If you're an agency principal, you understand the importance of securing a steady income for your business right from the start. Your company has big ambitions of expanding its operation and establishing a strong reputation in the local real estate market - a rent roll is what will help you get it!
Building a rent roll from scratch can be a time-consuming and resource-draining endeavour, taking months or even years to accomplish. But what if there was a way to acquire an income-producing asset without all the hassle? That's where buying a rent roll comes into play.
It's important to acknowledge that purchasing an existing rent roll brings its fair share of challenges. From the potential risks associated with rent roll churn to concerns surrounding profitability and compliance, there are crucial factors to consider.
In this guide, we're equipping you with insights, information, and even a downloadable cheat sheet to help you confidently navigate buying a rent roll, what challenges to expect along the way, and how to manage a new one effectively.
Let's get rent-rolling!
What are the benefits of buying a rent roll?
You've probably already heard that buying a rent roll is an excellent way to expand your real estate business and tap into new markets - we're here to tell you why. Particularly for agency principals, buying a rent roll could mean substantial practical benefits for a property agency:
- It's faster than building a rent roll from scratch: By buying a rent roll, you're skipping the process of organically growing your properties under management.
- Instant access to an income-driving asset: When you purchase a rent roll, you get instant access to a reliable and steady source of income that's injected into your business month to month.
- Gain market share from your competitors: Within the process of buying a rent roll, non-compete agreements mean you're gaining market share from competitors, which can help solidify your agency's position in your local area.
- Generate sales leads - With a rent roll, you can find high-value properties, motivated sellers, and off-market deals that aren't publicly advertised yet. You can even use it to connect with property managers who might have insider info on upcoming investment opportunities.
What to consider before buying a rent roll?
While the benefits are big, there's always factors to keep in mind to determine if buying a particular rent roll is the right decision for your business:
- High upfront cost: Buying a rent roll can be a quick way to secure a steady income, but at a hefty price tag.
- Potential for rent roll churn after sale: Since you’re buying a rent roll from another agency that’s spent time building relationships with their clients, owners may choose to take their rental properties elsewhere after the sale.
- Number of properties listed on the rent roll - More properties on the rent roll can mean higher potential income but also require more resources and increase the risk of vacancies. A smaller number of properties may be easier to manage but will generate less income.
- Location of the properties - What is the current demand for rental properties in the area? Any upcoming developments or changes can also impact the rent roll's performance.
- Type of properties: Are they residential or commercial, new apartments or old family homes? The condition and potential maintenance, renovation, and risk associated with the properties should also be considered.
- Overall performance of the portfolio: Check factors such as rent and yield, occupancy rate, retention rate, and any outstanding arrears or legal disputes that may affect the overall performance of the portfolio.
How much does it cost to buy a rent roll?
No two assets are the same and the cost of buying a rent roll can vary widely. However, sellers will generally use either the AAMI (Average Annual Management Income) method or MFI (Multiple of Fee Income) method to value their rent rolls, here’s how it works:
AAMI Valuation Method
This method is often used for valuing residential rent rolls and there are two formulas you could use.
The first is best suited for rent rolls that have varied rent and/or management fees, and is calculated using the formula:
AAMI = (Total Annual Income x Management Fee Rate)
The second formula is used for rent rolls that have a fixed management fee rate and is calculated using the formula:
AAMI = (Total Annual Income ÷ Number of Properties under Management) x Management Fee Rate
Once you have calculated the AAMI using either formula, you can apply a multiplier to estimate the value of the rent roll. Generally, this multiple ranges from 1.5 to 3 for residential rent rolls, depending on factors such as location, property types, and portfolio performance.
MFI Valuation Method
This method is more commonly used to value commercial rent rolls, and is calculated using the formula:
MFI = Net Operating Income ÷ Capitalization Rate
Net Operating Income (NOI) is the total income generated by the rent roll, minus all operating expenses (excluding taxes and interest expenses).
Capitalization Rate (Cap Rate) refers to the rate of return on a property investment based on the income generated by the property.
Similar to the AAMI method, once the MFI has been calculated, you will apply a multiplier to that figure to estimate the value of the rent roll. The multiple typically ranges between 8 to 12 for commercial rent rolls.
While the price tag is important, there are also several other factors buyers should consider before acquiring a rent roll.
Finance options when buying a rent roll
Buying a rent roll can be a wise investment, but financing one can be challenging. Luckily, there are several options available for rent roll financing in Australia.
- Cash: If you have the funds available, buying a rent roll outright can provide you with immediate ownership of the rent roll and the associated income. This can be a good option if you have a lot of cash reserves and want to avoid paying interest on a loan.
