Buy and value a rent roll updated version
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If you are looking to buy or sell a rent roll in the near future this could be handy to understand the process, how to value a rent roll and how to protect yourself contractually.
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Buy and value a rent roll updated version
- 1. BUY AND VALUE A RENT ROLL LEADERSHIP programme
- 2. TOPICS COVERED • Buying vs Natural growth • Due Diligence • Choosing your buyer • Method of appraising rent rolls • Understanding multipliers • Finance • Contracts (clauses to protect purchase) • Post purchase transition • Rent roll analysis and calculator
- 3. It is worth doing a comparison of the two methods of growth as both methods have positives and negatives BUYING VS NATURAL GROWTH
- 4. NATURAL RENT ROLL GROWTH POSITIVES NEGATIVES • You can control quality, location and fees of properties • You can avoid bad landlords • No inheritance of problems • Slower growth • Rent roll loses money for a period of time until numbers grow
- 5. BUYING A RENT ROLL POSITIVES NEGATIVES • Your Increased size gives the business momentum • Increases cash flow • Irons out fluctuations of the sales department • Eliminates a competitor from your local area • Increases networks and database • More opportunities for the sales department • Landlord rejection • Buying existing issues • More often than not poorly run • Integration issues
- 6. DUE DILIGENCE What are the average rents and management/letting fees? How recently were any of the above increased? QUESTIONS NEEDING TO BE ANSWERED
- 7. DUE DILIGENCE • What Ancillary Fees does the seller charge? – Postage, Bank transaction fees, Re-Letting Fees, Periodical Inspection Fees, Exit Fees • Is there room to add or increase any of these fees? QUESTIONS NEEDING TO BE ANSWERED
- 8. DUE DILIGENCE • Are all agency authorities/files up to scratch? • If not, what potential risk does this pose? QUESTIONS NEEDING TO BE ANSWERED
- 9. DUE DILIGENCE What is the location and type of properties being managed? How does the Geographical spread, furnished/unfurnished, houses/units, old v new affect the return on the rent roll? QUESTIONS NEEDING TO BE ANSWERED
- 10. DUE DILIGENCE • How many properties are owned by the vendor or affiliated with the vendor? • How could this potentially impact you? QUESTIONS NEEDING TO BE ANSWERED
- 11. DUE DILIGENCE • What is the ratio of Landlords to properties? • Are there a lot of multiple property clients? • What impact does this have on the value of the rent roll? QUESTIONS NEEDING TO BE ANSWERED
- 12. DUE DILIGENCE • What is the current staffing structure? • How many? • Are they any good? • Will they stay on? • What do they cost? QUESTIONS NEEDING TO BE ANSWERED
- 13. DUE DILIGENCE Will the Vendor/key staff remain for a period of time after settlement? If they don’t, what problems could this cause? QUESTIONS NEEDING TO BE ANSWERED
- 14. DUE DILIGENCE • What property management software is being used? • How easy will it be to integrate? QUESTIONS NEEDING TO BE ANSWERED
- 15. DUE DILIGENCE • Are Landlords currently being provided with services that you can’t or won’t provide? • What is your strategy for handling this? QUESTIONS NEEDING TO BE ANSWERED
- 16. DUE DILIGENCEQUESTIONS NEEDING TO BE ANSWERED Are landlords fees currently less than what you charge? What is your strategy for increasing fees whilst not losing properties?
