Buying A Rent Roll

Buying a Rent Roll

Tony Morrison

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

Buying a Rent Roll (Topics covered)

Before embarking on purchasing a rent roll it is worth comparing the merits of natural rent roll growth versus buying a rent roll as both methods of growth have positives and negatives.

Buying vs natural growth

Natural rent roll growth

Positives Negatives

You can control quality,

location & fees of properties You can avoid bad

landlords No inheritance of

problems

Slower growth Rent roll loses money

for a period of time until numbers grow

Buying a rent roll

Positives Negatives

Increased size gives business momentum

Increases cash flow Irons out fluctuations of

sales department Eliminates a competitor

from your local area Increases networks and

database More opportunities for

the sales department

Landlord rejection Buying existing issues More often than not

poorly run Integration issues

Due Diligence (questions needing to be

answered)

What are the average rents and management/letting fees?

How recently were any of the above increased?


answered)

What Ancillary Fees does the seller charge? – postage, re letting fees, inspection fees, exit fees

Is there room to add or increase these fees?


answered)

Are all agency authorities/files up to scratch?

If not, what potential risk does this pose?


answered)

What is the location and type of properties being managed?

How does the Geographical spread, furnished/unfurnished, houses/units affect the return on the rent roll?

Due Diligence (questions to be answered)

How many properties are owned by the vendor or affiliated with the vendor?

How could this potentially impact you?


What is the ratio of Landlords to properties?

Are there a lot of multiple property clients?

What impact does this have on the value of the rent roll?


What is the current staffing structure?

How many? Are they any good? Will they stay on? What do they cost?


answered)

Will the Vendor/key staff remain for a period of time after settlement?

If they don’t, what problems could this cause?


answered)

What property management software is being used?

How easy will it be to integrate?


answered)

Are Landlords currently being provided with services that you can’t or won’t provide?

What is your strategy for handling this?


answered)

Are landlords fees currently less than what you charge?

What is your strategy for increasing fees whilst not losing properties?


answered)

What Rent Payment methods are used?

Do you use a different method which will cause issues to introduce?


answered)

What percentage of properties are in rent arrears and how long have they been in arrears?

How does this affect the value?


answered)

What are the number and length of vacancies?

What problems are you taking on?


answered)

Are there any properties on the rent roll for sale?

Are you likely to lose these in the near future?

Are they likely to be sold to investors?


answered)

How long has the vendor been managing the rent roll?

What impact can this have to you?


answered)

Has the vendor purchased any rent rolls previously?

Does this pose any threat to you as Landlords do not traditionally like change?


answered)

What has the been the net growth/loss in the rent roll over the last few years?

What does this mean to you?


answered)

Has the trust account always been balanced?

How do you protect yourself against a trust account that hasn’t always balanced?


answered)

Are rental bonds held for each property?

What problem does this pose if not?


answered)

Have regular inspections been carried out on each property?

Was there an ingoing inspection carried out for the current tenant?

If not, what problems can this cause down the track?


answered)

How many outstanding maintenance issues are there?

Are you taking on major maintenance problems?


answered)

Are there tribunal hearing or insurance claims pending?

How time consuming & costly will these be?

It is important to get answers to the previous questions so

A) You know what you are getting into and B) To ascertain a fair market value for the

rent roll

Due Diligence

It is strongly advised that you or a senior Property manager inspects the premises of the person selling the rent roll to validate all the answers to the questions that you have been seeking.

Due Diligence (Physical inspection)

Don’t just sell to the person who offers the most money

You should only sell to someone who is at least capable of looking after your clients to the end of the contract retention period or you will lose more than you gained by taking a higher offer initially

Avoid selling to someone with a bad reputation or who is known to offer poor service

Choosing your buyer

The value of a rent roll is usually based on a formula which is a multiplier of the yearly management fee that each property brings into the business annually.

Generally letting fees and ancillary fees don’t come into the value of the rent roll as they are unpredictable.

Occasionally a smaller multiplier can be used for the letting fee

Method of appraising rent rolls

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

How the multiplier can affect the value of a property

In Tasmania the multiple generally varies between 2 and 3 but in some metropolitan areas in Sydney it can be as high as 3.5 to 4

There are many things that can affect the multiplier as previously discussed under due diligence

Supply and demand also has a considerable bearing on the multiple

Rent roll multiplier

Multiplier A. x 3 = great management, long fixed term

leases, no arrears, inspections reports thorough and detailed, maintenance excellent

B. x 2.5 = standard management, generally in good condition but some maintenance and arrears issues

C. x 2 = properties in poor locations, low rent values, vacancy, arrears and maintenance issues

Choosing a multiplier

Banks will generally lend up to approximately 60% of the value of the rent roll without separate equity as security

Banks will take into consideration the quality and location of the rent roll

Your ability to service the loan is also taken into account.

Finance

Contracts need to cover the following issues A Post sale restraint period must be included to

stop the vendor opening up in opposition and winning back the properties you have paid for.

A Retention of payment to the seller to cover loss of 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 for clients who refuse to be transferred over to you

Detail of all the documentation to be handed over on settlement

Contract to purchase a rent roll

Indemnity for future claims on the rental department for existing rent roll problems prior to settlement.

Warranties from the vendor How are rental properties which the seller

owns privately, which are being sold with the rent roll to be dealt with?

This is of particularly concern if the seller wants to dispose of them somewhere in the near future.


What happens if information you relied upon to estimate value of rent roll turns out to be incorrect?

GST should not be applicable as the rent roll should be sold as an on going concern

What actually gets handed over, e.g. (keys, security devices, landlord details, file history notes, maintenance reports, signed authorities, condition reports, all Landlord and tenant correspondence, tenancy payment ledger and all original leases)


Do you nominate an acceptable figure that vacancies and arrears must not be above on settlement day

Agreement over access to information prior to settlement

A notification process to landlords and tenants

Continuation of business in efficient and diligent manner

If possible, permission to start transitioning management authorities before settlement


Extremely critical stage Contact with landlord, both personal and

written must happen immediately Understand that Landlords don’t like change They didn’t choose you initially First impression critical to build trust and

loyalty Sell the benefits of what your firm can offer Have the previous owner involved in

transition whenever possible

Transition post Purchase

Preferably plan a joint communication plan for landlords and tenants

Essential to get Landlords signed up on your authorities a.s.a.p. (preferably prior to settlement)

May need to deal with issues over a difference in fees between you and previous agent

Some Landlords use this as an opportunity to exit from management as they weren’t happy and were looking for an excuse to leave


Set out how you normally communicate as it might be different from previous agent

Find out Landlord expectations Discuss changes with staff as soon as

contract unconditional Consider hiring some of the seller’s staff to

make sure management agreements stick Give reassurance to everyone


For a copy of a rent roll calculator contact Tony Morrison at [email protected]

or on 0418 130 563

Assessing rent rolls

mailto:[email protected]

Buying A Rent Roll

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