Almost the first question asked by rent roll owners when they contact me is “what’s my business worth”? While there is a simple formula for estimating value, appraising a real estate rent roll business can be a complex process and there are many factors that will impact the result and influence what a buyer is prepared to pay.
As the third part to our rent roll series, today we delve into pricing your rent roll business. If you missed the second part of the series, you can catch up here.
basic appraisal of a rent roll
At its simplest, the value of a rent roll is determined by:
AAMI x number of properties x pricing multiple
AAMI = Average Annual Management Income and is the average income you receive per property, per year, so the higher the better!
AAMI = Weekly Rent / 7 x 365 x management fee [ex-gst].
Then multiply your AAMI by the number of properties in the portfolio to calculate your yearly income.
This is the number of properties/lettings being sold in the portfolio, remembering that multi-letting properties are included as the total number of lettings and not just the one address.
This is expressed as say $3.00 per every $1 of management fee income. For example, if a portfolio had $400,000 in annual management fees, then the estimated price for that portfolio would be $400,000 x $3.00 = $1,200,000.
If you need a hand with finding your AAMI or pricing multiple, you’ve come to the right place- simply contact our agency broking experts to get started.
While that all looks pretty straight forward, the real question is what are the factors that influence the value drivers of the pricing multiple and what buyers are prepared to pay?
Below are several factors buyers will consider when making an offer to purchase a rent roll.
As noted above, the higher the better. A higher AAMI means higher income to the owner and that will help drive a higher pricing multiple.
location of the portfolio
Some areas will be more sought after than others by buyers [think inner city suburbs and growth regions for example].
There are also differences in value between metropolitan and regional areas, since there are generally fewer regional buyers and financiers may not lend the same amount for regional businesses compared to metro locations.
How spread out are your properties? As with everything in real estate, location matters and you need to not only consider the location, but also the geographical spread of the properties.
Think of it this way, a condensed rent roll means less travel between properties, which is easier and cheaper to manage than one that is spread out.
property management fees
The management fees charged by the agency for handling the properties can impact the value of the rent roll. Higher management fees may indicate a more profitable business, while lower fees may indicate that business has been ‘bought’ and landlords are perhaps not as loyal to the business.
multiple property owners
A concentration of landlords that own multiple properties [say 4 or more] will negatively impact the value of a rent roll, as losing one landlord will mean losing multiple rental properties.
For example, if a portfolio had 140 properties and had 2 landlords with 8 properties, one with 6 and 2 with 4, that’s 30 properties or 21% of the portfolio sitting with 5 owners.
rent arrears and vacancies
The presence of significant rent arrears or high vacancy rates can lower the value of a rent roll due to potential cash flow issues and added challenges and workload for the owner.
owner’s involvement and property management [PM] staff
How involved is the owner with their landlords? Do they make the effort to keep in contact, or is it all left to the PM team?
If it’s the latter, are the PM team willing to work for a new owner, or is there a risk that they will leave?
Given this risk, it’s essential to understand how the rent roll is managed and what can be done to provide a stable transition.
other fees charges
The other fees and charges paid by landlords [that form part of the rent roll income] will be assessed by buyers and potentially impact what they are prepared to pay.
These fees include letting fees, administration fees and inspection fess which can be around 20% of the annual management fees charged.
These fees are not directly included in the pricing formula above, but if an agent has been successful in legitimately recovering costs through additional fees, then this can add significant annual income.
The overall state of the real estate market, rental demand and the broader economy will also play a role in what a buyer is prepared to pay.
The potential for growth and expansion of the rent roll business, such as through marketing efforts, acquiring new properties, or expanding the property management services, can add value.
While it is difficult to obtain actual comparable sales information… doing your homework to understand what is on the market [as well as the bank’s lending attitude to certain locations and business types], will provide a baseline for your pricing considerations.
seller’s intention post sale
What’s happening with the actual sellers of the business? Are they retiring and getting out of the business, or are they staying in business in the local area which could potentially create a retention risk for properties in the future?
Having considered the factors above, what you can see is that with each of these, there is a risk the buyer considers as they evaluate what multiple of management they are prepared to pay to earn that revenue into the future.
Understanding these factors and doing what you can to avoid potential risks in the eye of the buyer, will give you the best chance of maximising your price when it’s time to sell your rent roll.
To achieve the best result, its essential to consult with experienced business brokers, real estate professionals, or financial advisors who have expertise in appraising rent rolls.
They can help you conduct a thorough evaluation of the portfolio to arrive at a fair and considered price based on the specific attributes of the rent roll business.
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