In this episode, we're joined by John Wilhoit, a real estate professional specializing in residential asset management and property management. Throughout his career, John has focused on high volume, large multifamily communities including market rate and fixed financed developments. He has also authored two books on real estate analysis: How To Read a Rent Roll and The Rent Roll Triangle.On today's show, we discuss How To Read a Rent Roll, including what a rent roll is, why it's important when analyzing an investment property, and the various aspects you need to consider when determining the strength of a rent roll.
In next week's episode, John will join us again to complete The Real Estate CPA Podcast's first ever two-part podcast series to discuss his second book, The Rent Roll Triangle, which is a calculation that helps compartmentalize the strengths and weaknesses in rental revenue and identify areas of concern before you ever buy an investment property.
The rent roll is the cornerstone of financial analysis for a multifamily property. Everything leads back to the rent roll. You must know the contractual income, which is the rent roll. There are two primary softwares: RealPage and Yardie. There may be other great options, but these are by far the most common in the large multifamily space. You must ask for a printout directly from the software. Most people are honest, but you want to see the source. You need to check names, units, and the dates presented. The rent roll is pretty much a document that shows the schedule of rents due from the perspective of the owner.
Steps in Determining Strength
Buying a large multifamily asset is like buying a business, and the rent roll is a representation of the contractual basis for buying the existing business. Part of the asset you're buying is the location, and the other significant part is management and how you run that asset/business. (7:00 for quote)
The market is just one component of the property, the same as the rent roll is just one component of financial analysis. You must know your market and sub-market. You also must know other competitive and comparative properties in your sphere. Every potential buyer has to do a bit of forensic accounting - you must go as deep as you can to verify the information you receive. For example, when analyzing the rent roll, you should be able to perform a lease review. This is how you know what's under the hood. What's in play, what's enforced, what's contractually obligated?
Specifics of the Leases
Diving into the lease review is the baseline for rent roll analysis. You should have a checklist for every document - is it a valid lease, enforced, has it expired, and the term of the lease. These results can help shed light on a few things. One being, you can calculate the total turnover and demand as well as project or infer the general turnover costs with this turnover rate. An asset with a low turnover rate may be valued higher because tenants are staying and turnover costs are low. It's likely a higher quality asset from a cash flow perspective.
Metrics that Help Determine Strength
1) Lease Review - true and correct, valid, and signed. Are there renewal documents in place upon expiration? Are there any patterns or consistent paths that stand out?
2) The income on the rent roll ties out to bank statements or bank deposits. You may not always get this info, but it doesn't hurt to ask. Even if you only get a few months, you can still analyze these, look at any differences, and create a range for expectation.
3) Average term of the existing lease: this is directly involved with turnover and turnover cost. How long has the existing resident base been in place? Another factor here is the rent comparison - are rents lower than other buildings? If so, this is a reason why tenants may stay. At this point, you need to walk the units and determine the amount of money you'll need to put into the units after close. All this began with starting at the leases, leading all the way to on-site analysis.
The credit quality of individual tenants is just one factor in establishing a payment record. The payment history itself is really the key metric, and the seller should have this record. You can cross this against deposits.
Outsourcing and Property Management
Just because you're an owner, don't assume you need to be the property manager. If you're new to this business and haven't done property management before, you'll likely want to hire the professional. Unless it's your full-time job, the property manager is going to be doing the work, answering the phone calls, and setting you up for autonomy and success during the year. Similar with your taxes - you may be able to file them yourself just fine, but you'll likely be safer and save more if a professional files them for you. This speaks to the larger point of outsourcing. It's harder to objectively drive results if you're emotionally attached and directly involved. What other professionals can you employ to free up your time?
Tune in next week to hear us speak with John again about his second book and the calculations involved: The Rent Roll Triangle.
Learn more about John and his work: http://johnwilhoit.com/