For commercial and multifamily investors, no two documents are more fundamental to understand an investment than the Rent Roll and the Operating Statements. We will be studying the rent roll, looking at some case studies, and hopefully improving our due diligence process.
So what exactly is a rent roll?
A rent roll is a list of the rental units of an income property, with some basic details essential for basic property underwriting. It is one of the foundational documents needed to property understand a rental property.
Basic Items contained in a Rent Roll Items.
Exact Information can vary by property type, but these are the most common:
- List of units
- Name of Tenant
- Rent amounts
- Square footages of units
- Rent Per Square foot
- Prior Balances
- Market Rent
- Loss to Lease
- Lease Start/End
- Additional Fees
- Security Deposit
- Date the Rent Roll was created
Rent Roll Uses
- Loan Applications—When purchasing a property, a lender is going to want to see a proper rent roll. You may have to create the rent roll if the owner doesn’t have one.
- Market Research—Are the rents low compared to market? Is there an opportunity to raise the rents?
- Lease Expirations—Are there leases expiring over the next 30 days? Are the tenants month-to-month or do they have long-term leases?
- Rental History—Are there balances on accounts growing, or shrinking? Are there a lot of vacancies? Do the tenants pay on time?
How do make a rent roll?
- Example – Download the template at the end of this article
- Ask – If you are considering purchasing a property, ask the owner for the details.
- Find the Source Documents – Leases, County Records, etc.
I received a call from an owner of a quadplex, who wanted me to study the property. I asked him to send me rent rolls and operating statements. He didn’t have them, but sent me the leases and two year’s tax returns. I put together a rent roll, and immediately saw issues. First, his rents were $100 low compared to comparable apartments. Second, three out of four of his leases were month-to-month. Third, he had MAJOR collection issues—two of his tenants hadn’t paid rent in over six months, and all of them were behind. These issues were immediately obvious from a review of the rent roll. When I asked him about this, he got quite defensive. He’d grown quite attached to his tenants, and wasn’t willing to evict them. Obviously, it was going to be very hard to sell the complex in the condition it was in, and I advised him to deal with his tenants before selling the complex. I often think about that owner because I’m not sure he realized the state that his property was in, and a quick review of a simple rent roll would have really helped him to prepare his property for sale.
We’d love to hear your stories and lessons learned about reviewing rent rolls from prior deals! Comment below! Also please share this with people you think may benefit from reading.
This post originally appeared in Jonathan Aceves’s blog and is republished with permission.