When you make an investment in a rental property, you are purchasing not only the real estate itself but also the income that will be generated by the property. Using a metric such as price-per-square-foot to estimate the worth of a home is a straightforward and relatively simple process. Nevertheless, determining the value of the revenue stream by employing a rent roll is a little bit more challenging, particularly in times of unexpected market conditions or economic volatility.
Before you buy or sell a rental property, read this guide to learn how to interpret and make use of a rent roll to assist in estimating the property’s true market value.
What Exactly Is a Rent Roll, Though?
The rental income generated by an investment property is detailed on a rent roll. It can be built for any kind of income-generating real estate, like single-family homes and apartment complexes, as well as commercial properties like office buildings and shopping malls, and even land that is rented out for agricultural purposes.
Some people consider a rent roll to be a straightforward document. However, the data contained within a rent roll is factored into important financial performance calculations for rental properties. These calculations include the net operating income (NOI), the internal rate of return (IRR), the gross rent multiplier (GRM), and the capitalization rate.
Why Is Maintaining a Rent Roll Necessary?
What you are actually purchasing when you make an investment in rental real estate is the income that will be generated by the property. Because of this, a real estate investor will generally place a higher value on a turnkey rental property that is already producing money rather than a vacant home that needs to be rented out to someone.
The rent roll of a property, assuming it has been properly organized, will provide a real-time perspective of the gross cash flow that is being generated by the asset. On the other hand, a rent roll will help you understand whether the gross rental income is expected to remain the same, increase, or even decline in the not-too-distant future. This is an extremely crucial consideration.
Rental property owners, potential buyers, and lenders can quickly determine whether the gross income recorded on the profit and loss statement (P&L) is true and accurate by comparing the rent roll to the income component of the P&L.
Who Takes Advantage of Rent Rolls?
Examining a rent roll that is accurate may be beneficial for a great number of different people and organizations. If you are considering refinancing the property, the document will be of interest to the lenders because they will want to know the property’s previous income as well as its predicted income. It is possible that some government organizations will demand it, and any property managers that you employ to manage your investment will also require it.
Furthermore, because it demonstrates the property’s earning potential and whether or not it has been consistently generating cash, a rent roll is something you should ask to see if the property in question is one that you are considering acquiring.
When considering whether or not to make an offer on a piece of real estate, prospective buyers will look at a number of criteria, one of which is the rent roll. The investor will examine the existing data and look into the possibility of boosting the amount of rental income the property generates.
How Potential Buyers Make Use of a Rent Roll
If you are a potential purchaser looking at a home that is currently on the market, the rent roll will show you the amount of rental money that should be collected and how much is really being collected. You will also learn from the rent roll report the likelihood that the income being generated by the property will continue in the foreseeable future.
How Long Have the Current Tenants Been in Their Tenancy?
You may find out how “seasoned” the tenants are by looking at the rent roll. Tenants who have been living in a home for a longer period of time are more likely to continue paying the rent, less likely to cause problems than new tenants, and more likely to extend the lease when it comes up for renewal.
A “seasoned” tenant is one who has lived in the rental property for at least six months, has never been late or short on rent payment, and meets all of these requirements 100% of the time. However, as was pointed out earlier, the more time a renter has spent living in the rented space, the better.
Is There a Problem With the Rent Being Paid Late or Not at All?
You will be able to determine, by inspecting the rent roll, whether or not the monthly rent is being paid on time and in full by each tenant in accordance with the terms of the current lease agreement.
If a tenant in one of the units, for instance, has been consistently late with their rent payments over the course of the past year, this is an indication that they are having financial difficulties and may need to move out sooner rather than later or risk being evicted.
Is There a Way to Boost the Amount of Cash That Is Coming In?
There is a possibility that the rent roll will disclose chances to boost cash flow. For instance, if the existing rent rates are much lower than market rates, it would be a simple and practical approach to boost profitability to raise them to market rates when the lease expires.
Will there be a continued influx of cash?
Take, for instance, the scenario in which you are purchasing a multifamily dwelling consisting of four apartments (a “fourplex”) in the month of September and three of the four leases are set to run out before the end of the year. If none of your leases can be extended at a price that is at least equal to the one currently being charged, you will almost certainly have a negative cash flow come January.
