EPMEPM: Leadership

The Multiplier Effect

Are you thinking of buying a rent roll but wondering how to determine its true value? Perhaps you’re pondering what your own rent roll is worth. There are a range of factors that can be taken into consideration. Ross Hedditch outlines how to ascertain the value of a rent roll.

“As a general rule, a property which has been managed for more than five years is a blue chip purchase.”

Many successful agency owners are currently considering purchasing a rent roll as a way of improving both the cash flow and capital value of their business. In most parts of Australia and New Zealand, the market value of a rent roll is derived by applying a multiplier to the net property management commission.

Experience shows that the following factors have the greatest effect on determining the rent roll multiplier.

1. Level of local supply and demand
Make sure you have a good idea of the local supply and demand for rent rolls. If you are the only buyer you can negotiate accordingly.

2. The warranty period/retention amount
The most common agreement is a three months warranty period with a ten per cent retention factor. No buyer should risk everything by entering into a contract without a warranty period and retention amount.

3. The average term the properties have been managed
As a general rule, a property which has been managed for more than five years is a blue chip purchase. Don’t settle for averages. Ask this question: What is the management term of every property?

4. The average distance to the properties being managed.
Properties located within five kilometres of the office are ideal. Those located outside this range take more time and expense to visit, let and manage.

5. The average rents being received.
Properties which achieve rents too far above or too far below the average for the area usually have higher levels of vacancy, and/or arrears and/or repairs and maintenance.

6. The average rate of commission charged and complementary fees paid.
Properties managed for a very low commission with few complementary additional service fees are usually owned by owners with a low loyalty factor. When the property becomes vacant, it will usually be given to several agents to let, with the letting agent securing short term management rights.

7. The rent roll vacancy/arrears history.
High levels of vacancy and arrears are typical of low quality rent rolls which should attract low multipliers when being valued.

8. The ratio of houses to units.
Some property managers consider units (flats) more profitable managements than houses as repairs/maintenance are comparably lower. The body corporate manages non internal matters involving a home unit building.

9. The system of accounting.
The method by which tenants pay rent and statements are sent to owners that is considered most valuable is the monthly tenant direct-debit-rent bank transfer to owner. Other less effective systems have a negative effect on the multiplier.

10.The agent’s level of delegated authority
Agency agreements which provide no reasonable authority to the agent result in time consuming and costly communication with owners on trivial matters.

11.The ratio of multiple owners
Most buyers will consider this ratio as hugely important when buying a rent roll. A ratio of one property to one owner is considered to be excellent.

Ross Hedditch commenced his career in 1978 and has been at the forefront of Melbourne’s residential real estate market ever since. Ross is a recipient of the Australasian Real Estate Agency Best Practice John Grieg Trophy for service to estate agency practice and he remains one the profession’s most forward looking and progressive thinkers.

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