Rent Roll Finance
With rent roll finance you can get the funding you need to rapidly grow your property management business in one acquisition.
As an owner of a real estate agency, you may be wondering how you can take the next step in your business.
By working with a mortgage broker that specialises in rent roll finance, you can get the commercial loan you need to buy a rent roll portfolio that can add the fixed income stream you need for your agency.
Rent roll finance lending criteria
There are many factors that the banks will look at when valuing a rent roll including management risk, the risk profile of the landlords, tenants and properties under management, and the risks and opportunities in the wider real estate market.
Bank appetite for rent rolls is constantly changing so getting approved means choosing the right lender and highlighting the strengths of the deal.
How much can I borrow?
We can help you get approved for rent roll finance to buy a register of 100-200 property under management.
- Borrow up to 60% of the purchase price or the bank valuation (whichever is lower).
- Borrow up to 100% of the purchase price with the help of a guarantor.
- Maximum loan term: 10 years
- Interest only: 3 years
- Loans over $5,000,000 accepted on a case by case basis.
- Business plan required and at least 3 years experience in managing a rent roll or real estate agency.
- Monthly or quarterly reviews typically required.
We know the bank’s appetite for rent rolls.
We can provide you with an indicative funding approval along with proposed loan terms and pricing.
Call us today on 1300 889 743 or complete our free assessment form to get the ball rolling on your rent roll finance.
How can we help?
Speak to a rent roll finance specialist
A number of our senior mortgage brokers have expertise in commercial lending having worked as the decision makers at a number of major banks and lenders.
They know exactly to build a strong case for clients that want to buy a rental book and what the banks are looking for in a rent roll.
With almost 40 lenders to choose from, where in a unique position to negotiate on commercial interest rates and pushing the bank to lend more (increasing the Loan to Value Ratio) for a strong rent roll acquisition.
What this means for you is an incredible deal for your rent roll finance.
Should I refinance before I apply for rent roll finance?
By refinancing any loans you have against the rent roll you currently manage, you can pay down the debt, reduce your liabilities and increase your borrowing power.
It makes sense from business perspective and, as mortgage brokers, we can help you do this before you apply for rent roll finance so you have a better chance of getting approved the first time around.
You should consider doing this 6 to 12 months prior to applying for rent roll finance but it’s different for every real estate agency.
On that note, you want to set up a line of credit and an offset account when you refinance your loans so that a percentage of of professional sales fees is set aside to absorb any potential equity losses.
What are the borrowing limits?
Refinancing existing debt on a rent roll is typically limited to around 50% of the net value.
It makes sense to retain some equity in the properties in order to cushion the blow of rate hikes or should you lose landlords as a natural attrition process of acquiring a new rent roll.
If you’re looking to refinance your rent roll finance, complete our free assessment form today.
How do I get approved?
As a general rule, you’ll need to meet the following requirements to be consider for rent roll finance:
- Minimum 3 years experience.
- Hold a current real estate licence.
In addition to this:
- If you’re buying as a company (incorporated): The bank will accept a fixed and floating charge plus directors debt and interest guarantees as security.
- Partnership or sole trader (unincorporated): Bill of Sale.
- You’ll need to have a property: The rent roll can’t be secured by the business alone. A property security is needed as well.
How will they look at my own business?
Since you’re acquiring a rent roll, the bank will want to know how you’re running your property management business currently, particularly how much you’re charging in property management fees.
Low fees are generally unattractive to lenders and potential buyers alike.
Apart from the fee structure, the bank will generally want to see your last 2-3 years bank transaction statement and profit and loss (P&L) summaries to work out whether you’ve run a successful property management business in the past.
For the new rent roll, they’ll want to see a business plan, cashflow and profit forecasting that shows things like the number of staff you will need to manage the rent roll.
You may also need to show evidence that you have contingency funds on hand should you or the business face financial hardship.
It’s common for some lenders to want to meet you as the principal as well as your business partners to get an idea of your experience, your credit history for any business or personal loans you have and what your business expansion plans are.
The bank wants to ensure that you can remain viable for years to come so you can pay off the rent roll finance.
How do banks value a rent roll?
The business will typically need to meet the following performance indicators and will usually be assessed on these requirements on a quarterly or monthly basis:
- Interest cover (EBITDA): 2.5x.
- Net advertising, salaries and rent as percentage of net revenue: 50% or less.
- Net profit margin as a percentage of gross income: over 25%.
- Total business liability over total business assets: under 70%.
Valuers will generally strip the valuation report back to gross annual management commissions as benchmark, excluding account letting fees and booking fees.
Management commissions range from 5-8% of gross business income for the year and, for a reasonably good quality rent roll, the valuer will use a multiplier of 2.6-2.8.
This gives a pretty good indication of the value of the rent roll register along with annual income per property.
In relation to ongoing reviews, it’s a base requirement of all lenders purely because of the changing nature of the property market.
However, in most cases you’ll simply need to provide a balance sheet and P&L for each month or quarter (depending on the lender’s requirements).
What else will the bank consider?
Rent roll stability
The stability of the rent roll, specifically how long the entity has been trading and whether rent roll has been expanding or shrinking over the past 3 years.
Buying a rent roll from franchise with a strong brand name like McGrath Estate Agents or LJ Hooker gives a lot of strength to your rent roll finance application.
