Rent Rolls are typically valued on a 12-month forecast of management fee commission income (excluding G.S.T.) on a fully let basis. I.e. Not taking vacancy rates into consideration. Then the multiplier is applied to that amount. E.g. 3.5 X Annualised Rent Roll Management Fee Commission Income = Price.
It's not standard industry practice to apply the multiplier to the extra fees and charges. (E.g. Admin Fees, letting fees, recovered advertising cost etc.). However, higher than average extra fees, and recovered cost can positively affect the multiplier applied to the management fee commission income.
Some of the other key performance indicators that come into consideration are,
The Average Annual Management Income (AAMI) per property under management for your region of operation. For example, if your AAMI is below the area average, the multiplier you may get may be less than average. Conversely, if your AAMI is higher than average for your area you may get a higher than average multiplier. Do you know where your rent roll sits based on your area of operation?
The average management commission fee percentage (%) excluding G.S.T. for example, is your average management fee commission percentage 4%, 5%, 6% (plus GST) or more? What's the average buyers in your area are seeking and/or expecting?
The geographic location of the business/rent roll. For example, the multiplier on rent rolls in the Eastern Suburbs, Lower North Shore and Inner West of Sydney will typically be higher than rent rolls further afield. Another way of taking this into consideration is that the Average Annual Management Income (AAMI) per property in those areas is generally higher than rent rolls further out where the rents may be lower.
The number and ratio of owners with multiple properties/tenancies. E.g. Do the vast majority of owners only have 1 or 2 properties or are there owners with 5,10, 20 or more properties/tenancies, and what ratio do they represent of the rent roll overall? What impact does this have on the rent roll value? What's common?
The geographic concentration of the rent roll. The more geographically concentrated, the more attractive the rent roll will be. Managements spread far afield cost more time, therefore money to service. They are at greater risk of being lost to local agent if the property remains vacant for a prolonged period. Also, if the vendors decide to sell, the sale listing is at higher risk of being lost to a local agent. Having said that, today every rent roll has properties outside their core area due to agents encouraging vendors to allow them to manage all their properties, or owners choosing to deal with preferred agent irrespective of the location of the Agency. Again, what are standard industry expectations in relation to the geographic spread?
Then there is simply the overall quality of the rent roll and how well it is run. Such as,
Number and ratio of different types of properties. Residential (houses, apartments, granny flats, semi's/duplexes, townhouses, villa's, car spaces). Commercial (retail, offices, industrial, warehouses, storage facilities, parking). They are all valued differently.
Quality of the properties.
Arrears
Vacancy rates
Complete and accurate documentation and files, E.g. in-going inspection reports be completed correctly and signed off by the tenants and the agents, same for periodical inspections, tenancy applications, leases.
Directors, staff, and family owned properties in the portfolio
What the sellers intend to do post completion of the transaction
Non-compete agreements being offered by the Vendor
Retention amount and periods post settlement.
And, the list goes on. It gets even more complicated and detailed when the business is being sold as a going concern.
It is not uncommon for real estate agents choosing to go it alone when selling or acquiring a real estate business and/or rent roll, because after all they have been in the business for x number of years. Or, they have bought or sold a real estate business or rent roll before.
So, off they go working through the process, only to find that the transaction is more distracting, time consuming, frustrating, stressful, and complex than first thought. Or, items importance got missed early on, then come to light just before exchange or settlement, causing key elements of the deal to change, be renegotiated. Or even worse causing the transaction to fall over all together.
I have heard the horror stories where Vendors used incorrect methodologies to arrive at the price of their rent roll and got paid dramatically less than they should have.
Just like you as an agent encourage clients to engage your services as professional marketer, adviser, intermediary and negotiator... Shouldn't you consider doing the same when it comes to selling your valued business asset?
Call or email us today to find out more about the customised service, advice and resources we can provide to ensure you achieve the best outcome.
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