If you own a real estate agency or property management business, buying a rent roll portfolio is a great way to expand your business and add a reliable fixed income stream. Unfortunately, finding the financing you need to buy a rent roll can be a difficult proposition.
With tighter lending criteria limiting your loan options, it's important to plan ahead and prepare a comprehensive application to increase your chances of rent roll finance approval.
What is a rent roll?
Rent roll is the snapshot of the rents due for a particular rental property. A rent roll portfolio is the overall ledger of all rental properties in a business's portfolio that can be bought or sold to other businesses as an investment.
What is rent roll finance?
Rent roll finance is a type of commercial property lending that you can use to help purchase an existing rent roll if you don't have the capital to do so.
How does rent roll finance work?
A rent roll is an important money-making tool for any real estate business. By acquiring a rent roll from another agency, you can provide a significant fixed income stream for your own business. This is a great way to help fledgling agencies grow or allow established real estate businesses to expand, as a rent roll can help cover up to 50% or even more of your fixed business costs.
However, unless you have a substantial amount of capital to work with, you'll need to borrow money to help cover the purchase price of a rent roll portfolio. This is where rent roll finance comes in.
Rent roll finance allows you to borrow up to 60 or even 65% of the purchase price. There are fixed- and variable-rate finance options available, and the money you borrow can typically be repaid over a term of up to 10 years.
Unfortunately, rent roll finance has become subject to tighter lending criteria in recent years. Not only is it important to shop around and compare your finance options, but you'll also need to make sure you prepare a comprehensive business loan application that meets all the lender's criteria.
Is your business eligible for rent roll finance?
While lending requirements vary, you will generally need to meet the following criteria in order to qualify for rent roll finance:
- Minimum of three years property management experience
- Hold a current real estate licence
- Have a property you can offer as security
There's also plenty you can do to maximise your chances of rent roll finance approval, including:
- Having solid equity in your business. The more equity you have in your existing rent roll, the better your chances of approval.
- Having good cash flow. Sufficient cash flow is essential as it demonstrates your ability to manage a rent roll efficiently and generate a profit.
- Preparing a business plan. You'll need to provide a realistic business plan that includes cash flow and profit forecasting. This will help the lender assess your ability to achieve your future business goals.
- Providing financial evidence. Ask your accountant to prepare detailed profit and loss reports and balance sheets for the past two to three years.
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How can you compare rent roll finance?
You'll need to consider the following features when comparing your rent roll finance options:
- Loan amount. Depending on the lender and your financial circumstances, you can generally borrow up to 65% of the rent roll purchase price or the bank valuation, whichever is lower. If you need to borrow more than $5 million, applications are generally approved on a case-by-case basis.
- Loan term. Maximum loan terms of up to 10 years are available.
- Interest rate. Compare interest rates across a variety of finance options to see which will be the most affordable and best suit your repayment capacity. There are fixed and variable loan options available, so make sure to compare apples with apples.
- Loan repayments. Familiarise yourself with the repayment schedule attached to your rent roll finance – what is the regular repayment amount and is it affordable for you? You can make principal and interest repayments only, while some lenders will allow you to make interest-only repayments for up to three years.
- Fees and charges. Read the fine print closely to make sure you're aware of any upfront charges and ongoing fees that will apply to financing.
- The lender. It's also worth considering what other features the lender can offer you beyond the actual loan facility. For example, does the lender specialise in financing for the real estate industry and can it offer additional information, tools and advice to help you grow your business.
What are the risks of rent roll finance?
There are a few key risks you should be aware of before you apply for rent roll finance:
- Biting off more than you can chew. Can your business afford to effectively manage all the properties on the rent roll? Do you have the time, staff and resources to provide the same high standard of service to your new clients? You need to have a detailed plan in place that outlines how you plan to care for the new properties.
- Not knowing your new landlords. When you buy a rent roll, you instantly end up with a host of new landlords on your books. Unlike clients you acquire organically, you won't be able to meet with these new landlords and find out what they want in a property management provider. You'll need to find out what sort of care those landlords have been accustomed to and determine a way to ensure that they continue to receive the same attention.
- Neglecting your existing properties. While you're spending all this time getting to know your new landlords, don't forget about your existing clients. Make sure they receive the same high standard of care and attention they are used to so that they don't feel the need to look elsewhere for property management services.
- Borrowing more than you can afford to repay. You should also be careful not to borrow beyond your means. Do your due diligence and prepare a comprehensive business plan to avoid taking on a loan you can't afford to service.
How are rent rolls valued?
Before approving any application for rent roll finance, the lender will need to have the rent roll assessed to determine its market value. This is commonly done using a formula known as a Rent Roll Multiplier, which works by applying a multiplier to the annual management income associated with the rent roll. The annual management income is the total amount earned from management fees and rent collection charges (excluding GST).
Once the overall annual management income for a rent roll has been calculated, a multiplier is applied to calculate a fair purchase price. This multiplier is affected by a number of factors, including:
- The average annual rent and management income for each property
- The number of properties on the roll
- Whether those properties are owned by single or multiple owners (landlord to property ratio)
- Where the properties are located and their geographical spread
- Whether the properties on the roll are residential or commercial
- How desirable the properties are and their overall condition
- Arrears and vacancy rates
- Current court actions
- The length of time for which the rent roll has operated
- Current interest rates
- Legislation compliance
Based on the above factors, a multiplier of between 2 and 3 is usually applied. However, in major cities like Sydney, the multiplier could be as high as 3.5 or even 4.
Rent roll finance FAQs
How much can I borrow?
This varies between lenders and depends on your business's financial position. Some lenders have a maximum loan-to-value ratio (LVR) of 40%, while others will let you borrow up to 65% of the rent roll purchase price.
Should I refinance existing debt before I apply for rent roll finance?
This may be a worthwhile option for some businesses. Refinancing any existing loans against your current rent roll could help you reduce your debt and therefore increase your borrowing power to help you buy a new rent roll.
How can I get help to find the right finance option?
You may wish to engage the services of a commercial finance broker that specialises in real estate lending and rent roll finance.