Why you should always undertake due diligence when buying a rent roll
Purchasing a rent roll can be a great business investment, but it is not without risks. The value of the rent roll you purchase will ultimately come down to the financial health of the portfolio, the quality of tenants, and how compliant each of the management agreements are with your local laws and standards. As a potential buyer, conducting thorough due diligence is important to not only ensure the rent roll aligns with your business goals but also could help identify any issues or major concerns before proceeding to completion.
As a buyer what should you consider when undertaking due diligence?
Financial Health of Rent Roll and Value
The first step in any due diligence should be assessing the financial health of the rent roll for instance:
is the revenue consistent or inconsistent;
how many (if any) tenants are in arrears and always late to pay rent; or
are there any unusual fee arrangements with any of the property owners or tenants?
Compliant Agreements and Tenancy Check
Next, you will want to review the management and lease agreements to check the agreements are all signed, comply with both state laws and regulations, the duration of the lease agreements, and if there are any unusual terms within any of the agreements. Does the management fee and other fees match the data within the property management software, does the weekly rent and bond amount match and what is the bond number recorded for each tenancy? Are the condition reports, such as the entry, exit, and routine inspection reports, present and on file? Are the agency set of keys tagged and available? A thorough investigation of these items will contribute to the immediate success of the rent roll purchase for you as the buyer.
Properties
Next, you may want to consider the diversity and composition of the property portfolio, ensuring the rent roll is comprised of a mix of property types, locations, and tenant demographics. You may also undertake a review of the current property owners to understand what the current turnover rate is like or if there are any owners on the list who own a high number of properties on the rent roll (multiple owners). The relationship with these property owners moving forward will be crucial to the continuing success of the rent roll you purchase.
Property Records and File Audit
As mentioned above, the first step when reviewing the property records and undertaking a file audit should be to review the rent collection and rent arrears data - how many tenants are in arrears and are there patterns with payment days. Next, you will want to understand how many tenants are due to vacate (particularly during the period after completion up until the expiry of the retention period), the number of bonds currently not finalised, and any future tribunal actions (possible or threatened).
Lastly, you should be reviewing the repairs and maintenance records in detail to understand how many repair or maintenance orders are currently on foot, the number of quotes that are pending, and the number of quotes outstanding (and for how long). Having a clear understanding of all the key rent roll data attached to the rent roll portfolio you are purchasing will give you a better understanding of what it is exactly you are purchasing and if it still aligns with your business goals and trajectory.
Due Diligence Checklist
You can find a copy of our free Rent Roll Due Diligence Checklist here.
Next steps
If you are considering purchasing a rent roll reach out to one of our experienced advisors at Vesta Law who have the experience to help you navigate the due diligence, contract, and completion stages of purchasing a rent roll.
