EPM

The Seven Principles of Rent Roll Financing

The big four bank shave made lending criteria tighter in recent years, and one of the most common queries from business owners is how to best secure finance to acquire a rent roll.

In a risk averse and ‘do-more-with-less’ economic climate, financing by the big four banks has made lending criteria tighter. If you are looking to acquire a rent roll, we have found that the following seven best practice principles will help you to either position your business in order to acquire finance, or make it a saleable asset.

  1. Cash-flow is king
    You must be able to demonstrate that you are a solid banking client. Remember that your lender will be assessing your ability to operate your business efficiently and with profitability. To that end, cash-flow is king, so keep your business plan and money matters in consistently good order.
  2. Business plan
    Your business plan should be both realistic and optimistic. It will quantify your historic growth to legitimise your future goals. It seems a fiscal irony, but you must be able to demonstrate your ability to develop the business without a merger or acquisition. This will stand you apart from the crowd and make you a more attractive prospect for financing.
  3. Money Matters
    When it comes time to providing financial statements, do not offer to “create your own spreadsheets” but instead have your accountant prepare your Profit and Loss and Balance Sheets for the last two to three years. If you have also held funds in an offset or line of credit account, you should be prepared to provide evidentiary support with bank statements.
  4. Separate the books
    When starting out in the industry, many agency principals operate a single book of accounts for the end-to-end business. As the business develops, this is not a sustainable way to operate so, if you have not already done so, separate your chart of accounts between the rental and sales departments. Failing to do so will mean losses are hidden from sight, and growth areas cannot be quantified.Your property management department should be viewed and measured as an independent department with its own budgets and finances. It will have its own goals for growth, conduct independent financial reviews, and be listed separately in the financial reports of the company books. This doesn’t mean simply identifying the breakdown between management and letting fees, but the proportion of expenses like rent, vehicle, phone, IT costs, printing and stationary, and of course salary and wages. For example, if the receptionist is spending 30 per cent of his or her time doing property management duties, then add that 30 per cent to the value of salaries for the property management division. The ability to demonstrate profitable growth in each division will make you a more attractive prospect for lending criteria.
  5. Supercharge Profitability
    Before you can grow your business through acquisition, you must firstly make your own property management department as profitable as possible. Whilst you may have a myriad of income streams, only a small number is considered of value to lenders. Your primary focus should be on the property management fee. Low fees will make it difficult to secure finance and, worse yet, make your own rent roll unattractive to prospective buyers. To ease the change of fees increase with your landlords, consider removing, for example, a monthly administrative fee that does not add up to very much over a year, in lieu of a 1.1 per cent rise in the management fee.
  6. Reducing Borrowing
    In the six to 12 months leading up to the planned expansion of your rent roll, look at reducing any borrowings you may already have secured against your existing portfolio. If you have positive cash flow and equity in a line of credit, you could draw some of those funds to pay down your existing loan against the rent roll. As property is secured at a lower interest rate to your business loan (usually 6.5 – 7.5 per cent compared to 8.5 – 10 per cent), it could also save you the cost of extra interest. Banks will typically look at lending up to 80 per cent on the value of investment property, and at a lower interest rate compared to the 60 per cent lent against the value of a rent roll.
  7. Ratio of borrowings
    When looking to purchase another rent roll, limit yourself if possible to about 50 per cent of the net value of the combined rent rolls. By retaining a little extra equity there is less chance of getting caught out when interest rates go up, or equity drops due to property losses and sales. In addition, when you lose properties through your sales department, a good agency will operate an offset account or line of credit so that a percentage of the professional sales fees from that property is set aside to absorb its loss in equity from the rent roll.More importantly, an agency with a low loan to asset value ratio will quickly find themselves on the wrong side of the lender should the rent roll move into negative equity. You should never let your business get to this stage because the next step is receivership. Even though you might have a good relationship with your landlords, any signs of trouble with your agency and they may start to leave in droves. It is best to be open with your bank, well in advance of any problems, and ensure you negotiate to market the portfolio before it is beyond your control.

Sasha Jovanovic is the NSW State Representative of The Rent Roll Broker. The Rent Roll Broker is a business broker specialising exclusively in the sale of rent roll portfolios and real estate agency practices in Australia. Chris Goodway is the CEO, with 35 years’ experience in Real Estate, while Sasha has been selling rent rolls in Sydney and NSW for three years. For more information, visit www.therentrollbroker.com.au.

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