Things You Need to Consider Before Purchasing a Rent Roll
Posted on 26 September 2023
Rolling into a Rent Roll? Things You Need to Consider Before Purchasing a Rent Roll
What is a Rent Roll?
A Rent Roll is the Property Management of real estate that deals with Tenants and Landlords, collecting rent, handling maintenance issues, tenant complaints and pursing evictions. In return for such services a real estate agency collects a commission and administration fees.
Why should I purchase a Rent Roll?
The purchase of a Rent Roll is of great value to your agency. It’s a great business asset that provides and generates an instant cash injection which is stable, recurring income and it’s also a great asset for when you decide to sell your agency or if you simply want to make a significant sale to generate a profit.
What to consider before purchasing a Rent Roll?
1. Location of Properties
This is often a pitfall that agencies fall into when purchasing Rent Rolls. If you are located at a significant distance as to where properties on the Rent Roll are located, clients may not wish to transfer over. This could potentially be detrimental if an owner with multiple properties on the Rent Roll decides to not transfer.
Will new staff be integrating into your team? Is it a complete handover? How many staff would be coming over? If no staff transfer over, can your current staff handle the workload, or will you need to hire additional staff? These are things you will need to consider and discuss.
3. Number of Properties under management
Ensure you consider the number of properties on the rent roll and if it is within your scope of capability of managing the number of properties. This is also a good time to consider the landlords on the rent roll and how many properties they own on the rent roll. This is important to do because if that client does not wish to transfer during the acquisition of the Rent Roll then you could be potentially losing a multitude of properties from the Rent Roll and therefore income.
4. Retention Amount and Period
Sometimes, landlords may decide to seek property management services elsewhere. This is not uncommon. Having a specific retention period and amount (such as 5% of the purchase price) if you lose clients in the aftermath of the acquisition of the Rent Roll is something you need to consider as it can provide you with protection for potential loss.
5. Restraint Period
In some cases, the agency whom you have purchased the Rent Roll from will continue operating their business. Adding a Restraint Period prevents Landlords that are tempted to return to the Seller from doing so or the Seller from “poaching” properties back.
6. Tax Implications
Rent Roll is typically treated as a CGT (Capital Gains Tax) asset. The purchase of a Rent Roll may be free of GST if sold with a ‘going concern’. Although, depending on the specifics of the contract it may attract GST. You should consult your accountant for advice specific to your circumstances.
7. Due Diligence
Inserting a Due Diligence clause is highly recommended. This clause allows you to obtain a list of the properties on the rent roll, the income they generate, the landlord etc. Further we recommend, with smaller portfolios, to check compliance with management agreements, lease agreements, bond amount, compliance certificates etc. You can also investigate what fees are being charged. Due Diligence allows you to get a comprehensive understanding of the Rent Roll and whether it will be an asset to your agency or a pitfall. We suggest engaging in an accountant and rent roll broker to assist you in this process.
8. Purchase Price, Multiple and Price Adjustments
Ensure that the purchase price is justified. This is where ensuring you perform due diligence is important. This will also ensure that the multiple is calculated correctly. Adjustments may also vary the purchase price such as leasing authorities being terminated, if any properties are in arrears of rent, if new leasing authorise are entered into between the date of contract and settlement date, if any properties become vacant between date of contract and settlement date.
HOW CAN OMNIA LEGAL ASSIST YOU?
If you are considering purchasing or selling a Rent Roll, we recommend consulting our Commercial Law team at Omnia Legal for a complimentary consultation to discuss your specific business and commercial needs.
This article provides general information on legal topics for educational purposes only, and should not be considered legal advice or recommendations. While we have taken care to ensure accuracy, Omnia Legal is not responsible for any errors, and makes no guarantees about the accuracy or completeness of the information. Links to third-party websites do not constitute an endorsement, and we are not liable for any damages that may result from using inaccurate or incomplete information. It's always best to seek legal advice for specific situations.