How to buy a rent roll

To buy a rent roll you need to be a licensed Estate Agent.  When you buy a rent roll the price you pay is a multiplier of the management fees. Items that effect values have described in other articles on this Blog, however these are some factors that influence value;

1.            The number of properties under management- if the rent roll being sold is too small then buyers will find it hard to secure finance from a Bank. If the rent roll is small then due to finance restraints the price will be affected negatively.

2.            Banks generally like to lend on a rent roll of 150 or more properties.

3.            The ratio of landlords to properties will influence value. Ideally a 1:1 ratio is perfect.

 

4.            The geographic spread of properties.

5.            The mix of properties under management .

Any offer to purchase a rent roll will encompass the price offered, settlement terms, is it subject to finance or not, the restrictive covenant offered by the vendor and the retention period and amount.

The broker will draft up the heads of agreement and then once all parties agree on the sale price then the vendor will instruct its solicitor to prepare contract of sale. The contracts are exchanged, a deposit paid and then the buyer has the right to conduct due diligence investigations. No due diligence occurs prior to any agreement reached between parties.

At the conclusion of DD, the parties agree on the wording for the assignment letters to be sent to the landlords (VIC ) or new authorities will be sent to all landlords in the name of the new agent.

 The final settlement price is determined once all authorities have been returned or notification of assignments has occurred. Generally the settlement of a rent roll occurs at the end of the month thus allowing the vendor to account to all stakeholders. All tenant and landlord information is required to be transferred onto the purchasers trust system at settlement allowing for an easier transfer. Naturally there will be a period of involvement from all the parties to ensure that the transfer occurs as smoothly as possible.

 The retention sum and period operates for the purpose that if any property drops off for no apparent reason post settlement then a financial adjustment can be made on those properties that drop off at the conclusion of the retention period. An amount of money from the settlement sum is held in Trust to satisfy this clause.

 

Valuation in the Volatile World

Rent Roll buyers are buying the future income stream or profits of a business.

Historic results are no guarantee of future performance. Profit & Loss statements, Balance Sheets will show past profits and trends but cannot tell you what will happen next year.

Averaging figures for the last 3 or 4 years can be dangerously misleading, particularly if the business is experiencing a decline in the present downturn. The most recent results are the best indicator of the businesses’ health and future profitability. The buyer must make a subjective judgement as to what the future really holds.

Businesses that consistently monitor their cash flow will be in a better position to take advantage of when the economy will rebound.  Eventually businesses will emerge leaner and stronger from the experience.

The challenge for the buyer is to predict the future performance of a rent roll that is for sale; how much the downturn will impact results, and how prices will be supported by the increased supply of buyers looking to replace decreased sales income with rent roll income.

Business valuation is never a precise science. All valuations are opinions and the only true test of value is an arms-length sale in the market-place after a thorough marketing program.

Vendor Finance is now becoming more popular

With the banks continuing to be cautious lending money to cash flow business (such as rent rolls), we are seeing more sales where the owner leaves in some money for the purchaser. This makes good sense for both parties- the buyer benefits from the seller’s continuing interest and support in the success of the business and the seller gets a higher interest rate and less risk by investing in a business they know and understands.

Analysis of the commission rates of a rent roll

Most trust management systems 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 there should be a price variation or lesser multiplier paid on a rent roll where there are a number of fees charged at 4 or 5%. It is too hard to increase the commission rate to 6-8% as owners will resist this increase. Therefore as a conclusion, the higher the commission charged, the higher the multiplier a buyer will pay.

If you own a rent roll, start the process to increase your commission rate over time and to do this in conjunction with increasing your rent. It will be hard for the landlord to resist pay a higher commission if at the same time they are getting a rent increase.

Top 10 Exit Planning Mistakes

We have compiled a list of the common mistakes business owners make when they exit their businesses.

1. Bad timing – judging the best time to sell is important to maximise the price received.

2. Not being proactive – waiting for the perfect deal is like waiting to win the Lottery– it is highly unlikely.

3. Not considering all your options – Discuss with your broker the potential target market and the sale options.

4. Being distracted – do what you do best – run the company. Let the professionals market your
business and negotiate the best deal.

5. Not knowing your value – what is your business worth now?

6. Where to next? – An important part of exit planning is answering that question. As soon as you start to think about selling, act on it as you are likely to be distracted and take your eye of the ball and stop running the business with all your energy.

7. Tax implications? – Your accountant should be part of your team implementing your exit plan.

8. It takes time – selling a business is much more complex than selling a house so allow plenty of time. Information has to be assembled, multi-pronged marketing strategies need to be implemented, legislative and tax implications need to be understood, and almost certainly there will be unexpectedroadblocks and challenges before settlement.

9. Hard work ahead- do not get overwhelmed with the task ahead. If you have an experienced team handling the process they will smooth the way and sort the problems.

 10. Ensure your listed price is correct- Agents spend a life time educating their clients about value- when you are selling head your own advice.