In the world of real estate, there is a lot of emphasis on growing a rent roll with little knowledge and emphasis on how to maximise the value of the current rent roll you are building.
Rent rolls are an integral part of real estate businesses and provide steady cash flow through recurring income streams, assist you with long-term wealth creation and asset value, and build long-standing relationships.
With such an important saleable asset in our business, business owners are still oblivious to how much a rent roll is worth.
Valuing a rent roll is not simple, as many factors come into play when determining the value of a rent roll.
Having the right knowledge of the factors that come into play will help you understand how to maximise the value of your rent roll.
Rent rolls are valued on the basis of a multiplier, which is adopted over the annualised management fee income. Such as, average weekly rent x average commission rate / 7 days x 365 days = annualised average management fee income.
Vacancy rates and arrears rates
No landlord wants to be without income and no business owner should be either.
These two factors should come as no surprise in terms of the impact they can make on your business profit and goodwill value.
When a property remains vacant, or you are not chasing, collecting and minimising arrears, there is no income generated from these properties.
The disbursement of your rent roll from your office location
I presented on this subject recently and many agents were surprised that this factor would impact the value of the rent roll.
The strategy of growing a rent roll and taking properties from ‘wherever,’ does impact your value and employment strategy.
There are fewer buyers available for rent rolls that are widely disbursed versus those who would prefer a nice, tidy rent roll up to 15km from your office location.
A widely disbursed portfolio will also require more manpower to manage it.
It will mean property managers are out of the office for longer and this will effect your goodwill and business profit.
Additional income streams
The multiplier is attached to the annualised management fees, not on additional income streams however, a buyer of a rent roll will pay a premium for a rent roll that achieves higher additional income streams in comparison to one that does not.
Therefore, additional income streams influence the multiplier.Â
Office location
The location of your agency will have an influence on your goodwill value.
Every state, territory, city, and suburb will have a different demographic, which will influence your rent roll.
Economic factors
This is the only factor that you have no control over.
Like the property market, there are fluctuations in the market depending on how many buyers are in the market for a rent roll at any given time and how the finance markets are going.
As this is out of your control, no energy and emphasis should be placed here and it should be redirected to factors you can control.
Historic sales data
A rent roll is only worth what the market is willing to pay.
Those business owners seeking to discount the value of another rent roll, in order to achieve what they believe in their eyes is a ‘good deal’, could and will impact their own rent roll value if the drive to discount the multiplier continues.Â
Due diligence
When value is determined in the contract of sale, a buyer is only negotiating on the basis of statistics, without truly knowing what is under the hood of the rent roll they are buying.
In the contract of sale, the buyer will conduct due diligence as part of the contract conditions and at this time, if completed correctly, the buyer may have the opportunity to renegotiate the multiplier of the contract of sale.
To prevent this, conduct due diligence throughout your business ownership and have conversations with prospective landlords, as you know how your portfolio is performing.
Minimising risk and finding missing income opportunities helps you ensure the value of your rent roll is secured.
Rent rolls are more than just a list of properties; they are a saleable asset that deserves careful attention and strategic management.
By acknowledging the interplay of factors that influence rent roll values, and by fostering a deep understanding of their dynamics, real estate business owners can unlock hidden potential, drive profitability, and cultivate sustainable growth.
