What due diligence should you do when acquiring a rent roll?
Acquiring a rent roll can be a savvy way for real estate principals to diversify their business. But, as with any major financial decision, you must do your due diligence to make sure it is a sound investment.
- Rent roll value
When assessing a rent roll, the main focus is on the revenue it generates.
Begin by reviewing the rent roll’s revenue details. This includes a look at the list of properties and the income they generate. Flag any properties with longstanding arrears, as they can significantly impact the rent roll’s overall value.
There should also be other income sources like leasing fees, inspections and renewals. Compare these figures with industry standards in your area to confirm they align with similar rent rolls.
Calculate the potential additional revenue you’ll acquire against the extra costs you’ll incur to manage and fund the acquisition. This will help you work out the profitability of the purchase.
- Properties
Examine the total number of properties and their details. This will help you evaluate the quality of the portfolio and flag any properties you might want to exclude from the deal.
Consider factors such as location, management fees, weekly rent amounts, and tenancy agreements for each property. Also, assess whether the portfolio includes houses, units, or a mix of both.
Check vacancy rates and explore reasons for vacancies, such as whether a property is uninhabitable. Additionally, identify any tenants in arrears without payment plans.
Determine the ratio of landlords to properties under management, and look into any special arrangements between the seller and landlords. This information will help you understand the relationships you’re inheriting.
- Property records and file audit
Conduct a detailed review of the seller’s property management files to ensure the rent roll is well-maintained and legally compliant.
Begin by examining the lease agreements to make sure they are up-to-date and meet legal requirements. Pay careful attention to clauses relating to rental rates, potential for rental increases, bond information and tenant obligations.
The property management files should also include detailed maintenance and repair records for each property. These should show a history of any issues raised by tenants, how they were resolved and whether repairs were completed within a reasonable time and cost. This will give you insight into the current condition of the properties.
The management files should also include any documents related to safety checks, such as smoke alarms, gas and electrical safety certificates and building certification where applicable. This is especially important for commercial properties where additional safety requirements may be needed.
Finally, evaluate how organised the seller’s files are. Disorganised or incomplete records can lead to compliance issues and delays in addressing problems post-acquisition.
- Staff and management
When purchasing a rent roll, property managers, administrative staff and sales staff may be included as part of the deal. This can impact the value of the sale. Including staff in the purchase can be valuable as they may generate future sales commission income for the business without any additional cost to you. This can make some acquisitions more profitable than others.
Plus, you will benefit from their existing relationships with landlords and tenants, creating better continuity with clients after the sale has gone through.
Check that the team has the right experience and proper training. Assess how efficient the team is, their communication skills and that they stick to legal requirements. Consider the team’s local market knowledge as this will be a key factor in your being able to expand the rent roll after purchase.
If staff are not included as part of the deal, there is a risk that they may try to poach landlords or set up their own competing business. It’s important to consider this risk and take appropriate measures to protect your interests.
You will also need to consider whether your current staff handle the additional work or if you will need to take on new team members.
Buying a rent roll
Before making a decision, it can be a good idea to engage professionals for advice. Consult with a finance broker, accountant and lawyer to ensure every aspect is carefully considered before moving forward.
During this process, ask your lawyer about including causes to cover restraint of trade and retention in the purchase agreement.
A restraint of trade can prevent the seller from competing with you by establishing a new business or working for a competitor within a specified location and timeframe.
A retention clause holds back a portion of the purchase price for a set period to account for any lost clients or properties soon after the sale. It also protects you against any issues not disclosed during the sale process.
These additions to the purchase offer extra security and protect your investment, helping the process run smoothly and minimising potential risks.
If you’re looking to acquire a rent roll for your real estate business, Finance Advisory Co can help you secure the right finance. Contact Ben by filling in this online form, calling 0426 236 007 or emailing ben@finad.com.au
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