There's a steep learning curve when you first get involved in commercial real estate investing, and one concept that might be new to you is the rent roll. If you're new to commercial property ownership, then you may have heard this term for the first time recently and have questions about it. Rent rolls are crucial when you're purchasing a property or applying for a multifamily building mortgage because rent rolls can tell you a great deal about the property’s income-generating potential.
What is a Commercial Rent Roll and Why Is It Important?
A rent roll is a document that lists the units in a building, unit sizes, the names and rents of the tenants in those units, lease dates and terms, security deposit information, and other fees collected from tenants (including parking, utilities, storage, late fees, and other income sources). Although this may seem like a simple document, the rent roll is critical for understanding the net operating income (NOI) of a multifamily property, which is the total amount of revenue generated by a property less the operating expenses.
Crucial Data You Can Glean from the Rent Roll
Along with getting a good idea of the economic viability of a potential property, the rent roll can also tell you a lot of other relevant information. For instance, by examining things like the vacancy rate, average vacancy length, and other items on the rent roll, you can gain an accurate picture of how well the property is being managed.
Similarly, by comparing rent rolls from current and previous years, you'll know how well the property is performing overall, and whether you can expect growth or at least a steady income in the future. Here are other examples of data you can learn by examining the rent roll:
● Turnover rate and how often you'll have to be searching for new tenants (low turnover translates to a higher NOI)
● Potential problems with the property (high vacancy and low renewal rates can point to issues)
● Projected revenue and growth, which you can glean from the lease dates and terms
● The gross scheduled rents, which tells you the full income potential of the property at 100 percent occupancy
● Late fee collection and evictions, which can tell you about the reliability of current and past tenants
Before agreeing to purchase a multifamily property, you should always scrutinize the rent roll. There's a lot of information hidden in a rent roll’s data, including your potential NOI, property management performance, possible problems with the property or the tenants, projections for future income potential, areas where improvements are needed, and so much more.
Your lender may also want to see the rent roll to ensure the property isn't high-risk, so it's good if you understand what information you can gain from it. If you've found your next multifamily acquisition, don't delay—apply now for your commercial mortgage solution.