Selling a rent roll can happen for a number of reasons, and can be due to unforeseen circumstances that take people by surprise. When this happens, tidying things up – if they have not been looked after – is often not a quick process. Not only that, for a potential buyer who is in a position to choose, viewing your rent roll vs one that has everything in order can be the difference between viewing a derelict property vs one that has been well-maintained and cared for. However, if you get your documentation right from the outset, you can avoid these unnecessary pressures and situations down the track.
In completing due diligence on some rent rolls, I am often shocked at the inconsistencies of the files or data and the many important documents missing or not signed. I believe that one of the leading causes is because these agencies have failed to have standard procedures in place, or standard ‘in-house’ examples outlining how to complete important documents and agreements.
When selling a rent roll, the industry standard ‘rent roll asset value calculation method’ of a property is: the weekly rent / 7 days of the week x 365 days of the year x the management fee % x the rent roll multiple ($2.20, $2.80, $3.20, etc.). For example: $450 weekly rent / 7 x 365 = $23,464.29 in rental income x 7% = $1,642.50 annual management fee income x $2.80 multiple = a $4,599 asset value of the property.
The rent roll’s ‘multiple’ sale value is governed by a number of different factors. It should also be noted that the ‘sale value’ of a rent roll is calculated differently to a valuation that may be required by a bank.
WHAT STEPS CAN YOU TAKE TO IMPROVE THE ASSET VALUE OF YOUR RENT ROLL?
1. Audit your rent roll now so you know where you are at.
This process may take time, depending on the size of your rent roll; however, you can start with a strategic plan of auditing several property files each week.
2. Establish internal procedures, systems and regular file audit checks.
Ensure that your documents and files are well-maintained and easily accessed.
3. Have a system for archiving old tenant files.
If you are using an electronic filing system, ensure that each document has a file name, such as ‘Tenancy Agreement’ or ‘Tenant Application Form’, rather than the random number 20098KL009.pdf that can often be generated during the saving process of the document.
For a potential buyer who is in a position to choose, it can be like viewing a poorly presented property or one that has been well-maintained and cared for.
4. Audit your management agreements.
More than 40 per cent of management agreements that we investigate or audit are not valid. During your audit process, I would recommend having one central folder, with A-Z tables inserted for the property street address, for all of your original management agreements. Management agreements are the fundamental value of a rent roll, and if you do go to sell the rent roll it makes the process so much easier than going through every property file to locate the agreement.
5. Document and note every tenant and landlord conversation.
Improve your tenant arrears rate and vacancy rate, where possible, and conduct a key register audit. Conduct a bond audit – you may be surprised at how many bonds are actually missing or where the full amount has not been paid.
6. Focus on increasing your rents where possible, in accordance with the market, and your management fees.
This can be daunting for some who are competing with agencies that are discounting their fees; however, there are ways to value-add and offer special discounts to win the business, without lowering your management fee. There are agents charging standard or above-average management fees in the marketplace, so it is possible.
7. Improve your AAMI (Average Annual Management Income) as this affects the value of a rent roll.
AAMI can only be improved by increasing rents and the management fees, and embracing KPI reports to easily show a snapshot of your business’s performance.
Managing a rent roll is serious business with increased compliance, activities and processes that must be adhered to. Keeping solid documentation is important to maximise the sale price as the buyer is purchasing your documents and data, amongst other possible assets and leases, and this will give them greater comfort that any future surprises will be minimised.