A Rent Roll is the term used to describe the business of property management and the income it derives. A real estate agent will manage an investment property on behalf of a client and will charge the investor a percentage of the rental income to do so. While many agents charge various fees, a figure of 8% per annum could be considered average for residential properties of an individual nature.
So, if a property is rented out at $30,000 per annum, then the fees the agent collects will be $2,400 per annum. If an agent has say 100 properties, then this income will be $240,000 in gross revenue for their business. Rent Rolls are considered a stable business with obvious recurring revenue and many agents will want to purchase other rent rolls to expand their own business.
Alternatively, they may wish to borrow against the value of the rent roll to expand their business organically with further marketing, a larger office and new staff salaries.
Given the recurring nature of the revenue, rent rolls are usually valued at market rates by professional valuation firms prior to finance being provided. For well run businesses, a valuation could be in the range of $2.50 to $2.80 per dollar of rental commission.
So, on our example above of a business with 100 properties generating $240,000 of commission, this business might be valued at $2.50 x $240,000 = $600,000.
The rent roll business owner may be able to access from 65% to 70% of this value ($390,000 to $420,000) for the purchase of a second rent roll, or for expansion purposes.
Bear in mind though, that other tests can apply to this number. For example, it’s likely that the bank will not want to lend more than 2.5 times the EBITDA of a business, even though they may lend ‘up to’ 70% of the valuation.
For example, let’s say that our firm above has an EBITDA of $150,000. This means that the maximum borrowing for the business will be $150,000 x 2.5 = $375,000. So, despite up to $420,000 being available, this business can only borrow a maximum of $375,000.
When applying for rent roll finance, there will be a range of requirements from a bank including understanding any arrears and management programs, locations of properties, experience of the team, the software systems being used for rental management and payments as well as the overall financial performance of the business compared to industry norms.
7 thoughts on “Financing Rent Rolls”
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