be in place.
Building up a rent roll is not the most high-profile, nor the most rewarding job in an agency. But building up a good reputation in the area helps. And the administration systems that are necessary can also help create a sense of best practice for the rest of the agency in terms of keeping costs down and increasing profit margins.
Rather than expanding your rent roll which, although a worthwhile activity, can take time, you may wish to consider purchasing a rent roll to generate additional income immediately, says Gary Lees, Managing Director (Sales) of Australian Real Estate Finance Group, a real estate specific brokerage business with mortgage brokers operating in all seven states. Gary’s key expertise is facilitating the funding of rent rolls for principals wishing to grow their property management business.
Despite the many advantages of having a rent roll, there are now a growing number of business owners wishing to sell their small or medium-sized rent roll, many of them because they are having trouble covering their fixed costs and there is little margin for error.
When purchasing an additional rent roll, say of around 120 properties, the fixed costs (such as desk cost, rent, trust account and procedural systems) don’t change much. The increased variable costs are also minimal and may include an extra property manager and perhaps another admin person. Because the increase in both types of cost is minimal this means that the additional income generated from buying a small rent roll flows straight through to the bottom line.
Gary says that it is important to take care to ensure that the rent roll you are buying is not only worth the purchase price but also that it will not contaminate your existing rent roll. For example, it’s a recipe for disaster if more than 80 per cent of staff time is spent on just 20 per cent of properties.
A detailed report, known as a due diligence, will uncover the facts about any tenancy breaches and rental arrears, as well as the history of repairs and maintenance. Due diligence will produce a report detailing average management fees, letting fees, monthly revenue, yearly revenue and average yearly revenue per property.
When you buy a rent roll you will need to make sure that it is complete with all the information that you need. This includes what unit types there are and how much revenue is generated on a monthly basis. You will be told the tenant names or a notation that the property is currently vacant, the actual rents, the account balance showing any rent owed or prepaid and the date of the last rent increase. You will also need profit and loss statements for at least the past two years and the year-to-date figures for the current operations.
Gary says that after settlement you will also need to check the following details:
- The current lease status
- All entry condition reports
- All bond lodgements
- Recent routine inspection reports
- Outstanding maintenance reports
- Rent paid to the due dates
- Familiarisation with diary notes and all documentation
- Identify all work in progress
This is because, subject to the retention contract terms, this period is the only opportunity to terminate a transferred management with major property or landlord issues. As each property management costs money, it is beneficial to engage additional staff if required to work through this process promptly rather than after the retention period expires. If done after the retention period expires it will cost the agency the value of that management paid at settlement, which may be equal to three or four times the annual commission.
As far as financing the acquisition of a rent roll, only a few lenders now specialise in this area. Most will only advance funds to a loan to value ratio of about 60 per cent to 65 per cent of the total acquisition. Gary says Australian Real Estate Finance Group has some key lenders on its panel that will lend up to 70 per cent for the right rent roll.
Gary reminds us that interest rates are currently the lowest in 30 years and the right acquisition could substantially add value to your current real estate operation. Also dealing with the right finance broker can streamline the process to secure to funds available to assist the purchase.
Jess Wheeler is a Marketing Consultant who specialises in delivering creative marketing solutions to a diverse range of industries, including ecommerce, finance, real estate and automotive. Jess was recently the Marketing Communications Manager of a well-known Australian Real Estate franchise, and is currently the Managing Director of outsauce.