- 17. DUE DILIGENCE • What Rent Payment methods are used? • Do you use a different method which will cause issues to introduce? QUESTIONS NEEDING TO BE ANSWERED
- 18. DUE DILIGENCE • What percentage of properties are in rent arrears and how long have they been in arrears? • How does this affect the value? QUESTIONS NEEDING TO BE ANSWERED
- 19. DUE DILIGENCE • What are the number and length of vacancies? • What problems are you taking on? QUESTIONS NEEDING TO BE ANSWERED
- 20. DUE DILIGENCE • How long has the vendor been managing the rent roll? • What impact can this have to you? QUESTIONS NEEDING TO BE ANSWERED
- 21. DUE DILIGENCE • Has the vendor purchased any rent rolls previously? • Does this pose any threat to you as Landlords do not traditionally like change? QUESTIONS NEEDING TO BE ANSWERED
- 22. DUE DILIGENCE • What has been the net growth/loss in the rent roll over the last few years? • What does this mean to you? QUESTIONS NEEDING TO BE ANSWERED
- 23. DUE DILIGENCE • Has the trust account always been balanced? • How do you protect yourself against a trust account that hasn’t always balanced? QUESTIONS NEEDING TO BE ANSWERED
- 24. DUE DILIGENCEQUESTIONS NEEDING TO BE ANSWERED Are rental bonds held for each property? What problem does this pose if not?
- 25. DUE DILIGENCE • Have regular inspections been carried out on each property? • Was there an ingoing inspection carried out for the current tenant? • If not, what problems can this cause down the track? QUESTIONS NEEDING TO BE ANSWERED
- 26. DUE DILIGENCE • How many outstanding maintenance issues are there? • Are you taking on major maintenance problems? QUESTIONS NEEDING TO BE ANSWERED
- 27. DUE DILIGENCEQUESTIONS NEEDING TO BE ANSWERED Are there tribunal hearing or insurance claims pending? How time consuming & costly will these be?
- 28. DUE DILIGENCE It is important to get answers to the previous questions so that; • You know what you are getting into and • To ascertain a fair market value for the rent roll
- 29. It is strongly advised that you or a senior property manager inspect the premises of the person selling the rent roll to validate all of the answers to the questions that you have been seeking. DUE DILIGENCE
- 30. CHOOSING YOUR BUYER • Don’t just sell to the person who offers the most money • You should only sell to someone who is at least capable of looking after your clients to the end of the contract retention period • Or you will lose more than you gained by taking a higher offer initially • Avoid selling to someone with a bad reputation or who is known to offer poor service
- 31. • The value of a rent roll is usually based on a formula which is a multiplier of the yearly management fee that each property brings into the business annually. • Generally letting fees and ancillary fees don’t come into the value of the rent roll as they are unpredictable. • Occasionally a smaller multiple may be used for letting fees METHOD OF APPRAISING RENT ROLLS
- 32. • A multiplier is simply the multiplication of the property management income not including letting and ancillary fees that a property brings in each year. • Properties can be sold at different multipliers. WHAT IS A MULTIPLIER?
- 33. e.g. Property rents for $300 per week with a 9% management fee $300 per week x 52 weeks in a year =$15,600 (income to owner per year) $15,600 x 9% = $1404 (yearly income to Real estate office from the property) $1404 (yearly income) x multiple of 2 = $2808 (value of property as an asset to business) $1404 (yearly income) x multiple of 3 = $4212 HOW THE MULTIPLIER CAN AFFECT THE VALUE OF A PROPERTY
- 34. • The multiple generally varies from 2 to 3 but in some cities it can be as high as 3.5 to 4 • There are many things that can affect the multiplier as previously discussed under due diligence • Supply and demand also has a considerable bearing on the multiple RENT ROLL MULTIPLIER
- 35. Location Multiplier Location Multiplier Sydney 3.2 - 4 Brisbane 2- 3 West Sydney 2.8 - 3.3 Gold Coast 2.5 Regional NSW 2.4 – 2.85 South Australia 2.8 – 3.1 Newcastle 3 plus Perth 2.35 – 2.95 Central Coast 2.5 – 2.85 Melbourne 2.8 – 3.5 RENT ROLL MULTIPLIERS (ACCORDING TO MACQUARIE BANK RESEARCH 2013)
- 36. MULTIPLIER A. x 3 Great management, long fixed term leases, no arrears, inspections reports thorough and detailed, maintenance excellent B. x 2.5 Standard management, generally in good condition but some maintenance and arrears issues C. x 2 Properties in poor locations, low rent values, vacancy, arrears and maintenance issues CHOOSING A MULTIPLIER
- 37. • Banks will generally lend up to approximately 50/60% of the value of the rent roll without separate equity as security • Banks will take into consideration the quality and location of the rent roll • Your ability to service the loan is also taken into account. FINANCE
