Is Purchasing a Rent Roll a Good Business Decision for Your Real Estate Business?

For real estate businesses who are looking for fast yet reliable growth, purchasing a rent roll can look like an attractive solution. However, there is more to buying a rent roll than simply adding more properties to your properties under management (PUM). 

Things to Consider  

As with any business decision, there are both benefits and downsides to purchasing a rent roll. With the right rent roll purchase, you may enjoy an improved cash flow, scalability, improved profitability, and potentially the increase to your overall agency value.  

While property sales have been volatile since the rapid rise in interest rates, rent rolls continue to provide steady cashflow and stability for real estate businesses. Increasing the size of your rent roll could create further resilience during challenging times. 

The current real estate climate in Australia means there are fewer properties on the market than there were 2 years ago. This means there are less investment properties available to rent – and with interest rate rise uncertainty, many investors are cashing out – adding even more stress to the rental market.   

On the plus side and according to data from Core Logic, the value per property from a rental perspective has risen as low vacancy rates push rents ever higher. For your property management department, this can mean you are getting a better income from fewer properties. 

One of the biggest impacts a new rent roll can have on your agency is on your property management team. Depending on the number of PUM you are adding to your existing rent roll, you may have to bring on new staff members, or depending on the terms of the rent roll transaction, integrate both the rent roll and some legacy staff from the vendors agency.  

There is also the risk of losing a percentage of managements during the transition from one agency to another although this can be mitigated to a degree through retention clauses in the purchase contract. 

Valuation Methods 

There are several methods used to value a rent roll, the most common being the multiplier method. This method considers the total annual income generated by the rent roll and multiplies it by a set number (typically between 2.75 – 3.75 depending on location) to determine the value of the rent roll.     

Read more about valuation methods for Rent Roll transactions here.  

Buying a Rent Roll Versus Growing Your Rent Roll 

Purchasing a rent roll can be a way to grow a real estate business quickly. First and foremost, it provides a steady stream of income through management fees. It is fast and depending on your capacity to borrow, you can add a substantial amount of value to your business in a very short amount of time. 

Growing your rent roll organically through sales and marketing obviously costs less up front, but you will spend time and resources to make the same gains. It takes time so if you are looking to scale quickly, you would need to invest in sales and marketing campaigns – which can be costly, with unpredictable results. 

Of course, it is possible to do both at the same time if you want to ensure consistent steady growth for your agency. 

Other Things to Consider 

Purchasing a rent roll is not as simple as it sounds. There is a lot of administrative work which needs to be considered. For example: 

• If the rent roll you are purchasing is part of the vendor’s exit plan, you may also be taking on some of the staff associated with the rent roll. 
• It is the vendor’s responsibility to notify property owners of the change. As the buyer, you will need to create communication to welcome them to your agency – and maintain or improve the property management experience for them in order for them to retain you as the managing agent. 
• Renters will also need to be notified of the change and of any alterations to how they interact with you for rent, maintenance or other issues.  

Financing Options 

Sourcing finance to expand a real estate business can be challenging. However, as with any other kind of loan, having a broker who understands the commercial aspect of loans can be a distinct advantage over attempting to do it yourself. They will know – based on your current circumstances, your business goals and your borrowing capacity – where you are likely to get the terms and conditions that specifically suit your business. 

If you are looking to expand your real estate business by increasing your PUM, speak to a broker who understands real estate, rent rolls and who can guide you through the process of financing your business growth so you can confidently make decisions that are right for your circumstances. 

Credit Representative 541104 is authorised under Australian Credit Licence 389328.  Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.