4 Critical factors when buying a rent roll
O*NO! You’re thinking of buying a rent roll but have never been through the process. You may be thinking of going out on your own, or perhaps looking to expand your already successful agency. These are the most critical things you need to know before taking that leap.
Due Diligence
Whilst many hear due diligence and think snooze fest, it is critical. But what is due diligence? In a nutshell, you are checking whether the vendor’s claims as to the state of their business are in fact true so you can determine if the asking price is fair. Whilst due diligence is time consuming, it is an absolute must have in any purchase. Just like you wouldn’t buy a second hand car without having a mechanic look over it first, you should never buy a rent roll without first looking under the hood.
Multiplier
The multiplier is the magical number that determines the value of the rent roll. You then times the gross annual management fees by the multiplier to get your purchase price.
Example: $148,680 (annual management fees) X 2.85 (multiplier) = $423,738 (rent roll value)
Whilst it is not rocket science, the multiplier is determined by way of valuation and takes into consideration many factors, such as:
Averages: Averages of annual rents and management income.
Management Terms: Term left to run on the management agreements and the authority given to the agent.
Portfolio Location & desirability: Where the properties are located with reference to the office and other properties in the portfolio.
Ratio: The number of landlords vs the number of properties under management.
Relationships: How close the relationship is between the vendor and their landlords and whether there are special circumstances.
Property type & condition: Mix of houses vs units and their condition.
Systems: How systematised the collection or rent and other management tasks are performed.
The retention
We all know that relationships are central to real estate agents. Many clients of ours do not do business with the brand, but the person. When buying a rent roll, you are attempting to buy these relationships. Not all landlords will want to stay – there is always a level of churn. When buying your rent roll, you need to address this churn (known as ‘lost management’s), by putting in place a mechanism where you get a ‘refund’ for the managements lost. This is done by way of a retention period and a retention amount. If you lose managements in the retention period, you will be refunded part of the purchase price, up to the capped retention amount. Whilst these numbers vary per transaction, it will depend on the type of rent roll and your area, but a rough guide is a 3-6 month retention with 5%-10% of the purchase price ‘at risk’ as the retention amount.
The restraint of trade
To protect the asset that you just paid a hell of a lot of money for, you need to ensure that the vendor won’t compete against you. Imagine paying for your shiny new toy, then having the former principal swoop in and take it from underneath you. To protect your new business asset, you must ensure that the vendor will not steal their clients back. As mentioned above, relationships are key in our industry and must be protected. You will also want to restrain the vendor from taking your new staff and luring them over to their new venture.
Your next steps
Looking at buying a rent roll in the next 12 months? Book a FREE 10 minute chat with our real estate agency law experts today.