If you're a property investor or manager, you've probably heard the term "rent roll" before. It's a fundamental concept in real estate investing that can help you make informed decisions about the financial performance of your rental properties. In this article, we'll explain what a rent roll is, how it's used, and why it's essential to your real estate business.
What is a Rent Roll?
A rent roll is a document that lists all of the rental units in a property, along with the rental income they generate. It's essentially a snapshot of the rental property's financial performance at a specific point in time. A rent roll will typically include the following information for each unit:
- Unit number
- Tenant name
- Rental rate
- Lease start and end dates
- Security deposit amount
- Move-in date
- Rent due date
This information is used to calculate the total rental income for the property and to track the occupancy rate. It is also used in the financial due-diligence during the acquisition and disposition of an income-generating real estate listing. Accurate and up-to-date rental roll is essential to buyers and sellers and their ability to demonstrate to their investors and lenders about the advantages of a deal.
Also, a quick look at the rent roll, an experienced set of eyes would be able to spot the potential of a building to grow its rent, or to establish the level of risk associated with a building
Why is a Rent Roll Important?
A rent roll is an essential management tool for property investors and commercial real estate managers for several reasons:
Understanding the Financial Performance of a Property
A rent roll provides a detailed breakdown of a rental property's income stream. By analyzing the information in a rent roll, you can determine how much income the property is generating, how much money is coming in each month, and what the occupancy rate is. This information is critical when assessing the financial performance of a property and making informed decisions about investment strategies.
Assessing the Value of a Property
A rent roll can be used to determine the value of a rental property. By calculating the total rental income and using it to determine the property's net operating income (NOI), you can estimate the property's value using a capitalization rate. This information is essential when negotiating with potential buyers or lenders.
Identifying Tenant Turnover
A rent roll can help identify when a tenant's lease is ending, which can alert the property manager to potential vacancies. By tracking the lease end dates, managers can take proactive steps to find new tenants before the current tenant moves out, ensuring a steady stream of rental income.
Improving Tenant Relations
By tracking lease start and end dates, property managers can ensure that they are communicating with tenants well in advance of any changes to their tenancy. This communication can improve tenant relations and reduce the likelihood of tenant turnover.
Live Example: Rent Roll and Valuation
As you have come to expect of Develuppers blog posts by now, each of our blog posts features a live example that allows you to see how the concept would work in practice. Let's have a look at the rent roll below and see how the rent roll determines the sale price of the property. We are assuming that the rent roll is for the year in which the sales happen:
General Rental Assumptions
| Building | Coastal Office Building |
|---|---|
| Operating Expenses (% of Rev.) |
25%
%
|
| Vacancy and Bad Debt Rate (%) |
5%
%
|
| Cap Rate |
6%
%
|
| Rent Growth |
4%
%
|
|
Purchase Price
|
|
| Purchase Date | |
| Holding Period (yrs) |
5
Yrs
|
| Exit Cap Rate |
5%
%
|
| Est. Sale Price |
Annual Cash Flows (Unlevered)
Purchase Date
TBD
Exit Date
TBD
Annual Cash Flow will appear here once the purchase date and holding period are entered
Discounted Cash-flow Model's KPIs
| ROI | TBD |
|---|---|
| IRR |
TBD %
%
|
Building Schematic will be displayed here once you put in the number of floors and units per floor
Typical Unit Schedule
Number of Typical Units
Rent Schedule will be displayed here once you put in the number of floors and units per floor
Rent Roll
| Unit number | Tenant name | Unit Class | Floor Area | BDRM | BTH | Parking | Rental rate | Rental Amount | Lease start date | Lease end date | Security deposit amount | Rent due date |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 101 | John Smith | A | 850 | 2 | 1 | 1 | $3.15 | $2,883.75 | 2019-05-01 | 2021-05-01 | $1,441.88 | 1st |
