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 from revenue per square foot to replacement value.  This writing 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.

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 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 with an eye towards determining stability of the tenant base.  The objective is to provide insight into the stability of the asset by knowing the financial reality associated with the income stream from multifamily assets.

Baseline Data.  When beginning a review of the rent roll ask for two copies; one for the current month and one for the same month from the previous year (two years if you can get it). Our objective is to obtain a baseline; to determine those tenants that are on the rent roll in the current month and those removed.

Turn ‘n Burn

Turnover.  While a nice catch phase, in our business increases in turnover means we are burning cash.  With the baseline data we can now determine turnover and inquire about the fate of those tenants 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, its standard stuff (the usual suspects) like job change, moving from  the area, down-sizing, etc.  For purposes of this analysis 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, less concessions, plus utility income, plus garages… yada yada.  How much RENTAL REVENUE was obtained  for the current month versus for 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 converts to a low turnover rate.  Low turnover converts to high gross margins and less turnover expenditures.

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 a NOI killer.  Reducing turnover through retention increases cash flow.  Excluding rent-regulated assets, 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 refers 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 is representative of a high quality income stream.   When collections activity increases there is an out-sized expense, in terms of time, necessary to collect monies due.  At some point (determined by management) it is better to not renew the lease than expend the time necessary on 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 under-lying tenant base.  Once late fees becomes 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 end result on each one; voluntary move once served  or  action necessitating legal fees?   What was the cost to turnover evicted units?

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.

Can you add to this list?  Please let us know through your comments.  Thanks!

Bonus!  Item 9… Compare revenue per unit year-over-year.  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.

Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. This article is intended to be informational only and does not provide legal, financial or accounting advice. See Multifamily Insight.

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