What is a Rent Roll?

What is a Rent Roll?

A rent roll is a snapshot of rents due for the period reflected in signed and valid leases.

Rent rolls have been around for hundreds of years.  A rent roll is a "roll-up" of all the rental revenue owed by tenants to a property owner for a set period of usage, usually a month or a year. However, the lease term is often for one year or longer, with rent due in equal monthly installments.

A lease represents the contract that both parties, owners, and tenants, have agreed.  The lease spells out what each party will do or performs for the term of the contract.  In the case of a multifamily rental, the lease language usually conveys that the tenant agrees to pay rent, and the owner agrees to provide safe and decent housing.

What is rent?

Rent: a tenant's regular payment to a landlord for the use of property or land.

The rent roll informs owners, managers, lenders, and government agencies about a rental property asset's value and stability.  The rent roll is the starting point for learning more about the rental income stream's amount and security attached to a rental property.  What is a rent roll without rental revenue?  A blank piece of paper.

Similar to how banks and others rate the quality of debt, the longer timeline that a rental income stream has occurred, the assumption is the higher the probability that said income stream would continue uninterrupted.

In theory, this is why it costs less to rent an apartment for twelve months versus for six months; the longer-term commitment has a higher value to the property owner, and they are willing to accept less rent in exchange for a longer-term lease.

rent roll man checking ipad finances

Rent Roll and Monthly Income

A rent roll, correctly assembled, is a distinctive document providing an array of information. When buying a rental property, you purchase the rent roll and the monthly income that comes with owning and controlling a rental property.

Why is it essential to establish the amount of monthly income from the rent roll? Because this is the reoccurring contractual revenue created from existing, in–force leases. The rent roll is a snapshot of current income as represented by the owner of the asset.

The rent roll is the property owner's representation of rental income derived from an income-producing real estate asset.

The rent roll is the most critical document in formulating the value of income property. Authenticating numbers on the rent roll will create a high level of comfort in the property buying decision–making process.  However, rent roll analysis doesn't remove the need for the full array of due diligence required of any real estate acquisition.

When considering the acquisition of income property, without discounting the importance of various ancillary income sources, you must devote the most attention to the largest revenue source, which is rental income, as reflected on the rent roll.

While a bank statement may reflect total revenue, the rent roll provides the amount and term of contractual rental income the owner can expect to receive.  Segregating rental income from all other sources of income is important for several reasons.  First of all, it is the largest income source and is most likely to repeat month in and month out consistently.  Second, stated lease income, as the primary source of revenue, has the largest effect on asset value and, it's the one number seasoned operators can impact the most.

A lease file review is imperative. A review of each lease file is essential to validating contractual rental income.  The rent roll, at its best, is an accurate depiction of in-place leases. All rental revenue represented on the rent roll must tie to a date and amount as denoted on in-place lease contracts.

If there are small explainable disparities between these documents, then you have your answers.  If there are significant numeric discrepancies between the leases, rent roll, and bank statement, this is a major red flag.  How do you know which document is the most accurate if none match up?  You cannot.

The rent roll will state the start and end date of the obligation to pay rent per the lease terms.

Is it true that "if" is one of the most important words in the English language?  In rent roll analysis, "if" rents collected as described by executed leases matched the rent roll, month-in, and month-out, answering the question about accumulated rental income has standing.

There is always (always) a difference between rental revenue reflected on the rent roll compared to the leases.  Finding out why there is a difference and if the amount is material will provide some comfort in your findings or lead to more questions.

rent and roll money income plant growing from change

Money at Stake is Yours

There is no room for the word "if" in the due diligence process regarding rental property acquisitions. There is too much money at stake. If (there's that word again) you are buying a rental property, then very often, the money at stake is yours.

What you do to acknowledge and address discrepancies between rental income, as presented by the seller, and rental income legally due to collective leases is the essential reason for performing rent roll analysis in the first place.  And remember that gaining just one new data point adds to your volume of knowledge about the property.

For example, if you can examine a rent roll that is twelve months old versus a current rent roll, the trends you can drill down into are nothing short of wonderful, such as changes in late fee income (reflecting issues with collections), the average term of leases (a huge tell in turnover numbers) and changes in gross potential rent and actual collections.

Rent Roll Analysis Will Keep You Grounded (as in, on the ground)

Someone has scammed you recently.  The plot was not very thick, and the loss so small that the event didn't warrant any more of your time or cause you to call authorities.  You buy a "nutty bar" and find no nuts. You purchase milk that is sour after three days at home. You buy an apartment building and find it empty.  Wait - what?

