Today’s episode is about Rent Roll Analytics: Baseline Data. Rent roll analysis is all about understanding rental income. The reason we need to understand rental income is so we have a frame for comparing one asset to another. The rent roll is the controlling document of what a property produces.
Today's episode is Rent Roll Analytic's: Baseline Data. Rent roll analysis is all about understanding rental income. The reason we need to understand rental income, to the nth degree, is so we have a frame for comparing one asset to another. In so doing, we can make better and higher quality investment decisions. That's the baseline, that is where we're headed but we can't do so unless we have a quality rent roll.
[00:00:34] The rent roll is the controlling document of what a property produces. Once we have a rent roll in order then we can offshoot from there a thousand different ways on what we want to review and have opportunity to compare between one property and another. We can't do that without a quality rent roll and a quality rent role is dependent upon good baseline data. That's our point of discussion for today.
[00:01:04] Most of you know me from my bestselling book How to Read a Rent Roll. I do spend a lot of time focused on rent roll analysis. People think that it's some mystery but rent roll analysis is not difficult but it certainly can be time consuming. So, breaking down the work into sections beginning with the collection of the baseline data makes the work that much easier and much more efficient.
Before we dive into baseline data let me define for you simply what a rent roll is.
A rent roll is property owner’s representation of rental income derived from an income producing real estate asset.
[00:01:46] We're talking about a document that presents income from the owner's perspective. And if you are a potential buyer of real estate then we're doing the rent roll analysis, or the rent roll review, to validate that the information provided us by the owner is true and correct. That's really all we're doing with rent roll analysis. To get there we must have certain baseline data, baseline information, that we can use to do our analysis. Here is the baseline data to collect:
[00:02:16] Why do we want to do our analysis? There's two reasons. The first reason is to have a better understanding of the quality and the strength of the in-place income stream. We don't want to go making changes before we understand what's there already. The second reason is to know how to measure and forecast future income and you can't do that unless and until you know what current income is.
[00:02:43] Before you can go into the analysis of a rent roll you must have the basics and the basics is what I refer to as baseline data. Having this hand rent roll analysis can be very simple yet powerful with respect to the outputs. This analysis tells you that the financial strength, or the quality of income, derived from any rental property. Rent roll analysis is what we're talking about. Collecting the baseline data for doing so is the focal point of this episode.
[00:03:14] Think of baseline data as not boring. I understand that's hard because it's pretty basic. However, it's just like an athlete; every athlete loves to do what it is they do well but unless they do the laps, unless they do the weight training, unless they do the calisthenics, they're not going to be able to perform at that higher level.
[00:03:37] As much as it may seem boring to collect the baseline data everything you do thereafter with respect to the role analysis is an offshoot of the quality of the information that you've collected in your rent roll analytics from baseline data. It is ultra-important that you do this right and to make sure that you have quality information that you can use in your investment decisions. As arduous as it is to collect this basic information it is ultra-important for you to be able to come to quality decisions and that's why I think it deserves your undivided attention.
[00:04:18] What is the baseline data? Baseline data is basic information gathered by you or your team that's later used is to provide a comparison for assessing facts provided by ownership or management for a transaction or a deal or property that you're looking to acquire.
[00:04:36] Baseline data is fact based information used in the creation of the rent roll. That's why we need it. Baseline data is everything collected to insert into the rent roll with the objective of validating rental income so baseline data includes property and financial information provided from sources other than the seller or the sellers representative, in addition to from the seller or the sellers representatives. The baseline data includes all the following information. Here's the bullet points: income, expenses vacancy, addresses, unit numbers and the built square feet.
[00:05:20] That's it. That's our baseline data that allows us to set our cornerstone for building our rent roll and being able to do rent roll analysis or analytic's.
[00:05:32] Rental income is derived from your lease file review, not just from the rent roll provided you by the owner. You do want to have an opportunity to perform a lease file review and match income that's stated in the leases to what's on the rent roll.
[00:05:53] On the rent roll, or from the leases you're not looking to ascertain ancillary income or any other form of income excepting rents. We just want to know rents. As rents represent most income from rental property this is where I want you to focus your attention on the income side. We can get to the added income or ancillary income later. But with respect baseline data we want to know what stated lease rents from the actual leases.
[00:06:25] Second is expenses, and while not necessarily a rent roll component per se we, will be reviewing expenses as a percentage of income. So therefore, it's a necessary component of the baseline data even though we're not putting expense information on the rent roll itself. If you can collect it along the way that's a good thing.
[00:06:46] We want to know vacancy as it's reflected from various ways and through various means. For example, with respect to baseline data, what is vacancy as a percentage of occupied units and in-place leases? Notice that's two different things; occupied units and in-place leases. Those two should match up, they should tie, but they don't necessarily always tie. For example, an owner of 100-unit building may have two units that they rent or lease to family and they say that that is income. But we already know, likely if you're the new owner, those family members are not going to remain because they're not expressed in the lease information.
[00:07:29] The address. Addresses are very important because they can sometimes be ethereal. We want to double check addresses when you are reviewing baseline data- that's the time to do. We want to know that the unit numbers as described by the seller actually match up to what's on the site. We want to be assured that there's a physical address for each unit.
[00:07:53] In a five-unit deal if there's a ABC and D unit but the owner is presenting the deal as five units because there's a basement that's also occupied, well, in reality we only have four units. That fifth unit that's occupied, and maybe even producing income, isn't valid leased space. It probably doesn't have any form of a certificate of occupancy. So, you're really only looking at four units and not five.
[00:08:25] That's why we want to know what the address is for each and every unit that's presented to us in our baseline data. Unit numbers fold into the address. Even if it's 123 Main Street we do want to see 123 Main Street units A B C and D. If the baseline data is confirming this that's great but if you find something different, you'll want to know why.
[00:08:50] Lastly is built square feet. This seems to have a different meaning for different people but the plain question here is this; what is the total square feet under roof? If you know that then you can kind of determine the other areas are built square feet, from there you can begin breakdown livable square feet, common area, office and storage, etc. We want to know what the total built square feet is and then we can segregate into these other areas.
[00:09:21] That's the baseline data. This is the beginning, or the starting point, for accomplishing rent roll analysis. You must have these data points before you can go on to performing your analysis. This is where the work is the work is in collecting valuable and valid data that allows you to create a rent roll analysis that has some standing, one that you can believe, one that you know is a fair representation of the property that's in front of you.
[00:09:53] All this folds back into being able to create or present a valid internal rate of return. Because when we're looking at acquisition candidates assuming your cost of capital is the same then that internal rate of return is what allows you to segregate the better return options from the lower return options. All of that boils down to how well you do your rent role analysis. That's why it's so important to have proper and correct, true and valid baseline data.
[00:10:32] I hope this is helpful. For more information, please do pick up my book How to Read a Rent Roll: A Guide to Understanding Rental Income. It focuses exclusively on this topic but in further detail.
Thanks for listening today. This has been John Wilhoit on Real Estate.
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