In a scenario such as this one, a smart buyer would make it a condition of the sale that the seller renews any leases that are about to expire. This would ensure that the property maintains at least the same amount of rental revenue even after the escrow process has been completed.
Are the Occupants of the Property Seasoned?
You may also find out how “seasoned” the tenants are by looking at the rent roll. The length of time that a tenant has lived in the property, and by extension, how probable it is that they will continue to pay the rent, is what is meant when we talk of “seasoned” tenants.
A tenant is considered to be seasoned once they have lived in the rental property for at least six months, during which time they have paid the rent in whole and on time every month. If our fourplex were used as an example, you would place a higher value on the property if every tenant had been renting there for two years, as opposed to the property only being occupied for two months at a time in each unit.
Is the Agreed-Upon Amount of Rent Being Paid Each Month?
You will also be able to determine, by looking at the rent roll, whether or not a renter has been paying the rent in accordance with the terms of the lease agreement.
Getting back to our fourplex, it’s possible that the same people have been living there for the previous two years and occupying all of the units. However, if two of the four tenants have been routinely late with their rent payments this year, there is a good chance that at least one of the other tenants will “go bad” and leave the property sooner rather than later, necessitating an eviction.
Are You Able to Enhance the Flow of Cash?
When you look at the rent roll before you buy the home, you can find hidden chances to create additional monthly income. This can help you decide whether or not to acquire the property.
If the existing rents are much lower than the market and the lease is about to expire shortly, for instance, you might be able to raise the rents to the market rate. If the present tenant is unable to pay the higher market rate, you can simply allow the lease to expire and look for a new tenant who is willing to pay rent that is in line with the fair market rent.
Understanding the Existing Cash Flow
Suppose, for instance, that in the month of January you were interested in purchasing a multifamily building that contained four units. You are going to examine the rent roll for the property, and this will show you the dates when each of the active leases is going to run out.
If all four leases are set to expire in February, then it is likely that you will have many vacant units, which will have a negative impact on the cash flow of your business. Even if this is not a deal-breaker for you, at least now that you have this information, you can plan for the decreased cash flow.
A shrewd purchaser might also make it a condition of the sale that the seller extends any leases that are about to run out. This ensures that the property will continue to bring in at least the same amount of rental revenue once the escrow process is completed.
What Are the Four Primary Applications of a Rent Roll?
The following are primary applications of a rent roll.
#1. Gain a Rapid Understanding of the Performance of the Property and the Gross Rental Income
As was just mentioned, the report provides a concise summary of the current gross rental income. Additionally, it outlines the tenancy periods and compares the actual rent collected to the rent that was anticipated. Because of this, landlords are able to analyze their tenancies and income levels in an effective manner to gain an understanding of vacancy times and to compare predicted gross income over a time period to actual income received.
#2. Examine Both Your Current and Previous Tenancies
Additionally, property managers and landlords can utilize it to obtain insight into the tenancy history of a property by utilizing its various features. This includes studying the specifics of vacancies, such as their length and duration, as well as evaluating the dates on which leases are set to expire.
If a landlord discovers that a tenant’s lease is about to expire, they have the option of contacting the tenant in order to offer them an extension of their present lease or beginning the process of showing the property and looking for new tenants. This enables them to reduce the amount of time that positions remain vacant.
#3. Carry Out Some Market Research
The rent roll contains essential information such as the total square footage, the number of bedrooms, and the number of bathrooms, in addition to the total rent. Because all of this information is contained inside a single report, landlords have the ability to easily compare their properties, or possible investments, to other properties on the market that are comparable in nature. Using this information, they will be able to verify that the asking price for the home is realistic and calculate an appropriate and affordable monthly rental fee.
#4. Analyze Prospective Investments
When assessing a possible real estate investment, the rent roll is an essential piece of documentation to have on hand since it offers a current snapshot of the gross rental income generated by a property.
How Property Managers and Landlords Can Benefit from Using a Rent Roll
A rent roll can be used by rental landlords and property managers in many of the same ways that it is used by buyers, including the following:
- Examine a rent roll that is kept up to date and be able to detect at a glance if a renter is behind on the payment of the rent; if so, apply a late fee and send a notification to the tenant to document the late payment.
- Find out which leases are about to run out and get the unit ready for pre-marketing in case the current tenant decides not to renew the lease.
