John Knight: why rent rolls are the real estate industry’s most wanted

As real estate businesses seek reliable income and reduced risk, demand for rent rolls has soared. Here, John explains the most common benefits of buying a rent roll, along with a few pluses additional you may not have considered.

Demand for rent rolls to buy has undoubtedly been high in recent times, and it does not look to be changing any time soon.

Why is this so? What are the buyers looking for?

Reliable income and risk minimisation

The obvious reason for beefing up your rent roll is to get more reliable income in the mix – especially in a changing market where we don’t know what is around the corner.

Unlike other strategies you could implement in a real estate business, buying a rent roll pretty much guarantees (other than natural disasters or losing clients) you more income. 

This stability can provide real estate businesses with a cushion in tough economic times, making it often an intelligent investment decision because it is effectively an investment in reducing your breakeven point.

Growth in sales and PM

By acquiring a rent roll, real estate businesses not only reduce their breakeven point but can also provide other growth opportunities, including:

  • new market share reach (the signboard effect) 
  • new salespeople to join the team (often they come with the rent roll)
  • new team members (who may have the capacity to help with your existing rent roll)
  • spreading the cost base across more people (lower average fixed costs per person or property under management)
  • justify the next jump in costs that the business may need (eg new offices, new systems or new roles).

Opportunities to improve capital value

Sometimes a lower quality rent roll (and therefore lower acquisition price) presents an opportunity to improve the value of the rent roll itself, delivering you a win with its capital value.

These opportunities may come through improving customer service, reviewing the ‘extra charges’ as a way to recover more or just increasing the rents in line with current market rates. 

All of this adds to your ability to lend in the future too. 

For example, if your existing rent roll is valued at three times earnings, but you buy a rent roll for 2.7 times earnings, once onboarded into your model, the bank may increase the value of the combined rent roll to be based on three times earnings overall and therefore increasing your capacity to borrow.

Corporate mindsets

I am seeing more corporate real estate businesses coming back into the market. 

Even private equity-backed companies are buying rent rolls again, and a cashed-up buyer is always good for a market. 

Not only are these corporate buyers back, but some real estate principals are also just thinking more like a corporate and being more business-like with their strategic decisions.

Succession for existing principals

Given that a market always has buyers and sellers, there are also forces from the seller side of rent rolls that force up the number of rent rolls sold.

Many principals, in my view, don’t have the energy to go through another economic crisis/recession/change and are putting their hands up to say, ‘I’m happy to get out!’ 

With valuation multiples on the rise, as a seller, it probably feels like a good time to get out. 

We are also seeing many selling principals agreeing to sell their rent roll to someone and at the same time deciding to come on board as a salesperson in the acquiring entity – this is a win-win for everyone as long as the selling principal is happy to adopt the culture of the new owners and toe the line from a leadership perspective.

Despite rising interest rates, I don’t see the demand to buy a rent roll dropping off soon. 

Many agencies are cashed up after a couple of bumper years in sales, and investing in a rent roll is a great investment in increasing the strength of the business into the long term.

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John Knight

John Knight is the Managing Director of businessDEPOT, a team of energetic accountants and advisors.