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
Square footages of units
Rent Per Square foot
Loss to Lease
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.
Damon Cline reported on Monday that Downtown Augusta will see one of the first downtown multifamily projects in decades at the corner of 10th and Ellis next year. Known as “Connell’s Corner”, and long home to the local favorite “Sandwich City”, the property will soon be the home to a new high-end four-story apartment building.
‘It will boast a covered and gated 57-space parking lot, ground floor retail/restaurant space, a rooftop patio and high-tech features such as keyless entry – the types of amenities that appeal to urban-minded young professionals migrating to the downtown area.’
The story was broken by Damon Cline, who also shared some statistics and details about the overall rental market in Augusta. Overall, apartment rents are rising quickly, and what was once considered a “Class-A” apartment renting at $1.15-$1.25/SF/Month, has been eclipsed by new super-luxury apartments renting at $1.30-$1.40/SF/Month. This new class of apartments come equipped with similar finishes found in luxury homes, including granite and high-end appliances.
We recently discussed charting rent curves and what they tell us about rent rates and forecasting rent rates. I think this is a great case study. Here’s what the rent curves for downtown apartments looks like:
You can download the spreadsheet here. These are asking rates at the major downtown apartment complexes vs. downtown lofts and upstairs apartments. You can see a big difference between the two. I think what we’re seeing is that the curves are moving out–driven by a higher demand for downtown apartments like Canalside and Ironwood. My guess is that the Atticus could probably plot a new curve–maybe ask $2.15 for their smallest units, and maybe $1.50-$1.65 for their larger ones. If they’re successful with this project, I think we’ll start to see redevelopment of buildings that have up to now been impossible to redevelop with existing rental rates.
What are your thoughts? What are your observations about Augusta’s rental market? Do you think Downtown will continue to grow and develop?
This is Jonathan Aceves with Meybohm Commercial Real Estate, advising business leaders and helping them make wise real estate decisions. Today we’re going to be discussing Multifamily Rent Curves.
How does one set out to study multifamily rental rates? We do this by building a rent curve. Let’s say you want to study the rental rates for housing in Martinez, GA. We would do a survey of rental rates at apartment complexes in the area, and plot them on a graph. The graph would start out looking like this:
Then we would separate them by class. Class is a ranking system given to multifamily properties by investors, generally A, B, C, and D. A properties are generally newer, amenitized, and really nice. B properties are usually good, but maybe a little older, maybe not the same level of amenities. C properties are in not-so-great areas, in fair condition, usually schools aren’t so good. D properties are in bad condition and really rough areas, these are the kind that you wouldn’t go to at night. Once you’ve broken them apart by class, you draw a curve over them. You would end up with something like this:
It is interesting to note the steepness of the curve, and the distance between the different curves. Another thing to note is that market changes shift the curves. This is what we see in rapidly gentrifying areas—the entire curve moves out.
So how do you use the rent curve? Well this helps investors identify opportunities for repositioning. It also helps you identify management problems. If I see a complex with below-market rents, I try to figure out why. Is it a problem that an investor can fix?
Thanks for reading! Please like and share with those you think might benefit from this. We’d love to hear from you! What are your thoughts about rental rates?
Today the Augusta Chronicle reported that it looks like the proposed $94 million dollar Augusta Riverfront Depot project is teetering on the edge of collapse. Bloc Global, the developer, has asked for the return of their $50,000 held in escrow, or they will terminate from the deal.
In 2016, the commission authorized the city DDA to market a 6.3-acre riverfront parcel at the corner of Reynolds and Sixth streets and we later learned of a pretty major conflict over the employee parking lot at the site that was provided for Unisys Corp the year before.
What are your thoughts on this project? What do you think will be the result?
Overall, we’ve seen the rental rates in Olde Town (Downtown Augusta’s primary residential neighborhood) climb from an average of $.67/SF to just under a dollar per SF over the past four years. That’s a 32% increase, about 8% per year. What’s going on?
Well, as we’ve already mentioned, Cyber and Medical young professionals are choosing to live downtown. That’s driving up rents and housing prices. Also, investors are renovating properties, and so we are seeing more available rental properties that are in in decent condition.
A decent case study is 107/105 Fourth Street. We recently helped a buyer from Virginia acquire those apartments. The previous owner had owned them for over 15 years, and they were in pretty rough condition with low rents. The new owner is going to make an investment into renovating the units, and with the help of professional property management, they will lease them at market rates. The location of the property is great–the condition was terrible. Now that complex (surrounded by young, professional homeowners) will probably target young professional or medical tenants, and we’ll see it on our rent study next year, my guess is on the higher end of our graphs.
You’ll also see in the graph a strong correlation between the “Score” and the price per foot. Our scoring system is a somewhat arbitrary numbering of properties by both location and condition from 1 to 5, and then averaging these two numbers together. Thus, a property with location of 4 and condition of 5 scores a 4.5 in this measure. The number again is somewhat arbitrary, but the correlation is quite strong. So I would assign a property in rough condition and poor location an estimated rental rate of .65/ft, while a property with a good location and great condition an estimated rental rate of .95/ft. Note that this measure doesn’t take into consideration size, which the first graph makes clear is highly correlated with the rental rate.