There is no replacement for seeing what is behind each door during acquisitions due diligence. Walk inside of every unit in any multifamily purchase under consideration. Every. Last. Unit.  No exceptions.  It is easy to get caught up in all of our tech-savvy all-knowing, all-seeing spreadsheets, apps, and formulas.  Walk the property, walk the ground.

A rent roll is an excellent tool.  But it doesn't take the place of a walk-through or the knowledge that comes with boots-on-the-ground.  Rent roll analysis and in-person property inspections are two sides of the same coin - they are inseparable. On that note, walk inside every bedroom door and closet during the onsite review.  There is no other time this will occur at this level of detail except during a buyer's site visit.

I spoke with two property managers this week that shared the same news by email; we have a water leak.  Okay?  What does that mean?  One water leak was a broken sprinkler head, where the repair took about an hour.  The other was a flooded-out basement with the boiler now underwater.  Kind of not the same thing, right?

Exchange the word "water leak" with rent roll analysis.  Just saying that you've done it doesn't tell us anything.  You have to go deeper to gain meaning and deeper still to gain understanding.

The Basics of Rent and Roll

The rent roll is a simple document.  It is. The problem is that people complicate the report by providing too little or too much information and call it a rent-roll.  What is a rent roll?

A Rent Roll is the property owner's representation of rental income.

A rent roll is a document (electronic or on paper) that "rolls up" all rents from a single legal entity - often described as a rental property.  Rolling up all rents requires first laying out all individual sources of rental income.  These documents are often referred to as leases.  Said another way, we roll out all the leases and make sure they are valid and enforceable; then, we roll them all up into a single document representing the expected income in a given month, quarter, or year.

Using a rent roll is the best and most comprehensive method for learning this information in usable, snapshot form.  For a small property owner, this alone can be a daunting task.  Yet this is the minimum requirement to build out a viable rent roll.  You can always expand the document, but for starters, stick with the basics.  A rent roll includes:

  • Tenant Name (Name of Lessee) - Formal name from a valid form of government-issued identification.
  • An Address (of property rented) - The actual postal street address and apartment number recognized by the U.S. Postal Service.
  • Unit Type (residential, commercial, retail) - To exclude presumption and set out usage type.
  • Square Feet (# of square feet rented to the lessee) - Qualifies the leased premises and eliminates disputes about space leased and usable by the lessee.
  • Monthly Contract Rent - Stated numerically and in long-form writing in the primary language of the property asset's location.
  • Lease Start Date - The date the lease starts.
  • Lease-End Date - The date the lease ends.

There.  Wasn't that easy?  What "belongs" on the rent roll?  Just the facts, please.  An exceptionally detailed rent roll may have twenty to forty columns of data for each lease. Still, the core data is succinct and gets you to a deeper understanding of rental income than pages and pages of stats, numbers, and pretty columns of unrelated information (professionally known as gobbly-gook and be avoided at all costs).

Stop right there.  Every piece of information required is in the lease. If not - it's a defective lease!  Said another way, the lease contract, if not executed correctly, is unenforceable.  An expired lease without a signed lease extension may be valid or not.  Why risk it?  I've been to properties where everyone pays cash (cash!).

If you seek to review the lease files at the all-rents-are-collected-in-cash property (stop and laugh heartedly), this is probably not the property for you.  But for most of us in the rental property business, a lease is more than a passing fancy.  They are the be-all-end-all stop-start-and-finish of determining financial viability and feasibility.

How do you get ahead of your competition for property assets?  For people competing to purchase small multifamily deals, taking the time to analyze the financial information presented within a rent roll will have you miles ahead of the competition.  Let me give you two examples:

  • Lease-end dates.  The rent roll is telling you precisely when the existing income stream is in jeopardy of ending.
  • Pay record. If 20-30-40% of tenants are paying late, that's a problem!  Any downward blip in the local economy will have this number increase from where it is now.
  • Lease extensions.  If all leases are original with no extensions signed, there is a presumption that the lease contracts auto-extend month-to-month at the end of the initial lease term. An auto-lease renewal is a weak document.  They do not age well and can severely curtail the ability to obtain financing or new debt as all in-place leases can terminate at the end of the next month.

For right now, presume we are building a rent roll from scratch. Consider that all documentation, all of the electronic files were "lost" except the leases.  The rent roll shortlists depicted above will be our initial rent roll and nothing more.

rent roll apartment building

Rent Roll Review and Bank Statements

Rent roll, check.  Bank statements - got them.  The income statement ties out, okay.  Walk the property. Go into every unit before closing.  See then if what your eyes are observing correlates to the numbers on the rent roll.  It's all part of the process.  The buying decision will always be a mix of financial analysis and physical, operational readiness for any property asset.

