How to tell if a rent roll is the right fit for your business

In a recent REB masterclass, “How to build your rent roll, fast”, the director of Starr Partners Windsor, Adam Buchert; the co-founder of Managed App, Thom Richards; and Real Estate Dynamics’ Dean Yeo all discussed the questions that business owners need to be asking if they want to go down the path of buying a rent roll.

“You do need to look under the hood, because it is a major investment that you’re making and it can go horribly wrong,” began Mr Yeo.

He argued that potential rent roll purchasers should consider the same questions of a rent roll as they would ask when they go to take on a new landlord.

“A lot of the time, it’s the same thing,” he summarised.

Mr Richards added that looking at the quality of landlords and whether the rent roll would fit into the business’s processes are important factors.

“Even if that rent roll is a perfect fit for me, I’ve still now got to look into retention periods and multiples and compare the process of previously traded portfolios in the area,” he said.

For Mr Buchert, who has looked into purchasing rent rolls on multiple occasions, profit is a key factor.

“Obviously, we’re looking for the best or the most profitable rent rolls,” he weighed in.

“If we’re going to have staff and space rented and that sort of stuff, we want to make sure that those rent rolls are going to be profitable.

“We have a benchmark that we’re always aiming to achieve: average annual management income — AAMI.

“We try to get as close to $1,500 per annum as our AAMI.”

He then stated that that’s his business’s “first flag”.

“If we get sent something by Real Estate Dynamics — or one of those — if they send us a rent roll and it’s got an AAMI of $900 a week, we would go ‘thanks, but no thanks.”

Another thing that Mr Buchert looks for, while not calculated in multipliers, is the “residual phase”.

In his opinion, what landlords and business managers have been able to build into the business “are a really big thing for us”.

He explained it as an indicator “as to how that business is being run”.

“Because if they can have a really successful method of bringing those fees into that business, then it means that they’re generally a pretty good operator, and so we’ll be always looking at what the residual fees are as well as the AAMI,” he continued.

The third major consideration, from the director’s perspective, and one which can pose a big red flag is: the number of managements per landlord.

“We see that as quite a big risk,” he commented.

“Our model is driven around mum and dad investors who have one home because we see safety and security in that.”

On the other hand, “if we have institutional investors with four-plus [properties and] there’s lots off those in a rent roll, we will negotiate the multiply down on that”, Mr Buchert considered. And then, generally, how we’ll look at the other red flag that we look for is the number of managements per landlord.

But despite the red flags, Mr Buchert did concede there’s no hard and fast rules.

“There’s a couple of factors that might make me accept a lower AAMI. One would be the technology they’ve got in the business, and they might already be running their rent roll a lot more efficiently than us. They might have one property manager looking after 350 properties because of their new technology — and so they can do it for that,” he offered.

Mr Buchert went on to note that there are other things that he also looks at “from a sales business point of view”.

Those considerations might be if it’s in a geographic area that really suits his business growth model, or where the agency is looking to push.

“We’re happy to probably take a haircut on the AAMI to get into that suburb,” Mr Buchert conceded.

According to Mr Richards, it’s also worth keeping in mind that “when you look at profit, it’s measured as a percentage, not a dollar figure. If you look at a return on investment, it’s never a dollar figure, it’s a percentage.”

He argued that if he was looking at a rent roll and saw something that was below his AAMI, he’d “be looking at, what is the profitability of that business like?”

“How many maintenance tasks have been going through that property? What’s the vacancy rate like?” he queried.

From his perspective, if there’s lots of maintenance, a property manager is spending a lot more time on the properties without charging a higher fee.

If a business owner is spending a lot more of their time and energy and resources in that regard, then their profit is “coming down”.

“If I’ve got lower average fees, but the amounts of energy required to manage that portfolio is pretty consistent or low, then I know that my profitability can be still pretty good, even though the target’s lower,” the proptech platform co-founder countered.

The sentiment led Mr Buchert to offer up his own strategy for due diligence — even though “it might be seen as a little bit extreme”.

He said: “Once we get to the point where I can get a list of the addresses, I’ll spend two days driving around looking at those properties.

“I’ll take two days out of the office and just drive.”

Explaining that it does give him an idea as to whether properties are being maintained, Mr Buchert said it’s also a less tangible way to tell whether a rent roll would be a good fit, and allows him to take note of his “gut feeling” about the business decision.

To learn more about whether growing or buying a rent roll is the right decision for your business, click here.