All the information you need to help you buy or sell a rent roll from due diligence to methods of appraising, contract clauses to the all important post transition.

1. RENT ROLL
(BUY, VALUE & SELL)
LEADERSHIP programme
Version 3 Sept 2015

2. TOPICS COVERED
• Why you should build a rent roll
• Buying vs Natural growth
• Due Diligence
• Method of appraising rent rolls
• Understanding multipliers
• Finance
• Contracts (clauses to protect purchase)
• Post purchase transition
• Selling a rent roll
• Rent roll analysis and calculator

3. WHY?
• To Bullet proof your business when times are tough.
• It forms the main part of your asset when you sell.
• Sales brings cash flow
• Property management brings Asset growth
• (Understand the difference between cash flow and asset growth)
• It is the best strategy for increasing profit.

5. It is worth doing a comparison of the two methods
of growth as both methods have positives and
negatives
BUYING VS NATURAL GROWTH

6. NATURAL RENT ROLL GROWTH
POSITIVE NEGATIVES
• You can control quality, location
and fees of properties
• You can avoid bad landlords
• No inheritance of problems
• The cost
• Slower growth
• Rent roll loses money for a
period of time until numbers
grow
• Capital Gains Tax issues on
sale of rent roll

7. 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
(The multiplication effect)
• More opportunities for the sales
department
• Landlord rejection
• Buying existing issues
• More often than not poorly run
• Integration issues
• Huge pressure on existing
team

8. DUE DILIGENCE
What are the average rents and management/letting fees?
How recently were any of the above increased?
QUESTIONS NEEDING TO BE ANSWERED

9. 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

10. DUE DILIGENCE
• Are all agency authorities/files up to scratch?
• If not, what potential risk does this pose?
QUESTIONS NEEDING TO BE ANSWERED

11. 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

12. 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

13. 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

14. 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

15. 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

16. DUE DILIGENCE
• What property management software is being used?
• How easy will it be to integrate?
QUESTIONS NEEDING TO BE ANSWERED

17. 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

18. DUE DILIGENCEQUESTIONS NEEDING TO BE ANSWERED
Are landlords fees currently less/more than what you charge?
What is your strategy for increasing fees whilst not losing properties?

19. 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

20. 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

21. DUE DILIGENCE
• What are the number and length of vacancies?
• What problems are you taking on?
QUESTIONS NEEDING TO BE ANSWERED

22. • Has there been a change in the market?
• Can you achieve rents that have been previously achieved?
• What sort of impact could this have on the relationship with your new
landlords if you can’t?
DUE DILIGENCE QUESTIONS NEEDING TO BE ANSWERED

23. DUE DILIGENCE
• How long has the vendor been managing the rent roll?
• What impact can this have to you?
QUESTIONS NEEDING TO BE ANSWERED

24. 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

25. 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

26. 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

27. DUE DILIGENCEQUESTIONS NEEDING TO BE ANSWERED
Are rental bonds held for each property?
What problem does this pose if not?

28. 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

29. DUE DILIGENCE
• How many outstanding maintenance issues are there?
• Are you taking on major maintenance problems?
QUESTIONS NEEDING TO BE ANSWERED

30. DUE DILIGENCE
• How many properties in the rent roll are currently for sale?
• How are they going to be handled in relation to purchase price?
QUESTIONS NEEDING TO BE ANSWERED

31. DUE DILIGENCEQUESTIONS NEEDING TO BE ANSWERED
Are there tribunal hearing or insurance claims pending?
How time consuming & costly will these be?

32. 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

33. A COPY OF PREVIOUS P/L’S
• Not always possible as the property management figures maybe
rolled in with the sales figures.
• Beneficial to see a couple of years figures to see if there are any
trends developing.
• Can help in the negotiation process on sales price.
• Sales prices are based on multipliers but you are not going to pay a
big multiplier if the department is losing money.

34. 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

35. • 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

36. • 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 within the same rent roll
but it is unusual.
WHAT IS A MULTIPLIER?

37. 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

38. • 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

39. 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)

40. 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

41. • 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

42. 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

43. • 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.
• What happens when any property is sold in the rent roll?, Those on the
market on settlement date, those that come on the market in the retention
period and those that come on the market after the retention period finishes.
CONTRACT TO PURCHASE A RENT ROLL

44. • 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

45. • A clause covering holiday pay and long service for staff transitioning.
Are there any benefits in taking on these entitlements or should you have
them paid out?
• 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

46. • What is wrong with this clause?
• “On 31 January 2015 if any of the properties that were on the
Property Management Rent Roll at the date of completion and
thereby included in the calculation of the purchase price are no
longer under the management of the purchaser, due to cancellation
in writing of the management agreements by the landlord, then the
purchase price will be reduced pursuant to value allocated to those
properties in clause…”
• “due to Notification of cancellation in writing ….”
• Furthermore any notice periods in the sellers landlord agreements
must be taken into account.
THE RETENTION CLAUSE

47. • 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
• A joint communication plan for Landlords and tenants
TRANSITION POST PURCHASE

48. • Mail and follow up with a phone call to all tenants about change in rental
payments
• Essential to get Landlords signed up on your authorities ASAP (preferably
prior to settlement)
• Essential to have new tenants on new payment methods asap so as not to
disrupt landlord payments
• Try to populate as much of new authorities as possible to make it easy for
landlords
• 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
• A personal introductory letter from the landlords new portfolio manager.
TRANSITION POST PURCHASE

49. • 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.
• Understand how different management styles from the selling
company to your company impacts any staff that cross over to your
firm.
• Give reassurance to everyone
TRANSITION POST PURCHASE

50. • 1) Rent on time (no disruptions)
• 2) Clear statements on time
• 3) Good communication
• 4) The name of their new property portfolio manager and contact
from them asap
• 5) Nothing affecting the stability or happiness of tenant
• 6) Don’t tell them that nothing will change. Show them that little will
change but the reality is that some things will change.
WHAT IS IMPORTANT TO THE LANDLORD IN THE
TRANSITION

51. PREPARATION FOR SELLING
• Authorities and all paperwork in order
• Review Management Fees
• Review rents
• Get Arrears under control
• Minimise Vacancies
• Make sure you have keys for all properties
• Have Introductory templates ready
• Have a draft of a contract ready
• Work out a rough transition plan

52. 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

53. ASSESSING RENT ROLLS
For a copy of a rent roll calculator contact Tony Morrison
at tony.morrison@harcourts.com.au or on 0418 130 563

54. BUY AND VALUE A
RENT ROLLLEADERSHIP programme