How to Read a Rent Roll (8 Ways to Sunday)

What is a rent roll?

Here is my definition:

the property owner’s representation of rental income derived from an income-producing real estate asset

Following are eight ways to measure financial outcomes from the rent roll.  There are numerous metrics to value a multifamily asset, or rental property, from revenue per square foot to replacement value.  This article is focused on the rent roll and various means to measure the quality of the income stream derived from the existing, in-place tenant base.

The categories below are not numbered because, for your purposes, you can re-arrange them to focus on those that you believe will have the most value for your analysis given your goals.  Baseline data will always be first in line because everything else pulls from this information.  Otherwise, pick and choose that make the most sense to you.

How Much?

We have many friends in various aspects of the multifamily business; some focus exclusively on acquisitions.  One of my friends is notorious for saying "how much"?  The question is unrelated to the asking price.  His real question is "how much" income is reflected in the rent roll, and is this a valid number?  Most focus on Net Operating Income (NOI).  My friend targets valuing the quality of the income stream.

Here are eight ways to read a rent roll to determine the tenant base's stability.  The objective is to provide insight into the asset's stability by knowing the financial reality associated with the income stream from multifamily assets.

Baseline Data.  When beginning a review of the rent roll, ask the seller (or seller's representative) for two outputs; one for the current month and one for the same month from the previous year (two years if you can get it). The objective is to obtain a baseline; then to determine those tenants remaining on the rent roll in the current month as compared to one year earlier.

While this ask for more than one rent roll may appear to be SO very mundane the results speak volumes about the stability of the in-place resident base AND if rental increases are keeping pace across the asset - including at renewal time.

Turn 'n Burn (Turnover)

Turnover.  While a nice catchphrase, in our business, increases in turnover means we are burning cash.  With the baseline data, we can now determine turnover and inquire about those tenants' fate no longer on the roll.  What became of them?  Each person previously on the rent roll was a paying customer, and we are very interested in their fate.  What happened that they are no longer a paying customer?  Inquiring minds want to know.  Most often, it's standard stuff (the usual suspects) like a job change, moving from the area, down-sizing, etc.  For purposes of this analysis, the assumption is a very bad word.  We really do want to know.

Revenue and Revenue Growth (Rent Growth).  Minus the layered view of revenue including Gross Potential, less vacant, fewer concessions, plus utility income, plus garages... yada yada.  How much RENTAL REVENUE was obtained for the current month versus the same month one and two years previous?  Without the "yes but's" and "variance" stances, we are at the moment only attempting to determine the amount of rental revenue received for the most recent full calendar month.

Renewals and renewal rates. Renewals are the cornerstone to stability.  What is the year-over-year renewal rate?  A number north of 75% is very good.  High renewal rates convert to a low turnover rate.  Low turnover converts to high gross margins and fewer turnover expenditures.  A focus on high renewals rates is the easiest way to print money at rental property.

Lease Start dates/Lease end dates.  This is separate and distinct from renewals.  This category says much about the potential of unlocking value.  What is the average length of tenancy?   Is it 12 months or 12 years?   Nationally, turnover is fifty percent annually.  As we all know, turnover is an NOI killer.  Reducing turnover through retention increases cash flow.  Excluding rent-regulated assets, a longer average tenancy represents strong future income.  Longer average tenancy allows you to forecast out further into the future when projecting revenue and revenue growth.

Collecting on Collections

Collections Activity.  Collections refer to only collections of rent- not any other category.  We are focused only on the rent roll.  What percentage of rents are collected as of the first of the month?  What is this percentage as of the second and third of the month?  Collections in the 90th percentile on the first are representative of a high-quality income stream.   When collections activity increases, there is an out-sized expense necessary to collect monies due in terms of time.  At some point (determined by management), it is better not to renew the lease than expend the time necessary for continuing collections activity.

Late fee revenue.   Late fees can be an indicator of future collections.  This revenue is a mechanism to enforce timely payment of rent.  The real target inquiry is to determine the quality of the underlying tenant base.  Once late fees become consistently high, say, more than three percent of annual revenue, it becomes a red flag requiring deeper investigation.  Is this line item confined to a particular set of tenants, or is it property-wide?  Is enforcement of the provision uniform?  What are the credit underwriting standards for new tenants?

Evictions Activity.  Per the rent roll, how many evictions were performed in the last few years?  What was the result on each one; voluntary move once served or an action necessitating legal fees?   What was the cost to turnover evicted units?  Units with forced evictions will often have much higher turnover expenses.

Consider utilizing this exercise on all of the assets in your portfolio.  This may bring to light some previously unknown patterns.  For example, it may be only four or five tenants taking one full day a month of management time for collections.  Knowing this allows for crafting a remedy.

Bonus!  Item 9… Compare revenue per unit year-over-year - at the unit level.  This will gleefully require your analysis to include the average term of the lease, a very important factor in rental income stability (see Rent Roll Triangle).  Consider this similar to the “same-store sales” metric used in retail and restaurants.   A significant measure of revenue growth is to analyze year-over-year revenue on only occupied units.

Read more from the author at John Wilhoit is the author of the best-selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW's Podcast here.

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