The majority of the rent roll will be made up residential properties but some of them may include holiday income (for businesses operating in a holiday area, like a bed and breakfast or hotel/motel) or industrial storage space.
Holiday properties/accommodation are consider considered an unreliable income type because they tend to be seasonal, while storage tends to return very little in rent.
Because of this, these properties are assessed at a lower multiplier.
Ideally, the bank wants to see the majority of the rent roll made up of residential properties.
Owner to property mix
Concentration risk can be a major concern for banks when it comes to rent rolls.
For example, if you’re buying a book of 100 properties and 60 are owned by one landlord, this would represent a massive risk, particularly if they decide to take their business elsewhere once you acquire the rent roll from the previous owners.
Arrears and vacancy rates
High rental arrears rates may either be an indication of poor property management or simply be an effect of the property market.
Nevertheless, this will factor into the bank’s appetite for the deal along with the vacancy rates of the rent roll.
Arrears under 14 days aren’t generally a huge concern for the lender but anything above 2 months would be so they will be considered the rates of conviction and any tribunal matters currently underway.
What if I want to buy the real estate agency as well?
Although it’s more common for a real estate agency to sell a rent roll for a profit, we may be able to help you buy an agency along with the rent roll.
Although there would two valuations – one for the rent roll and one for the rest of the business – the lender will take the property management book as security.
The rest of the real estate business has some value but it’s more from a goodwill/brand name perspective rather than something that the bank can hang their hat on, so to speak.
Guide to buying a rent roll
Valuing a residential or commercial property is one thing but how do you put a value on a book of properties that may exceed 200?
Why buy a rent roll?
When you buy a rent roll, you’re essentially buying the major money making arm of a real estate business.
Whether you’re a fledgling agency or you have big expansion plans, it’s a very popular way to push your business forward.
Although any business acquisition is not without risk, rent rolls have the potential to cover up to 40 to 50 per cent of fixed business costs.
In addition, they can provide that bit of extra security for the agency by selling the roll should the business hit a rough patch or if you can no longer manage such a large portfolio.
With so many properties under management, you also have a huge number of leads in place to cross-sell mortgages, insurance and other services.
It’s like having a market at your fingertips!
Where can I find a rent roll?
Speak to a rent roll broker or stay in close contact with a large real estate agency network.
Agencies with large, growing rent rolls may look to offload some properties in order to keep the roll manageable, if they’re looking to make a quick profit or if they’re closing up shop and retiring.
You should also think about establishing relationships accountants and solicitors.
You might hear something that won’t be advertised in the classifieds.
What to look for in a rent roll
One of the first things you should ask the vendor is why they they are selling the rent roll in the first place.
It could be a legitimate reason like selling the business or wanting to make a profit but it may also be because they are experiencing a landlord exodus.
Ask for 3 years (P&L) statements from the vendors along with an auditor’s report for their trust account.
Poor management of revenue is an indicator of poor management which may mean you’re in a good position to negotiate on the value of the purchase price of the rent roll.
Have a good business plan in place so you know exactly how you can turn things around.
Residual fees like booking and letting fees are not often taken into account by valuers but it’s something you should take into account because they can bring in around 20 per cent than what the property management fees alone can deliver.
In terms of property mix, it’s important that the roll is mostly residential but even then, you’ll want to steer of have all apartments, for instance.
This can be a massive risk especially in parts of Australia that have been characterised by oversupply.
Then there’s also the fact that fee returns are better on houses than units although maintenance costs will be lower when it comes to units.
Other things to consider include:
- The distance of the properties to your office: Travelling more than 20 km between properties takes time and can take a financial toll on the business for minimal reward.
- Be weary of mining or resource boom towns: There’s a high potential of arrears and evictions as mining and industrial operations start to slow down so be careful of rent rolls with a high concentration in these locations.
Making the acquisition easy
Whenever acquiring a business, employees become anxious.
While your staff and the new employees you’re taking on will be apprehensive, your landlords will be too and they’re not necessarily afraid to jump ship due to a change in management!
Landlords, particularly professional investors, are very particular about how well their properties will be managed by the real estate agent.
They want to see rent paid on time and that their tenants are being looked after.
If suddenly the property management business has been replaced with new owners, they may feel like they’ve been let down.
Take the time to call and introduce yourself, make sure they have the right contact details should they need to discuss something with you and ask them how their tenancy has been so far.
You make the acquisition process smoother if you make it requirement of the contract of sale that the property managers (or at least selected senior members) transition across to your business.
This could be indefinitely or at least as a sort of handover period.
On that note, it’s essential to maintain a good relationship with the vendor throughout the sales process and beyond.
Rent rolls are very high risk because the landlord agreement terms are usually between 30-60 days.
So essentially if you have a disagreement with the owner or the owner moves on, your tenure is 30-60 days.
If the vendor is retiring you might want to consider offering them a short to medium-term role with your agency to provide consistency and to assist with the transition.
You can get more tips about managing a rent roll and what legislative and market forces are facing by checking out industry publication Residential Property Manager.
Apply for rent roll finance
Call us today
Do you need rent roll finance to rapidly grow your real estate agency?
Call us on 1300 889 943 or fill in our online assessment form to find out how we can help you.