- 38. CONTRACTS NEED TO COVER THE FOLLOWING ISSUES • A post sale restraint period. • A retention of payment to the seller to cover loss of properties from the rent roll. • A clause covering non payment to the seller for clients who refuse to be transferred over to you • Detail of all the documentation to be handed over on settlement CONTRACT TO PURCHASE A RENT ROLL
- 39. • Indemnity for future claims on the rental department. • Warranties from the vendor • How are rental properties which the seller owns privately, which are being sold with the rent roll to be dealt with? • This is of particular concern if the seller wants to dispose of them somewhere in the near future. CONTRACT TO PURCHASE A RENT ROLL
- 40. • Vacancies and arrears on settlement day • Agreement over access to information prior to settlement • A notification process to landlords and tenants • Continuation of business in efficient and diligent manner • If possible, permission to start transitioning management authorities before settlement CONTRACT TO PURCHASE A RENT ROLL
- 41. • Incorrect information? • GST should not be applicable as the rent roll should be sold as an on going concern • What actually gets handed over, e.g. keys, security devices, landlord details, file history notes, maintenance reports, signed authorities, condition reports, pool safety and smoke alarm certificates, all Landlord and tenant correspondence, tenancy payment ledger and all original leases CONTRACT TO PURCHASE A RENT ROLL
- 42. • Extremely critical stage • Contact with landlord, both personal and written must happen immediately • Understand that Landlords don’t like change • They didn’t choose you initially • First impression critical to build trust and loyalty • Sell the benefits of what your firm can offer • Have the previous owner involved in transition whenever possible TRANSITION POST PURCHASE
- 43. • A joint communication plan for landlords and tenants • Essential to get Landlords signed up on your authorities ASAP (preferably prior to settlement) • Issues over a difference in fees between you and previous agent • Some Landlords use this as an opportunity to exit from management as they weren’t happy and were looking for an excuse to leave TRANSITION POST PURCHASE
- 44. • Set out how you normally communicate as it might be different from previous agent • Find out Landlord expectations • Discuss changes with staff as soon as contract unconditional • Consider hiring some of the seller’s staff to make sure management agreements stick • Give reassurance to everyone TRANSITION POST PURCHASE
- 45. ASSESSING RENT ROLLS For a copy of a rent roll calculator contact Tony Morrison at tony.morrison@harcourts.com.au or on 0418 130
- 46. BUY AND VALUE A RENT ROLL LEADERSHIP programme
Editor's Notes
- PowerPoint v18Mar13
- UNCOVER Doing your due diligence when considering the purchase of a rent roll is critical. There are a number of factors to consider and questions we should be asking the owner of the rent roll to establish the value of the rent roll and whether the rent roll is worth buying. DISCOVER What are the average rents and how recently were they increased? The purchase of a rent roll is based on a percentage of the properties weekly income. Trainer use whiteboard to demonstrate If a property is achieving $400 per week and your fee is 10% the income is $40 per week for that property however at $200 per week with a fee of 10% is $20. If the rent roll is made up of properties with a higher average rent your income will be greater for half the amount of work. It is better to have 2 properties at $400 per week than 4 properties at $200 per week. It is also important to know if the rents have recently been increased, why because if the rents haven’t been increased for 12 months or more this could give you an opportunity to grow the value of your asset and increase cash flow immediately, if however they were increased recently your ability to grow the asset is limited for a period of time. What are the average management /letting fees and how recently were they increased? Things to consider: Purchase price: If the management fee is high and the whole purchase of the rent roll is based on the management fee then you are going to pay more for the purchase. Current management fees: If the management fee is low say 8% and you charge 10% it will give room for growth with out increasing the number of properties under management. Knowing whether the fees have been increased recently will help you determine whether there is room for immediate or future growth. Challenges you could face: If the previous owner only charged 7% and your fee is 9% an increase of fees may be met with some resistance from the landlord.
