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.