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