Buying A Rent Roll

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A guide to helping agents buy a rent roll

Transcript of Buying A Rent Roll

  • 1.Tony Morrison

2. Buying vs Natural growth Due Diligence Choosing your buyer Method of appraising rent rolls Understanding multipliers Finance Contracts (clauses to protect purchase) Post purchase transition Rent roll calculator 3. Before embarking on purchasing a rent roll itis worth comparing the merits of natural rentroll growth versus buying a rent roll as bothmethods of growth have positives andnegatives. 4. You can control Slower growthquality, Rent roll loses money location & for a period of time fees of properties until numbers grow You can avoid badlandlords No inheritance ofproblemsPositivesNegatives 5. Increased size gives Landlord rejectionbusiness momentum Buying existing issues Increases cash flow More often than not Irons out fluctuationsof sales departmentpoorly run Eliminates a Integration issuescompetitor from yourlocal area Increases networks anddatabase More opportunities forthe sales departmentPositivesNegatives 6. What are the averagerents andmanagement/lettingfees? How recently were anyof the above increased? 7. What Ancillary Feesdoes the seller charge? postage, re lettingfees, inspection fees,exit fees Is there room to add orincrease these fees? 8. Are all agencyauthorities/files up toscratch? If not, what potentialrisk does this pose? 9. What is the locationand type of propertiesbeing managed? How does theGeographical spread,furnished/unfurnished,houses/units affect thereturn on the rent roll? 10. How many propertiesare owned by thevendor or affiliatedwith the vendor? How could thispotentially impact you? 11. What is the ratio ofLandlords toproperties? Are there a lot ofmultiple propertyclients? What impact does thishave on the value ofthe rent roll? 12. What is the currentstaffing structure? How many? Are they any good? Will they stay on? What do they cost? 13. Will the Vendor/keystaff remain for aperiod of time aftersettlement? If they dont, whatproblems could thiscause? 14. What propertymanagement softwareis being used? How easy will it be tointegrate? 15. Are Landlords currentlybeing provided withservices that you cantor wont provide? What is your strategyfor handling this? 16. Are landlords feescurrently less thanwhat you charge? What is your strategyfor increasing feeswhilst not losingproperties? 17. What Rent Paymentmethods are used? Do you use a differentmethod which willcause issues tointroduce? 18. What percentage ofproperties are in rentarrears and how longhave they been inarrears? How does this affectthe value? 19. What are the numberand length ofvacancies? What problems areyou taking on? 20. Are there anyproperties on the rentroll for sale? Are you likely to losethese in the nearfuture? Are they likely to besold to investors? 21. How long has thevendor beenmanaging the rentroll? What impact can thishave to you? 22. Has the vendorpurchased any rentrolls previously? Does this pose anythreat to you asLandlords do nottraditionally likechange? 23. What has the been thenet growth/loss in therent roll over the lastfew years? What does this mean toyou? 24. Has the trust accountalways been balanced? How do you protectyourself against a trustaccount that hasntalways balanced? 25. Are rental bonds heldfor each property? What problem doesthis pose if not? 26. Have regularinspections beencarried out on eachproperty? Was there an ingoinginspection carried outfor the current tenant? If not, what problemscan this cause downthe track? 27. How many outstandingmaintenance issues arethere? Are you taking onmajor maintenanceproblems? 28. Are there tribunalhearing or insuranceclaims pending? How time consuming& costly will these be? 29. It is important to get answers to the previousquestions so A) You know what you are getting into and B) To ascertain a fair market value for the rentroll 30. It is strongly advised that you or a seniorProperty manager inspects the premises ofthe person selling the rent roll to validate allthe answers to the questions that you havebeen seeking. 31. Dont just sell to the person who offers themost money You should only sell to someone who is atleast capable of looking after your clients tothe end of the contract retention period oryou will lose more than you gained by takinga higher offer initially Avoid selling to someone with a badreputation or who is known to offer poorservice 32. The value of a rent roll is usually based on aformula which is a multiplier of the yearlymanagement fee that each property bringsinto the business annually. Generally letting fees and ancillary fees dontcome into the value of the rent roll as theyare unpredictable. Occasionally a smaller multiplier can be usedfor the letting fee 33. e.g. Property rents for $300 per week with a 9% management fee$300 per week x 52 weeks in a year =$15,600 ( income to owner per year)$15,600 x 9% = $1404 (yearly income to Real estate office from property)$1404 (yearly income) x multiple of 2=$2808 (value of property as an asset to business)$1404 (yearly income) x multiple of 3 =$4212 34. In Tasmania the multiple generally variesbetween 2 and 3 but in some metropolitanareas in Sydney it can be as high as 3.5 to 4 There are many things that can affect themultiplier as previously discussed under duediligence Supply and demand also has a considerablebearing on the multiple 35. MultiplierA. x 3 = great management, long fixed termleases, no arrears, inspections reportsthorough and detailed, maintenanceexcellentB. x 2.5 = standard management, generally ingood condition but some maintenance andarrears issuesC. x 2 = properties in poor locations, low rentvalues, vacancy, arrears and maintenanceissues 36. Banks will generally lend up to approximately60% of the value of the rent roll withoutseparate equity as security Banks will take into consideration the qualityand location of the rent roll Your ability to service the loan is also takeninto account. 37. Contracts need to cover the following issues A Post sale restraint period must be included tostop the vendor opening up in opposition andwinning back the properties you have paid for. A Retention of payment to the seller to cover lossof properties from the rent roll. Usually 10/20%of the sale price for a period of 3 to 6 months. A clause covering non payment to the seller forclients who refuse to be transferred over to you Detail of all the documentation to be handed overon settlement 38. Indemnity for future claims on the rentaldepartment for existing rent roll problemsprior to settlement. Warranties from the vendor How are rental properties which the sellerowns privately, which are being sold with therent roll to be dealt with? This is of particularly concern if the sellerwants to dispose of them somewhere in thenear future. 39. What happens if information you relied uponto estimate value of rent roll turns out to beincorrect? GST should not be applicable as the rent rollshould be sold as an on going concern What actually gets handed over, e.g. (keys,security devices, landlord details, file historynotes, maintenance reports, signedauthorities, condition reports, all Landlordand tenant correspondence, tenancy paymentledger and all original leases) 40. Do you nominate an acceptable figure thatvacancies and arrears must not be above onsettlement day Agreement over access to information priorto settlement A notification process to landlords andtenants Continuation of business in efficient anddiligent manner If possible, permission to start transitioningmanagement authorities before settlement 41. Extremely critical stage Contact with landlord, both personal andwritten must happen immediately Understand that Landlords dont like change They didnt choose you initially First impression critical to build trust andloyalty Sell the benefits of what your firm can offer Have the previous owner involved intransition whenever possible 42. Preferably plan a joint communication planfor landlords and tenants Essential to get Landlords signed up on yourauthorities a.s.a.p. (preferably prior tosettlement) May need to deal with issues over a differencein fees between you and previous agent Some Landlords use this as an opportunity toexit from management as they werent happyand were looking for an excuse to leave 43. Set out how you normally communicate as itmight be different from previous agent Find out Landlord expectations Discuss changes with staff as soon ascontract unconditional Consider hiring some of the sellers staff tomake sure management agreements stick Give reassurance to everyone 44. For a copy of a rent roll calculator contactTony Morrison or on 0418 130 563