Does the length of time of properties managed on a rent roll influence value?

Over the past few months we have had a number of real estate agents looking to sell their rent rolls. Their primary question is- how much do you think the rent roll is worth?

One needs to consider a number of factors in valuing rent rolls; not the least the length of time each property has been managed by the agency.  A rent roll that has only been operational for a few years isn’t considered a mature rent roll, not having built good loyalty with the clients of the rent roll.

Generally speaking, these property owners are first time or new investors who invariably have geared their investment and are influenced by the economic conditions, vacancies and level of commission & fees charged. If the property is vacant for a few weeks the agent could find the listing is vulnerable and those property owners leaving to go to another agency.

That said, rent rolls with this profile and dynamic are worth less than a rent roll where property owners have been with the agency and built a relationship with the agency over time.  The value of rent rolls that have a mature client base is more valuable than those without.

Preparing your rent roll for sale

Make sure that you know your business- what are the state of the rent roll files?

If you are selling a rent roll then do a self audit of the files to ensure

·         all the authorities are updated and have the correct entities name on the authority

·         ensure that leases to all the properties are signed

·         the condition reports are up to date

·         the bond lodgement registers up to date

Above all ensure that what’s in the file matches the computer records.

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What restrictions should the vendor offer when selling a rent roll?

A purchaser expects that the vendor selling a rent roll should offer and entered into the contract of sale with a restrictive covenant clause. This clause should preclude the vendor from having any interaction with the landlords of the rent roll sold for;

a.        A period of up to 3 years.

b.      An area of up to 10 kilometres from the vendor’s office.

c.       In the capacity of director, shareholder, branch manager or consultant.

The vendor should be further restricted from soliciting or assisting others to solicit the landlords and should be restricted from providing any material to enable someone to solicit the landlords.

How long should the retention period be when selling a rent roll?

Naturally the vendor will want shortest time and the lowest amount and the purchaser will want the

longest time and the highest amount.  So therefore what is reasonable?

I am suggesting that an amount of 10-15% of the purchaser price to be held in Trust as the retention sum for a period of up to and no more than 6 months. In most of the transaction that have been negotiated, the retention period has been 4 months.

The interest on the retained amount shall be divided between vendor and purchaser.

What factors influence the purchase price of a rent roll?

There are a number of factors that influence the value of a rent roll;
1. Number of properties managed
2. Ratio of landlords to properties
3. Geographic spread of the properties managed
4. The commission rate
5. Amount of sundry income charged such as letting fees, postage etc
6. Length of time each property has been managed

Using a broker to sell your rent roll

What is the first thing a prospective seller should do?
The principal should conduct an audit of all the management authorities. It is is important that the authorities are up to to date, particularly with the correct entity name and ACN noted as the agent. Ensure that the authorities do have a clause to assign the managing agency rights to another licensed agent as this will decrease the need to obtain a new authority from the client once you have sold the rent roll.

Rent Rolls- Build or Buy?

If you are serious about building long term wealth in a real estate business that will become an asset you can sell in the future then the decision is not whether you need a rent roll but which is the most effective way to increase your properties under management.

Although it is normal to borrow the money to fund the acquisition of a rent roll you get the benefit of immediate cash flow from rental commissions and letting fees. You are also buying the relationship or goodwill that exists with the property owners and this is a great platform to leverage your services to build upon the solid base you have purchased.

When you start a rent roll from scratch it is difficult because of the initial and ongoing expenses, such as employment, marketing and administration costs paid whilst growing the rent roll. It is not uncommon for the Principal to initially grow and manage the rent roll however this does take your focus away from more productive areas of the business.

When buying a rent roll the main concerns purchasers have relates to the retention of owners and properties. You need to make sure that the retention clause in the contract of sale is fair to both parties and if a property drops off during the retention period then you don’t pay for it at the completion date.

A quality rent roll remains a fantastic asset and investment. It will pay for itself in a few years and provides instant cash flow to the business as well as a source of sales and investors looking to purchase another investment property.

Analysis of the commission rates of a rent roll

Most trust management system will provide a potential purchaser of a rent roll with a management statistics report.

Generally this will show the statistical information of the portfolio or the rent roll, such an average rent, gross fees, letting fees, number of properties managed, number of landlord, arrears etc. It is important for a potential purchaser however, to obtain the actual commission rate charged for each property managed to review whether there is a variation in the rent commission charged across the rent roll.

The value of the rent roll is in part based on the commission charged. That said, you don’t want to purchase a rent roll where they are a number of fees charged at 4or 5%. It is too hard to increase the commission rate to 6-8% as owners will resist this increase. Therefore higher the commission the higher the multiplier a buyer will pay.

If you own a rent roll, start the process to increase your commission rate over time.

