Not all rent rolls are created equal - What's yours worth?
When the days turn into a grind and retirement is on the brain, agency owners turn their attention to their rent rolls.
Rent rolls are a beautiful thing. They won’t walk out the door like your best sales agent can, it’s relatively immune to economic cycles (notwithstanding viruses) and there’s a very active market to sell into when the time is right.
So what’s your rent roll worth? We all know what the back of the envelope says - Average Annual Management Income (AAMI) multiplied by a range of 3 - 4 times.
But there's a lot that isn't baked into your AAMI figure that will affect your sale multiple. The difference between a low and a high multiple will be determined by the positive and negative attributes of your rent roll. Some will penalise your multiple and others will push it higher.
Below are some of the more important factors
Vacancy Rates
That AAMI figure you calculated earlier, is annualised, meaning you take your weekly or monthly figure and multiply it by the number of weeks or months in a year. It doesn’t factor in the vacancy of your owner’s properties, hence the vacancy rate is the first thing that will knock down your multiple from the top end of the range.
By how much will depend on how high your vacancy rate is. Try and keep it around 2-3% to avoid a heavy multiple discount.
Arrears (negative score)
Money and time are inextricably linked. Given a rent roll's income is derived from the owner’s rental income, a normalised arrears rate of 20% every month means that your agency’s revenue will be down by 20%. This is a cash flow thing - Even if you manage to collect last month's accounts receivable you'll have the same problem the following month. If you're constantly under collecting this problem will get even worse.
A high arrears rate also means more work for your property management team, a lot more work; following up tenants, potentially sending eviction notices and attending civil tribunals to name a few.
Owner Concentration (negative score)
Imagine if your rent roll had 100 properties on it and just one of your owners owned 50 of those properties. Now imagine if a competitor down the road offered your big owner a sizable discount to manage his portfolio. The problem you face is one of customer diversification. One of your customers controls 50% of your revenue and could potentially walk out the door with maybe 30 days notice.
Benchmarking is tricky here, but a general rule of thumb is one customer shouldn’t account for more than 10% of your revenue or your top five customers shouldn’t account for more than 25% of revenue.
Additional Fees (positive score)
AAMI is just management fees and doesn’t contemplate letting fees, admin fees, transaction fees, statement fees and anything else over and above a percentage of gross rental income being charged.
If your admin fees are considerably high, you may even want to change the earnings line from AAMI to just revenue to yield a higher valuation.
Geographic Spread (negative score)
Property management can get really physical; appraisals, open homes, ingoing inspections, routine inspections and outgoing inspections all require your staff to be driving around from property to property. If your rent roll properties are at opposite ends of the city, productivity is going to decrease potentially leading to higher overhead and lower relative profits for the business.
In other words a high geographic spread will penalise your sale multiple.
Age of Rent Roll (positive score)
A well established rent roll will certainly attract a premium multiple. Think about a rent roll that’s just been started. You hardly have any data, meaning your vacancy rates, owner churn, arrears and any other valuable data points just don’t have enough time against them to be statistically significant.
An older rent roll will typically have more properties and will have normalised making it easier to value.
Property Types (negative score)
In most M&A transactions you look for cost synergies. How do I buy revenue without the associated costs. Rent rolls are great for doing this because the acquiring business will usually have a team of PMs, admin staff, bookkeepers, management and infrastructure already in place.
If I’m a buyer of a residential rent roll, I might give a portfolio with commercial properties a negative score, purely because I might not be geared up for it; rental invoices, large disbursements across office buildings, splitting GST etc. There might also be some funny property types like factories or commercial kitchens that require special attention.
