Buying a rent roll? (advice for Licensees)
Rent roll acquisition has helped Orana Property to expand to a portfolio with over 240 properties under management.
We launched during the pandemic, which saw an overall surge in sales activity in the WA property market.
Our team capitalised on this turnaround by focusing on purchasing portfolios, without neglecting organic growth.
Orana’s short-term priority has been to acquire smaller residential rent rolls (with 100 to 300 properties) in Western Australia.
Lately we’ve noticed that many smaller portfolios are available for purchase, so this could be a good opportunity for you too.
This article shares valuable advice for business owners who want to go down this path (we know how daunting buying a rent roll can be when starting out).
But first, let’s review some definitions for people who may be completely new to this.
What is a rent roll?
As you know, a property manager’s rent roll portfolio represents the collection of rental properties we handle on behalf of our landlord clients; who pay a management commission and other fees.
If you want to exit your business or reduce the number of properties you look after, you can sell your entire portfolio (or parts of it) to another real estate business.
By the same token, you may wish to expand your portfolio at a faster rate than organic growth will allow. In this case, you can buy a rent roll from another business (rent roll acquisition).
Buying or selling a rent roll is an investment strategy – you’re buying or selling the rights to manage properties in that portfolio.
Why should Real Estate business owners consider buying a rent roll?
Organic growth occurs when a real estate business uses internal resources to increase revenue. One example would be improving marketing strategies to appeal to landlords looking for property management services.
Although organic growth is a controlled and cost-effective way to grow, this process can be slow in smaller agencies.
On the other hand:
Buying a rent roll generally secures an immediate return and cash flow for your business. When tackled properly, this is a stable source of income that can also generate organic growth when clients bring on additional properties for us to manage (or via referral business).
However, this strategy isn’t for everyone – it always depends on the circumstances of your business.
Consider the size and manageability of your current portfolio, and the capacity of your team before purchasing a rent roll. It’s important that you don’t spread yourself thin and compromise your operational duties!
If your resources are limited but you want to go down the acquisition path, why not focus on buying a small portfolio? There’s no such thing as a rent roll that’s too small!
And remember, after a certain point of expansion, you may need to hire more staff.
After all, you need the resources required to effectively manage all properties in your portfolio. As you know, building relationships with landlords and tenants is no minor task. We shouldn’t rush this process because there’s too much on our plates.
It’s worth adding:
Don’t get caught up in the hype of what other property managers are doing either. Take a step back and do what suits your business. In your case, this may mean rent roll acquisition. On the flip side of the coin, it could make more sense to sell a portion of your portfolio so your workload is more manageable.
It’s different for everyone!
If you’d like to hear our tips, tune into this podcast with Alison Ringuet, Orana’s acquisition and business development manager.
What to consider when buying a rent roll
There are a number of challenges associated with rent roll acquisition, when the process isn’t handled properly. You could end up purchasing a host of problems related to landlords and tenants, if you don’t do your due diligence at every stage.
1. Research is key:
Take time to investigate the health of the rent roll you’re interested in, as well as the operational efficiency of the seller’s business.
- This will help you figure out if the asking price is reasonable.
- If there are too many red flags (such as a long list of tenant and landlord complaints) then it’s probably wise to abandon ship before signing any contracts. Otherwise you may inherit those problems.
The more effort you put into this research process, the better. Spare yourself the headache of crisis management further down the track!
Don’t simply take the buyer’s word as a guarantee, ask for evidence that shows information such as:
- Overall profitability of that rent roll
- Number of properties
- Gains and losses over the last six months to a year
- Locations of the properties. Are they in one area or spread out geographically? (You don’t want too many properties that are far from your office, as this translates to higher travel costs)
- What type of properties?
- What condition are the properties in?
- What are the management fees (are they reasonable)?
- Are the management agreements up to date?
- How many staff on the seller’s team, and are there any restrictions in their employment contracts?
- Do they currently do end-to-end management or outsource?
- How much are they outsourcing?
- What systems and software do they have in place? Is it the same as yours, or will changes need to be made?