Can the property you are buying attain its maximum financial output "as is" or only after further investment?  We humans like to tinker.  If additional investment is the right decision, proceed like a professional and work up all necessary post-closing changes during the due diligence phase.  Similarly, a professional does not spend, commit, or write a check for not one thing until after closing (excluding inspections and appraisals).

My guess is two out of ten real estate deals fall apart within three weeks of closing.  That's a pretty high failure rate!  Thus, there is NO reason to risk cash on a real estate deal "in process" until you own it.  It's normal to get excited; keep your checkbook in your pocket until the ink is dry.  Spending money on a property you might own is like dreaming of a cold drink on a scorching hot day; you're just going too hot as hell until you get that drink.

There is a method for performing rent roll analysis that allows for all the steps to be covered.  Missing just one step in rent roll analysis process can create a dramatic "hole" in your outcomes.  Rent roll analysis is not hard. However, it does require focus and attention to detail.  Rent roll analysis requires a methodical tenacity to get it right.  What is rent roll analysis?

Rent Roll Analysis is determining the validity or reliability of rental revenue collected from income property.

Why is this important?  Because every year, billions of dollars in property change hands "valued" on the property's ability to deliver reliable income. Rent roll analysis is a primary tool in determining the strength of income, the property's ability to perform as described and provide the revenue the buyer expects.

(Think of how many shopping mall operators went bankrupt in 2020. None of them could have dreamed that half their tenants would also file for bankruptcy protection - all at the same time!)

Rent roll analysis concludes with having validated the in-place rental income accurately based on a review of records that can tie income perceived (from the rent roll) with income received.

Rent roll analysis is the first step in assessing the rental income derived from income-producing real estate assets. Getting rental income right is imperative as this number affects every other figure in the financial reporting that follows.

The best of all worlds is when buyers and sellers can agree on rental income; when the buyer and seller are on the same page and agree on something (anything) as a point of fact. Gaining agreement between the parties that the rent roll is true and correct is a big step towards a successful closing and asset sale.

A rent roll refers to the amount of rent due from each lease, rolling up all the leases into a single document.  In pre-revolutionary America, properties were almost exclusively agricultural lands “rented” in exchange for a percentage of crops produced.  In other contracts, the rent was a flat percentage of revenue paid to the landowner.

The use of the rent roll today is the standard operating procedure for multifamily owners and operators.  A rent roll provides a wealth of operating information that assists in managing the business of rental property.

A rent roll is more than an electronic page with names and amounts. Broader concerns can aggregate this data for review creating proprietary knowledge specific to a single property or a portfolio of properties.  The convergence of low-cost computing power and big data is making this possible for any size asset.

Rent Roll Analysis is Like Gambling - Wrong!

No, it is not!  I recall listening to a professional gambler comparing his profession to finance.  He said, "gamblers and people in finance are in the same business; the only difference is their investment horizon."  There is some truth that; the gambler is looking at the next five minutes versus the finance professional viewing five years.  Day-traders are perhaps more like gamblers based on their investment horizon.  Most people in finance have a longer view, and those of us in real estate longer still.

The underlying objective of professional investors is to assess risk and make money.  But there are plenty of differences in timing and methods, including the level of commitment, risk tolerance, and dollars committed.

Rent Roll Analysis is Risk Management

Always remember that rent roll analysis is nothing more than a simple method of risk management that, once mastered, will always be in your financial toolbox.  Once you get used to it, rent roll analysis will be wedged into your mind as a valuable component of your real estate due diligence; it will become like breathing. You will reference it all the time during the real estate decision-making process.

There are two salient moments for any real estate investor; the day they buy an asset and the day they sell it; these are the bookends of real estate ownership.  The timeline can be long or short, distilled with profits or staggering losses of equity capital.  Time of ownership is just one factor in determining this outcome.  Allow rent roll analysis to assist you in selecting better assets, those with significant potential for gain, those with a higher probability of delivering sustainable rental revenue and recurring rents.  The hard work is in making decisions today that deliver an outcome in the future. Let rent roll analysis bring a big assist in making better decisions.

Consider joining American Apartment Owners Association.  AAOA offers services to thousands of apartment owners nationwide. Their mission is to provide multifamily owners with the tools they need to manage their units cohesively.

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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