There is one method you can use when valuing a rent roll in Australia, which relies on International Valuation Standards and the official definition of market value.
However, different valuers use different data when applying this method. Some use historical data and numbers, others rely on current rents and commission rates.
I use the rent roll data assuming the following; the analysis of the rent roll is as at the valuation date not historical data and numbers. the reason the current data and then annualise it is the it is the most current data, i.e. it picks up all properties, picks up the current rents & commission rates, whereas historical data review the past 12 months - which doesn't pick up new listings and current rents rather is averages the %rate etc.
If two parties get independent valuations, it is important there is an agreement as to which method each party is using. Ideally, the valuer will submit a letter of engagement upfront. This will include the basis on which the valuation will be conducted. At this point, if there is another valuation being carried out, all valuers should agree on how data is used.
After building your rent roll, you may decide to sell all or part of it to raise funds for new opportunities.
When you reach this stage, the question on everyone’s lips will be, “How much is it worth?”.
There are two methods, or ‘formulas’ which are generally used to determine the value of a rent roll. Neither way is definitely correct, however if you have a situation where two parties are getting valuations independently, the same formula should definitely be used for both. If the methods used to determine market value differ, the resulting amounts will be different.
Formulas to value a rent roll
The first way to value a real estate rent roll based on numbers is to look at historical performance data then base the valuation on past figures.
The second formula relies on the same data but only from a very up to date time period. This is sometimes called ‘settlement data’ and I believe is the correct method as it includes the most recent information.
When using historic data, valuers will look back at factors including all or some of the following:
Properties under management
Average weekly rent
Average management fee
Any additional income through fees and charges
Number of landlords
Outstanding accounts
Business operating costs
These will all be taken into account, along with other factors like staff and administrative resources, to determine the value of the rent roll.
The difference between historic and current data can be significant. For example, if a real estate agency has managed an average of 500 properties at a time over the last five years but has recently grown by an additional 100 properties, the current value/ settlement data value will be more than the historic value.
If an agency has downsized and gone from 500 managed properties to closer to 350, this historic data will be inflated when compared to the current value. It is unlikely a buyer would be interested in using historic data in this scenario.
How to value a rent roll
Strictly speaking, neither formula is ‘right’ or ‘wrong’. However, at BDHS we believe applying the most up to date data at settlement provides a more accurate assessment of the rent roll’s real-time value. Things are changing more rapidly than ever and because a rent roll did very well two or three years ago doesn’t mean the pattern will continue.
The valuing method I recommend and work from is as follows:
Annualised management fees as at valuation date( assuming all properties are occupied and not in arrears), multiplied by the multiplier factor.
The multiplier factor is the market value as defined in the International Valuation Standards. What influences the multiplier is the number of properties under management, geographic spread of the properties, the percentage rate, the actual rent paid, the length of time managed and other factors such as arrears, vacancies and ancillary fees charged.
If you are working with an independent valuer and your potential buyers are doing the same, both parties must apply the same formula. If one party is using historic and other working from up to date figures, the results are more than likely to be very different. As a result, negotiations will be far more difficult.
Agreeing on a formula
Before you embark on a journey to sell your rent roll, have discussions about which formula will be applied by your valuer and document this in your Heads of Agreement. Ask them to share case studies on how this has worked for other agencies in the past.
Be mindful of the fact your buyer will wish to pay the lowest price possible. If historic data will help them bring this about, they may request to use this formula. It is also advisable to broker an agreement between the vendor and the buyer as to which methodology will be employed.
However, there are many other factors which can be included when determining the price of your rent roll, including:
the number of agents in the area
your timeline for selling
the reputation of your business
the geographic spread of properties
types of properties
vacancy rates
quality of properties
length of management agreements
number of properties owned by each landlord
It may be possible to leverage these factors to bring the value more in line with what you are hoping for.
To get the best possible price for your rent roll, speak to someone who has experience with valuation and sales. Having helped with similar transactions in the past will allow them to create the ideal strategy for your agency.
BDH Solutions are rent-roll agents with over 30 years experience in connecting the right vendor with the right purchaser. To stay up to date with our latest listings, register here.