- Frequency of rent arrears, complaints and court issues (avoid rent rolls with a concerning pattern – although some can be turned around with effective communication and processes).
- How are complaints being solved?
2. Every acquisition is different because every business has unique conditions:
For example, in one acquisition you may integrate staff from the seller’s business into your team. In another acquisition, the original property manager could be leaving and request a complete hand over. These details will be hashed out during confidential conversations with the seller.
Remember, the acquisition process can be mutually beneficial to both parties. It doesn’t need to be a complicated process either. You may not even need a broker to facilitate the transaction, as long as the terms and conditions are clear and everyone is happy with the arrangement.
“It can be quite an easy process and seamless transition once you go through the integrational and operational side of things.” – Alison Ringuet, Orana Property
3. Get advice from your lawyer and accountant:
This applies to both the buyer and seller. Even though you’re approaching this process with an open mind, don’t leave anything open to innocent misinterpretation or deliberate manipulation. It’s important to cover all bases.
An expert who specialises in rent roll acquisition will draft and review documents related to:
- Terms and conditions
- Contract of sale
- Non-disclosure agreements
- Restraint of trade clauses
- Transfer documents
- Licensing
- Retention fee
- Vendor loans (if applicable)
- Trademark matters
- Mortgage documents
- Employment agreements and more
Your lawyer will also provide advice about adding a “non-compete” or “restraint of trade” clause to the contract.
In cases where you’re buying a rent roll from a business that will continue operating, some of the landlords may be tempted to return to the seller (if they had a strong relationship). Adding a “non-compete” clause protects the buyer from that.
On a related note, have you considered that some landlords may seek property management services elsewhere – because they’re no longer liaising with a familiar agent?
It’s not uncommon for some level of churn to occur after the seller is no longer involved. Consider including a contractual mechanism that gives you a specific retention amount if you lose clients in the aftermath of the acquisition (for example five to ten per cent of the purchase price for a six month period).
4. Give your new landlord clients a reason to stay with you:
Speaking of retention, have you planned how you’re going to give acquired clients a smooth transition so they don’t consider leaving? Building trust and loyalty in these early days is critical. Make sure you prioritise communicating over the phone and in-person. You should also prepare a package that contains information about your business and what you’re offering. In some cases, it makes sense to employ staff from the seller’s agency, to ease the transition process for everyone involved.
How much does it cost to buy a rent roll?
It’s different for every purchase, there’s no set amount.
The value of a rent roll is typically calculated by applying a multiplier to the annual management income for all properties in that portfolio. This management income represents management fees and rent collection charges.
The amount for the multiplier depends on a number of factors, such as:
- Number of properties on the rent roll
- Property location and geographic spread
- Residential or commercial
- Overall condition of the properties
- Regularity of court actions
- Interest rates
- Landlord to property ratio
- Vacancy rates
- Arrears
In our experience, the multiplier tends to range from 2.5 to 3 times.
A note about financing this investment:
You may need to apply for a loan to afford the purchase cost, unless you already have access to a considerable amount of capital.
Rent roll acquisition can be financed with a secured business loan, which requires an asset (such as residential or commercial property). The amount that you’re permitted to borrow depends on your lender’s policy and the financial position of your business.
Rent roll financing isn’t different from a standard business loan, which requires frequent repayments (with interest) until the loan term ends.
Please note that stricter lending criteria has been applied to rent roll financing in recent years, so you’ll need to carefully put together a thorough business loan application, and show you’ve worked in property management for several years.
Orana specialises in rent roll acquisition in Western Australia
Orana Property has been helping residential and commercial investors to optimise the value of their assets, and we have more than 120 years of experience between us.
Our experienced team provides property management services at a more inclusive price structure. We deliver a premium service, based on each client’s unique requirements.
Rent roll acquisition is a major focus of our business. We’re actively looking for rent rolls to purchase, and we’re interested in mutually beneficial relationships. Please reach out to us for a strictly confidential conversation if you want to sell your entire rent roll, or part of it.
Request a free call back or ring 1300 509 554 to find out more.
You can also send an email to Alison Ringuet (a.ringuet@oranaproperty.com.au), or call her directly on 0499 696 166.