- Bank Loan: If you need to borrow money to buy the rent roll, you can apply for a bank loan. You will need to provide the bank with a business plan, financial statements, and other documentation to support your loan application. If you are approved, the bank will lend you the money you need to purchase the rent roll, and you will need to make regular payments to repay the loan over time.
- Vendor Finance: In some cases, the seller may be willing to provide financing for the purchase. This option can be beneficial if you don't qualify for a bank loan or prefer to negotiate the financing terms directly with the seller. With vendor finance, the seller will receive regular payments from you until the purchase price is fully paid off.
- Equity: If you own other properties or assets, you may be able to use them as collateral to secure financing for the rent roll purchase. For example, you could take out a mortgage on a property you own to raise the funds you need to buy the rent roll.
How to buy a rent roll: A step-by-step guide
Review the market: You can get a sense of what prices are typical for rent rolls in your area of interest by looking into other rent rolls for sale nearby. Search online listings, engage with business brokers, and network within the industry to scope out possible options.
Conduct your due diligence: Review whether the rent roll is compliant with relevant regulations, ethical standards, and contractual obligations, and examine the state of lease agreements and the relationship between the current agency and their clients to ensure you’re purchasing a well-managed rent roll.
Calculate the value of the rent roll: You can do your own calculations or work with a rent roll broker to estimate how much you will earn from the rent roll purchase. Prepare a budget to assess and estimate potential earnings for the next year or two.
Gather legal documents: Work with legal professionals to help you prepare, gather, and review any documents related to the sale, including sales contracts and employment contracts.
Understand the retention clauses: Make sure you understand the retention period and amount. Retention periods are generally 3 to 6 months, during which time a percentage of the purchase price (usually around 20%) is held back to account for any rent roll churn, or turnover of properties, during this period.
Prepare for settlement: Once you’ve done your research and due diligence, get your rent roll value reassessed to ensure you're only paying for the properties that remain in the rent roll after the retention period. A rent roll broker or valuer can perform this reassessment for you.
Notify landlords and tenants: Once the sale is finalized, notify landlords and tenants of the change in ownership and provide them with details of the new management. Ensure all necessary documents are filed with relevant authorities, such as the state's regulatory body for real estate agents.
Complete the transfer of ownership: Transfer the management authority and complete the transfer of ownership. Understand the retention clauses and ensure you're only paying for the properties that remain in the rent roll after the retention period. Review legal documents related to the sale to ensure the transfer of ownership is complete.
Should I buy a rent roll?
If you’re an agency principal looking to expand your business and want a steady income without the hassle of organically growing your rent roll from scratch, then absolutely yes, buying a rent roll could be the best move for your company.
But like any financial decision, you have to take a look at the possible challenges and what that could mean for your own business structure.
Let’s look at some of the biggest hurdles when it comes to buying a rent roll and how you could potentially overcome them:
1. Valuing a rent roll can be difficult, to say the least. Any valuations should be based on the revenue generated by the rent roll as well as its future growth potential - this isn’t information you’re likely to come by easily.
What you can do: The best solution is to hire a professional valuation service to avoid overpaying, and an experienced property management consultant to make sure you don’t end up being stuck with a loss making rent roll.
2. Retaining clients on your new rent roll can become a challenge if they feel like their expectations from a new management aren’t being met. Clients might also feel understandably anxious during the transfer period and it can be a stressful time for everyone.
What you can do: Clear communication and building relationships is absolutely essential! Reach our to your new clients and let them know you’re there to support their needs and help in a smooth transition. You could also up your customer satisfaction levels by offering additional services like maintenance and renovation.
3. Managing additional properties means an increased workload and the need to hire new staff to tackle it. This would mean additional expenses, but if not handled correctly it could affect the quality and productivity of your service, and at worst, trigger burn out or resignations.
What you can do: Plan ahead. Give your teams the information and tools to assess their new workloads and prepare for new recruits. Have good onboarding practices and internal communication systems in place to train and upskill new staff to settle into their roles quicker and confidently. You could also consider investing in proptech to automate time-consuming tasks, or use the services of a property management solutions provider to take the heavy lifting off your teams.
The easiest way to manage a large rent roll
Arguably the most difficult challenges after buying a rent roll are centered around managerial and administrative issues. Figuring out the easiest and most effective way to manage your new rent roll properties and clients can pose its own challenges. It’s why we created a :Different solution!
:Different for Agencies is a purpose-driven solution built by property managers, for property managers. We understand the tools needed to effectively manage rent roll properties and deliver great customer experiences to create a seamless process for property managers, tenants and owners, particularly during a transition phase.
By working with us, you get the right tech and the right people on the job to take on the complexities of managing your rent roll. This means your teams are free to focus on building long-lasting client relationships for your business and building on the growth potential of your rent roll!
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