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.