The perks and pitfalls of building a rent roll

A strong rent roll has long been touted as the holy grail for real estate agents looking to build their own business.

For competent operators, the rewards of selling under their own brand can be immense. But the problem remains of how to grow their baby into something of value.

Yes, a portfolio of managed properties turns that real estate business into a sellable asset and creates equity. But property management is no picnic, and anyone attempting to do their own needs to know exactly what they’re signing up for. 

Here’s our guide to the perks and pitfalls of building a rent roll.

Perks:

1)      Guaranteed income

Unlike sales, which fluctuate, the rent roll of any agency generates guaranteed monthly income. Obviously, the bigger the portfolio, the bigger the income.

2)      Sellability

You may be making millions from your real estate sales, but it’s the rent roll that represents the majority of your agency’s market value.

In fact, the value of the rent roll makes up 85-95% of the business worth - important if you decide to sell it and sail off to the Bahamas for a cruisy retirement.

3)      Value

A rent roll is normally valued at between $2.75 - $3.75 for every dollar generated from management fees each year. It’s the only part of the business that a bank will recognise and lend money against as an asset.

Your annual management income is dependent on a number of factors including the ‘health’ of the rent roll, locations of properties, their average rental figure and the yearly management fee. Vacancy rates, while sitting close to zero for the Sunshine Coast currently, are also a consideration.

Having a well-managed portfolio of regulation-compliant properties leads to optimum property retention and creates the best chance for a strong annual income.

4)      Leads

When the landlord of one of your portfolio rentals decides to sell, who better to approach than the professional who so ably facilitated the management of their asset?

The leads from rent roll sales can be lucrative for sales agents and are often the reason agents are too scared to leave their big-brand employers.

Pitfalls:

1)      Hassle

Property management is high touch and there are numerous demands to be met as tenants, landlords and tradespeople all need to be satisfied.

Responsibilities include ensuring properties are well-maintained and compliant with latest building regulations, tenant issues are dealt with promptly and effectively, rents are paid on time, landlord incomes are appropriate for the market and vacancies are kept to a minimum. This leads to:

2)      Costs

It’s easy these days to sell homes without a bricks-and-mortar office, but property management is different.

It’s almost impossible to run numerous key collections without a central workspace, particularly as that portfolio grows into the hundreds.

If you’re building a substantial rent roll, you’ll need an office, and one staffed appropriately to drive business and service the burgeoning demands of your clients.

3)      OH&S 

Even if you have a skeleton staff, this is a major consideration.

As the touch point for tenants, property management staff can be on the receiving end of some pretty nasty abuse from tenants and landlords.

Established property managers know this and plan accordingly: Coded language systems, door locks and direct police alerts are all used to ensure front office staff can react quickly to potential threats.

For staff working from home, OH&S is equally important to get right. Insurance needs to cover issues as diverse as trip hazards within the home and the confidentiality of data accessed on a shared computer.

4)      Auditing 

A rent roll takes planning, shaping and pruning.

Files for each landlord and tenant should be regularly reviewed, title searches should be checked for accuracy, missing keys should be identified and an audit made to ensure that the bond amount held for each property is correct.

Outstanding arrears, maintenance, inspections and vacancies should all be followed up on, periodic tenancies should be kept to a minimum and higher rents prioritised over lower ones.

Worth it?

A rent roll undoubtedly adds value, but only if its managed right.

For those who have the passion, resources, time and know-how, developing that portfolio should prove a lucrative addition to their real estate empire.

For those who don’t? Disruptors like Greenhouse are getting smart about offering an alternative.

By linking with established property management groups, they allow agents to develop a portfolio of properties which are managed by experts - for a fee - but retained by those agents as assets.

For those looking to grow equity, it represents an enticing middle ground - growing a rent roll as a sellable asset without having to do the grunt work.