Rent Rolls- A time to top or gain market dominance

I have noticed over the last few months that since the decrease in the number property sales a number of agencies are considering buying rent rolls to supplement lost income.

There have been a number of sales that our company has transacted to buyers who either are looking to “top up” their existing rent roll portfolios or use the current market and the competitive asking price for rent rolls to gain market dominance within their market place.

To find out more on rent roll opportunities click on the link www.bdhsolutions.com.au

Rent Rolls- Build or Buy?

If you are serious about building long term wealth in a real estate business that will become an asset you can sell in the future then the decision is not whether you need a rent roll but which is the most effective way to increase your properties under management.

Acquiring a rent roll in geographic area may not be a simple option, the choice may be made for you, but if it is possible, buying an existing rent roll could fast track your property management success. Although it is normal to borrow the money to fund the acquisition of a rent roll you get the benefit of immediate cash flow from rental commissions and letting fees. You are also buying the relationship or goodwill that exists with the property owners and this is a great platform to leverage your services to build upon the solid base you have purchased.

When you start a rent roll from scratch it is difficult because of the initial and ongoing expenses, such as employment, marketing and administration costs paid whilst growing the rent roll. It is not uncommon for the Principal to initially grow and manage the rent roll however this does take your focus away from more productive areas of the business. Building a profile and reputation in property management will take time- initially you will have a negative cash flow and the growth in income will be inconsistent.

When buying a rent roll the main concerns purchasers have relates to the retention of owners and properties. You need to make sure that the retention clause in the contract of sale is fair to both parties and if a property drops off during the retention period then you don’t pay for it at the completion date. A retention clause will ensure that the vendor participates in the hand over process and do anything possible to see the smooth transition of the change of business owners. After all it is their financial interest to do so.

Generally speaking a well run property management business has identifiable systems and procedures in place. As part of your due diligence take a close look at the quality of properties under management- take particular note of the amount of arrears, pending tribunal hearings, the number of multiple owners, and owners that may have a close relationship to the principal, the outstanding or upcoming maintenance, are the routine inspections, rent reviews and lease renewals up to date and the paper work in place.

A quality rent roll remains a fantastic asset and investment. It will pay for itself in a few years and provides instant cash flow to the business as well as a source of sales and investors looking to purchase another investment property. Ross Hedditch can be contact at bdhsolutions.com.au

Five tips on pricing your rent roll accurately

When you are pricing your rent roll or agency there are a number of tips you should consider when you are selling. The speed of the transaction and the ease in which a sale is concluded depends on the transparency and accuracy of the information made available. This is pertinent particularly when the buyer is obtaining finance from the bank or lender.
Here are some tips to assist the seller.
1. Provide full information, both financial and operational. Supply historical information as to income and expenses of the business for the last 3 years.
2. The financial statements of the SMS rarely show their true earning capacity. The accounts need to be “normalised” to adjust for any nonessential or owner related expenses.
3. Buyers are purchasing a cash flow, what are the risks that could affect the cash flow position of the business? Is the business currently dependent on the prinicpal bringing in the majority of the income?
4. Benchmark the business- look at the ratio of property managers, support staff to the properties managed. Is this consistent with industry standards. If it isn’t, then this could affect the price a buyer will pay.
5. Increasingly, the value of a rent roll depends on the intangibles- length of time the properties have been managed, the geographic spread of the properties, the ratio of owners to properties, the amount of sundry income and letting fees obtained. All these factors and others will affect the price and it is critical to speak to our brokers to unsure you are pricing the business correctly.

Buying a Rent Roll- What will Banks lend?

When purchasing a rent roll or agency, buyers need to be conscious of the policies and guidelines adopted by Banks when lending to cash flow business. These guidelines are general in nature and every buyer should make their own investigations prior to entering in to any contract of sale.
Most Banks have guidelines, policies and underwriting standards when it comes to lending to fund the acquisition of a rent roll. Detailed below are some of these underwriting standards;
1. Financial institutions will lend a purchaser 2.5 times the EBIT interest cover in the balance sheet of the purchaser’s entity.
2. Banks will lend up to a maximum of 70% of the buyer’s business balance sheet under gearing and will include the existing rent if it has been organically grown.
3. In general terms, Banks would prefer to lend to an agency principal who has a “track record” in running a rent roll and has already up to 200 properties on their books. The principal will need to demonstrate that they have systems and procedures in place to operate the current or acquired rent roll.
4. Banks will generally lend up to 60% loan to valuation ratio. Buyers may need to consider offering additional assets as security in order to bridge the ratio gap. In would be prudent for borrowers to obtain current valuations on their existing assets that they are providing as security.
The Banks most active in lending on rent rolls are, Westpac, Macquarie, and National. For further information call Stephen or Ross for a confidential discussion on purchasing a rent roll.