RENT ROLL GROWTH
BY ROSE KELLY
What to analyse and why
Business growth in a Real Estate business can be quickly accelerated through the purchase of a ready-made cashflow in the form of a Rent Roll acquisition, which is exciting, and financially rewarding. Buying an established Rent Roll can position you well either at the starting blocks of a business, or for established businesses it can be an important positioning stage in your growth journey. Equally so, the disposal (sale) of a Rent Roll or part of one can be a key decision in the consolidation or change in direction for an established business.
Rent Roll transactions by their nature, are highly confidential, and generally kept under tight wraps. In simple terms the seller and buyer are transacting relationships with the promise of future predictable income. Since banks and financial institutions view them favourably, they tend to represent significant Asset value on the Company Balance Sheet, but they can be tenuous if not clearly understood and managed proactively. It is in the interests of both Sellers and Buyers to fully understand what they are transacting and how to best manage the many stages of the portfolio acquisition. When business owners embark on the growth journey they often find themselves in a conversation about whether it is wiser to purchase an existing portfolio or to invest the funds in organic growth. There is no standard answer to this question. Rent rolls provide good predictable income. Of that we are certain. However, it is wise to unpack that story a little to start to uncover your answer. Firstly, you will need clarity around your cost of management in your current business (if you have one, or the one you are purchasing) and then the financial impact of the acquisition on your financial performance. For example, you may be in a situation where your break-even or annual cost to manage is say $1,200 per property, however if you had an additional 200 properties it could potentially drop to $1,050 per property per annum. Consideration of infrastructure, staffing, geographical location of the properties would all come into this analysis. There is a common belief that economies of scale are the golden goose in rent roll businesses and that scaling up is the answer to profitability. There have been countless business owners who have embarked on rent roll acquisition only to find later that their problems were not solved. I have seen many rent roll businesses operating with very slim margins despite having a sizeable portfolio. The usual place to look is in the staffing costs and in one particular business I recall they were considerably higher than I would have expected. It came down to several things which could be fixed but a big stumbling block was the geographical spread of the properties. This was exacerbated by the outlying properties bringing in an annual income substantially lower than the average across the rest of the portfolio. This business had been grown organically under the false assumption that numbers are what counts and since there was no debt, success was assured. In this situation the best case forward was to dispose of 100 properties and use those funds to grow within a defined geographical area with a targeted higher income per property. Without doing this analysis the business owner may naively believe that they simply need to grow in order to improve their profitability. The buy or build story too often relates just to numbers. I trust you can see from the examples I have given that this is a dangerous approach. Margins are slim on a per property basis. If you are not managing the right stock to ensure a profitable business, then it is unsustainable and pointless. If you are interested in pursuing this idea, then click on the link HERE and you will find a Publication I have written titled “Behind the Scenes in a Rent Roll Transaction”. This explains in detail how to look at the geographical spread and how to analyse the financial metrics of a rent roll. Whether you are considering buying, selling or building I am sure you will find it very insightful. I look forward to hearing from you.