| 102 | Jane Doe | B | 750 | 1 | 2 | 1 | $3.83 | $3,016.04 | 2018-09-15 | 2022-09-15 | $1,508.02 | 15th |
| 103 | Emily Chen | B | 700 | 1 | 1 | 0 | $2.80 | $1,960.00 | 2021-01-01 | 2022-12-31 | $980.00 | 1st |
| 104 | Adam Lee | B | 700 | 1 | 1 | 0 | $2.80 | $1,960.00 | 2022-03-01 | 2023-02-28 | $980.00 | 1st |
| 105 | Erica Kim | C | 900 | 2 | 1 | 2 | $3.25 | $2,925.00 | 2021-11-01 | 2022-10-31 | $1,462.50 | 15th |
| 201 | Sarah Johnson | B | 650 | 1 | 1 | 1 | $2.50 | $1,625.00 | 2022-02-01 | 2023-02-01 | $812.50 | 15th |
| 202 | Tom Davis | C | 900 | 2 | 1 | 2 | $3.00 | $2,700.00 | 2022-01-15 | 2023-01-15 | $1,350.00 | 1st |
| 203 | Michael Lee | C | 800 | 2 | 1 | 0 | $1.90 | $1,520.00 | 2022-09-01 | 2023-09-01 | $760.00 | 1st |
| 204 | Karen Smith | A | 750 | 1 | 1 | 1 | $3.00 | $2,250.00 | 2022-05-01 | 2023-05-01 | $1,125.00 | 15th |
| 205 | Karen Davis | C | 950 | 3 | 2 | 2 | $3.00 | $2,850.00 | 2020-09-01 | 2021-09-01 | $1,425.00 | 5th |
| 301 | Emily Wilson | A | 800 | 2 | 1 | 1 | $2.75 | $2,200.00 | 2021-08-01 | 2022-08-01 | $1,100.00 | 5th |
| 302 | David Lee | B | 650 | 1 | 1 | 0 | $2.25 | $1,462.50 | 2022-01-01 | 2023-01-01 | $731.25 | 1st |
| 303 | David Kim | C | 500 | 1 | 1 | 0 | $1.75 | $875.00 | 2021-09-01 | 2023-09-01 | $437.50 | 5th |
| 304 | Samantha Lee | C | 500 | 1 | 1 | 0 | $1.75 | $875.00 | 2021-09-01 | 2023-09-01 | $437.50 | 5th |
| 305 | Jackie Lee | C | 800 | 2 | 2 | 0 | $2.00 | $1,600.00 | 2021-12-01 | 2022-12-01 | $800.00 | 1st |
| 401 | Michael Lee | C | 550 | 1 | 1 | 0 | $2.25 | $1,237.50 | 2022-05-01 | 2023-05-01 | $618.75 | 1st |
| 402 | Sophia Kim | B | 750 | 2 | 2 | 1 | $3.00 | $2,250.00 | 2022-03-01 | 2023-03-01 | $1,125.00 | 15th |
| 403 | Tom Brown | C | 550 | 1 | 1 | 0 | $2.00 | $1,100.00 | 2022-01-15 | 2023-01-15 | $550.00 | 5th |
| 404 | Emily Davis | A | 800 | 2 | 2 | 1 | $3.25 | $2,600.00 | 2020-12-01 | 2022-12-01 | $1,300.00 | 1st |
| 405 | John Smith | B | 700 | 1 | 1 | 1 | $2.75 | $1,925.00 | 2021-06-01 | 2022-06-01 | $962.50 | 1st |
Cash Flow Analysis
Purchase Date
Not Provided Yet
Purchase Price
Selling Price
| Month | Gross Potential Rent | Gross Realized Rent | Operating Expense | NOI | Capital Expense | Unlevered Cash-flow |
|---|---|---|---|---|---|---|
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| Mo.3 | ||||||
| Mo.4 | ||||||
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| Mo.24 |
Rent Roll and Operating Expenses
When assessing a potential real estate investment, it's important to understand the relationship between the rent roll and operating expenses. While the rent roll provides valuable information about the units, their rental income, and tenant details, it also plays a crucial role in determining the property's total gross realized rent. This, in turn, has a direct impact on the net operating income (NOI) and ultimately the operating expenses. Typically, operating expenses account for around 25% of the annual NOI, so any changes to rental income can have a significant impact on the bottom line. By analyzing both the rent roll and operating expense report, investors can better understand the property's potential ROI and make informed investment decisions.
Existing buildings often have a detailed schedule of operating expenses that outlines recurring expenses like taxes, insurance, maintenance, and utilities. However, if tenants started their tenancy years ago in a jurisdiction with rental caps lower than inflation and annual property tax hikes, comparing the rent roll and operating expenses can reveal disparities between income and expenses. On the other hand, if the jurisdiction permits landlords to renovate and rent at market rates, the rent roll can signal market potential. For existing buildings, it's crucial to examine both the rent roll and operating expense report to ensure the expenses align with the net operating income and market cap rates for the building type.
Conclusion
In summary, a rent roll is a critical tool for property investors and managers to understand the financial performance of their rental properties. By tracking rental income, occupancy rates, lease end dates, and other important information, property managers can make informed decisions about their investment strategies, assess the value of their properties, and identify potential vacancies before they occur. If you're a property investor or manager, it's essential to have a thorough understanding of what a rent roll is and how to use it to your advantage.