- No authorities, nothing to sell Include assignment clause in management authorities to avoid having to get owners to sign new authorities Ingoing and outgoing inspections reports Indemnify new owner for poor paper work in contract
- Geographical spread Houses v units Old v new Maintenance issues Furnished v Unfurnished – return v work, cleaning, record keeping
- Talk about claw back clauses or retained money clauses Talk about the risk if you don’t have these in contract How many are close personal friends of the owner or even worse family
- Recap
- What are the indicators that the staff are good? - Low vacancies and arrears, paperwork up to date Long term staff usually indicates a happy working environment What if rent roll has been managed by one property manager for 5/6 years and then the owners they go to task based team where they have three people looking after them? What are the risks? Will they feel they have lost the personal touch with their property manager? Will they feel that they are now a number, and no longer special?
- Talk about how to minimise fall out Talk about how some owners may use the selling of the rent roll as an excuse to get out of an unhappy situation They want the choice on who they go to and not be told
- Will the data have to be manually entered? Can it just be downloaded?
- All property management services are different e.g Reporting processes Payments monthly or twice monthly Options for payment for tenants Regularity of periodic inspections
- Chasing rent arrears prevents cuts back on time dedicated to growth You don’t collect rent, you don’t get paid Possibilities that high arrears allow – ability to negotiate price You could put clause in contract about arrears being below a certain figure on settlement day.
- Is the rent too high? Are the properties in bad areas? Are the landlords stubborn? Are there maintenance issues? recap
- People don’t like change What happens if the current business owner has had a large turnover of staff over the preceding 2/3 years? Will they give you a chance to show your value?
- Very small growth may indicate that although the property manager has looked after the portfolio well, they have no desire or skill to grow the rent roll. Do you up skill or off load this staff member? If the rent roll has grown rapidly over the last few years what issues could this bring? Poor service?
- What happens if the same tenant has been in the property for ten years and paid a bond but there is no record of it. Being liable for repairs when tenant moves out
- How long do the maintenance issues go back? Is the landlord the problem? Can he not afford to fix it? Is the landlord willing to fix the problem but the tenant won’t let them in
- Tribunal hearings are time consuming and require a lot of paper work Generally tribunal hearings favour the tenant. If that is the case the owner will be coming after the new business owner What if you haven’t renewed the insurance Time consuming doing paper work recap
- Vacancies and arrears on settlement day. Vacancies and arrears cant be any more than 3% on settlement and if they are what happens does it effect the seller financially. Arrears on the day of settlement have to be down to a certain amount and if not what happens. Agreement over access to information prior to settlement. This is important so you have the opportunity to have everything set up so on the day it transfers its like a press of the button. Landlords will barely notice any difference in receiving their income and tenants in paying their rent. A notification process to landlords and tenants. The person selling is going to be involved and will help you in the sending out of letters and notifying all the landlords. Note: It is in the sellers best interest to be involved in this process to ensure there isn’t a fallout rate that could have financial consequences for them on the sale of the rent roll. Continuation of business in efficient and diligent manner from the date you sign the contract to the date it settles so that once they sign the contract they don’t just go on holiday If possible, permission to start transitioning management authorities before settlement, on somas you can spread the workload over a few weeks instead of transitioning all the properties on the day of settlement. Often solicitors will discourage the addition of this clause.
- Set out how you normally communicate as it might be different from previous agent for example the previous agent may have always used telephone contact and your preferred communication is via email and are they happy for the mode of communication to change. Find out Landlord expectations in that first phone call Discuss changes with staff as soon as contract unconditional so all team members are aware of the changes ahead. Consider hiring some of the seller’s staff to make sure management agreements stick Give reassurance to everyone