I think this is great news for our Downtown rental market. Augusta is changing, and I believe that the rising tide will lift all ships.
What are your thoughts? What has your experience been in the rental market?
The primary Class A Complex in our study was Nine Two Six West, at 926 Stevens Creek Road. Nine Two Six averaged $1.26/foot/month asking rent. Rocky Creek and Iron Horse we considered Class B, which averaged at .84 cents. Fountainhead we considered Class C, and averaged $.69.
Takeaways: It does make a difference who the management company is, where it is advertised, and having good photos and floor plans.
If you are a multifamily investor with north of 20 units, you should sit down with the guys at Doorpost Management. They can give you the same economy of scale as the as the 200+ unit complexes with their integrated maintenance. Also the quality of their financial reporting is critical for owners that may be considering sales in the next few years. It’s hard to get a professional investor to take a serious look at your property when your manager can’t provide clean financials and rent rolls.
Southeastern Development received a recommendation for approval on zoning revision to modify the shape of the site on Blackstone Camp Road. The property is near the upscale River Island Subdivision in Columbia County. The project would be limited to 274 units, and would follow the River Island PUD narrative design standards. Southeastern Development has already started the site work. The project was technically approved in 2002. It recently has received a lot of criticism from neighbors, including a petition for the Columbia County Commission to reconsider.
I think this is a good project and will ultimately be good for this community. I think it’s important to have a healthy mix of housing, and new Class-A apartments force older complexes to lower their prices, and create a cycle which helps create a diverse offering of housing products. Also, A-Class housing becomes B-Class housing, B-Class housing becomes C-Class, and so forth.
It seems that lower-income neighborhoods that don’t want to see change and diversification fight against gentrification, while higher-income neighborhoods that don’t want to see change fight against “higher crime rates” and “overcrowding of schools”.
This is Jonathan Aceves with an update on Multifamily Transactions in the 2-8 Unit Space for 2019. Here’s the Spreadsheet: 4th Quarter Market Report.
Overall, the market was steady in small multifamily for the year. The average price per door was $58,256, with an average Gross Rent Multiplierof 7.56. Anecdotally, we have seen overall interest in Downtown multifamily increase significantly.
Downtown, we’re seeing rents increasing, and I think this is helping to drive investors to renovate buildings and put make new product available. The 8-unit complex we sold on Fourth Street I don’t think would have sold two years ago, but rising rents made the property compelling for an investor willing to upgrade the units and reposition the property to students and young professionals.
We reviewed 36 transactions from 2-8 Units, with an average of $58,256 per door, and an average GRM of 7.56. Average price per foot was 64.07. We did find that GRM went down slightly over the year. There was one outlier, and when removed the Average GRM was 7.77.
We’ve shown Days on Market by this box and whisker graph, and it shows that 50% of all transactions closed betwen 50-150 days. There were some transactions that closed over a much longer period, one over 300 days and one at over 700 days. The overall average was 116 Days. I think what this shows is that if priced correctly and adequately marketed a multifamily property should close within 4-5 months.
My experience has been that if priced correctly, a multifamily property in this category should go under contract relatively quickly. We tend to suggest pricing a property with a fair margin to an investor, using market financing assumptions. Here’s a simple spreadsheet you can use to help think through a multifamily deal: Basic Multifamily Underwriting Worksheet.
Thanks for reading! What do you make of the numbers? What’s your opinion of the market?
Downtown Augusta continues to announce new projects and developments! Developer Ivey Development announced Friday they had closed on the land for a new downtown apartment complex. This new development is in the immediate vicinity of two other ongoing development projects on Telfair Street, and three blocks from the newly completed Georgia Cyber Center.
Ivey Development, developer for the 155-Unit Apartment Complex at 11th and Fenwick in Downtown Augusta, announced on Friday December 6th that they had closed on he land and were moving forward with the project. McKnight Construction has been selected as the General Contractor. The land was purchased by Ivey Development from Jeff and Joey Hadden, who also own Phoenix Printing across the street.
This project is 500 feet from Augusta Office Solutions’ new building at 1024 Telfair,and a block from the city’s new fire station at 928 Telfair Street. RD Brown is the general contractor on 1024 Telfair Project, which appears to be moving along nicely.
This is great news for the City of Augusta! 155 high-end apartments will help fill in the housing gap created by continuing downtown developments, and will continue to press demand for retail and office space in the Central Business District.
Congrats to Beman Group and Ivey Homes on what looks to be an incredible project! McKnight Construction Company, Inc. will serve as the general contractor. Trotter-Jordan represented the seller.
What is your opinion of the downtown momentum? What do you think we will see in 2020?
132-Unit Student Multifamily Housing Development on Druid Park Ave given preliminary approval. Myrtle Beach Developer College Acres has proposed to build a four-story #apartment development aimed at Paine & AU students. David Despain, the developer, has developed a number of similar properties, and was also involved in working with Coastal Carolina University for the development of the HTC Center in Conway, SC.
It is great to see developers take notice of what’s happening in Augusta. This looks like a great project and should have a big positive impact in that neighborhood!