Before you can begin to analyze a rent roll, you must have the basics. Having these in hand, rent roll analysis can begin with simple, yet powerful outputs that tell you about the financial strength, or quality of income, derived from your rental property.
Baseline data is basic information gathered by your team. It is used later to provide a comparison for assessing facts provided by ownership or management.
Baseline data is fact–based information used in the creation of the rent roll. Baseline data is everything collected to insert into the rent roll with the objective of validating rental income. Baseline data includes property and financial information provided from sources other than the seller or seller’s representative. It includes your review of the leases, your research, information from public records and third–party sources.
Baseline data includes all of the following information:• Gross Potential Rent (GPR)• Income• Expenses• Vacancy• Address• Unit Numbers• Built Square Feet
Income in this case is rental income as derived from your lease file review. On the rent roll you are not looking to ascertain ancillary income sources- just rents. As rents represent the vast majority of income from rental property this is where to focus your attention on the income side.
Expenses, while not necessarily a "rent roll" component, you will be reviewing expenses as a percentage of income, therefore, it is a necessary component and part of baseline data.
Vacancy is reflected in various ways and through various means. For baseline data purposes, what is vacancy as a percentage of occupied units and in-place leases?
Addresses are important and this is the time to check (and double check) that the number of units as described by the seller and sellers representatives actually matches what is on-site. You want to assure that there is a physical address for each unit. We do this to avoid paying for rented space that is not code certified. A simple example is buying a four-plex being sold as a five-plex because the basement is rented- even though the basement has no actual physical address or separate utility meter.
Unit Numbers fold into addresses. If 123 Main Street has apartments A-D listed as physical addresses, great. Your baseline data is just confirming that each address has four units per building.
Built Square Feet seems to have a different meaning to different people. The plain question to answer here is; what is the total number of square feet under roof? That's the baseline number. From there, you can begin to break down livable square feet, common areas, office and storage space, etc. Yes, you will want to absolutely know rentable square feet, but for our baseline data, knowing the built square feet provides you with a starting point for drilling deeper.
Rent roll analysis is not hard, but it can be time-consuming. Breaking down the work into sections, beginning with the collection of baseline data, makes the work that much easier and efficient.
Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 - How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.
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About This Blog: 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. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. www.MultifamilyInsight.com
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