- When the tenant’s lease comes up for renewal, compare the rent that has been received from them to the rate that is currently being offered on the market, and decide if there is an opportunity to increase the tenant’s rent.
- Examine the refundable security deposit that a tenant has paid in order to determine whether or not there are adequate funds available in the event that the renter causes damage to the property that goes beyond what is considered to be normal wear and tear.
How a Rent Roll Is Used by Lenders and Tax Collectors
Lenders utilize a rent roll to gain an understanding of the property’s historical, current, and prospective sources of income.
For instance, if over the past few years a property has been consistently generating rental revenue and the tenants have had years of experience, a mortgage broker or lender may see little risk in providing a loan for the property.
On the flip side, if the rental property has a history of high tenant turnover and an increasing vacancy rate, it is possible that there is a problem with the property management firm, the process of tenant screening, or the rental property itself.
The tenant is required to pay a monthly rental or use tax, which the landlord is required to collect from the tenant and then pay over to the local department of revenue in many different jurisdictions. In the event that the landlord is ever subjected to an audit, the tax collector will examine the rent roll to determine whether or not the property owner has been collecting and remitting the rental tax in accordance with the mandates of the applicable local statute.
A Step-by-Step Guide to Making a Rent Roll
Using a spreadsheet application such as Microsoft Excel, it is simple to generate a rent roll for an apartment complex. Simply give the rows and columns the appropriate headings and then enter the data as it is gathered one piece at a time.
Because it is created to meet the specific needs of the landlord, the information that is included in the rent roll can vary, but a good rent roll includes certain general information about the tenants and the property.
The Heading of the Document
This section of the spreadsheet will be located at the very top, and it will contain any identifying information that pertains to the property owner as well as the investment property.
- The owner’s given name of the property
- Where the rental property can be found
- The name of the property manager or management business, if necessary.
- Particulars of the Unit
There needs to be a specific row for each rental unit that includes the following categories of information:
- Number of units: This number needs to correspond to the unit number that is listed on the lease agreement, such as Apartment #1 or 3A.
- Square footage: In terms of square footage, how big is the apartment? When comparing the rent values of this property to those of other units in the vicinity, this information is helpful.
- Count of bedrooms and bathrooms: This will be helpful in determining whether or not you are charging the appropriate rent for the unit given its current market value.
- Security deposit collected: When they moved in, how much money did you collect from them? The cost of the first month’s rent should not be included in this total.
- Amount of money owed for rent: When the rent is collected, how much does the tenant have to pay for their portion?
Read Also: Rent Abatement: All You Need To Know
- Money collected for rent: Include the day that the rent was collected, the amount of rent that was collected, and the method that was used to pay the rent.
- Lease start date: Include the date that the lease was initiated as well as the date that the initial payment of rent was collected.
- Lease end date: If the lease has a termination date, enter that date. If there is no termination date, enter the current month and year.
- Additional tenant expenses: Take note of whether or not the renter will be responsible for any additional costs, such as those associated with building upkeep or utility costs.
- Additional information regarding the unit: This is the space where the landlord has the option of writing any comments they may have regarding the unit, such as an upcoming rent increase or renovations that have either been finished or are slated to be done on the unit.
- Rent Totals: This is the total amount of rent that might be collected from the property each and every month or each and every year:
Rent collected on a monthly basis is calculated by adding up the rent paid by each tenant on a monthly basis.
Rent collected for the entire year The amount of rent collected for the entire year can be determined by multiplying the total monthly rent by 12.
Rent Roll FAQs
What should a rent roll include?
Information on a rent roll comprises whether or not a unit is occupied, the identity of the tenant, the tenant’s payment history and the amount of the security deposit being retained, the length of time the renter has leased the property, and the end date of the current lease.
Are rent rolls profitable?
In reality, the average profit margin has decreased from 16,8% in 2014 to 15.4% in 2016. As more fixed-fee real estate agencies and low-cost rivals enter the market, maintaining the profitability of your rent roll is crucial for the survival and growth of your company.
How is a rent roll useful to a property manager?
Landlords and property managers use rent rolls for the everyday management of properties. They can be utilized to examine projected rental income, actual rental money collected, and the potential for rent increases based on the area’s fair market rent.
