How to Evaluate a Rent Roll for a CRE Rental Property

By Published On: April 25, 20227 min read

A rent roll is a document landlords use to keep track of the cash flow of a property. This information helps potential investors and lenders determine the profitability of a property. The rent roll contains financial information about a property, such as who the tenants are, their lease terms, date and amount of payment, and whether the payment was made on time.

Read on to find out how to evaluate a rent roll for a commercial real estate property and some of the red flags to look out for.

What Is a Rent Roll?

A rent roll is a document that contains the inflow and outflow of cash regarding a property. A rent roll captures 12 months of the rental property’s history and rental income. Property owners report crucial data each month.

“What you’re looking at is kind of a thumbnail sketch of what the property makes and what it costs to keep it maintained,” said Brian Boyd, Owner and Managing Attorney at Boyd & Wills, PLLC. This financial document plays a role for investors to evaluate the potential profitability of an investment.

A rent roll is more than just the rent that’s paid. It’s the costs associated with that particular unit or tenant, and the rent roll will give you an idea of the costs associated with the property. For example, a newer property will have less maintenance, while an older property may have appliances that constantly need to be repaired.

The rent roll will tell you the rent paid and if the rent was late, and it will state whether a late fee was assessed. You’ll also see what maintenance was done to the property each month, as well as any external expenses such as a city fine for leaving trash on the yard, Boyd explained.

Why Is a Rent Roll Important?

When you’re considering investing in a commercial real estate rental property, rent roll is one financial document that will show the property’s potential profitability. Rent rolls can show rental income broken down by unit number and square footage. Of course there are many other documents to consider, and a rent roll is only one factor in determining the property’s worth.

Rent roll will give you information about the rental property that is important to consider, both for investors and lenders. You’ll see the turnover rate of a property, the tenant occupancy rate, how many vacancies the property has, and how long tenants are staying.

In many cases, a rent roll will tell you some information, but not the whole story. If you see there is a high turnover rate, you’ll still have to find out why. Is it because the property is for college students who leave every year, or is there something about the property that makes people want to leave? The rent roll can reveal clues that can lead to more questions as you are investigating a property.

When seeking financing, lenders will want to see a certain amount of occupancy on a property to determine that it is a stabilized asset.

“Lenders want to see the highest occupancy available so that you can get the best leverage and proceeds,” said Matt Rubin, Associate at Lev.

For permanent financing a ballpark number is that the property is 90% occupied, but a more accurate number will depend on market vacancy. “You could be in an area where technically a building is stabilized when it’s only 85% occupied, because market vacancy is just 15%,” Rubin explained.

What Information Is Contained in a Rent Roll?

There are a few key pieces of information that will appear on every rent roll.

Property Information

A rent roll will contain information about the property, such as the name of the management company or owner, address and type of property (e.g., multifamily or industrial).

Tenant Information

The rent roll will include information about the tenant and the specific property they are renting, like their monthly rent, any additional fees they pay, security deposit owed to the landlord, the lease start and end date and any rent concessions given by the landlord.

Tools to Create a Rent Roll

Every property manager will organize their rent roll differently. For example, some property managers would use an online management system like AppFolio that will automatically generate it, Rubin explained. Property management companies will either keep track of rent roll through a spreadsheet or PDF.

What Are Potential Red Flags on a Rent Roll?

A rent roll will be one financial document to assess when researching a potential investment property. In some cases, it can lead to uncovering more information about the investment. If you’re in a position where you’re evaluating a rent roll, you’ll want to consider the following.

A High Number of Maintenance Calls For One Unit or Property

The number of calls made about one issue is something to consider, Boyd warned. For example, if you see that one tenant has called about a broken washing machine three times in the same month, you’ll want to try and understand why. “It could be the tenant or it could be the property. You have to investigate further,” Boyd said.

Consistent Partial Payments on Rent

If the rent roll reveals that there are consistent partial payments by the tenant or tenants, you’ll want to better understand why this is the case.

A Record of Unusual Expenses

An expense can simply be a cost needed to fix a property, or a recorded expense can tell a larger story about a property. Boyd advised to look further into the expenses when you’re evaluating a property. A broken dishwasher or a leaky faucet is to be expected every once in a while, but what about a mailbox getting stolen, or property damage on a yard?

Most likely, some costs will be typical maintenance, and some may be external factors that you as a landlord and the tenant don’t have any control over. But Boyd explained that while these incidents may be one-time events, they could also uncover important information about the property and the neighborhood.

In general, when you’re evaluating a rent roll, Boyd recommends asking yourself the following questions. “What are the costs and why are they costs? What is happening to create these costs?”

Tips For Evaluating a Rent Roll

“I would always say that you want more than one year of rent roll,” Boyd explained. “Ideally, you’ll be looking at three years, including the current month with the rent paid on time.”

Another rule to consider is whether the property is profitable enough compared to how much it costs. “If you buy a property for $100,000, the rule of thumb is you want to make about 1% on it,” Boyd said.

The length of the lease is another factor to consider. “If it’s an office, retail or industrial building, you want to have a long lease term so you have limited lease rollover risk,” Rubin explained. “You want to have a high occupancy and good leases in place rather than month-to-month tenants.”

Boyd noted that the pandemic has changed the way investors are looking at rent roll. “Some tenants are waiting for their COVID relief money to come in. That will pay the rent for them until they can get back to work. That’s important to know,” he explained.

While the rent roll might report months of rent due, knowing that a certain tenant is expecting COVID relief money changes that story. The pandemic has impacted the landscape of rent roll drastically. This factor is something we haven’t seen before. Property investors are still learning to understand and adapt.

A Rent Roll Tells a Story of a CRE Property

A rent roll tells the story of a commercial real estate property, but sometimes the whole story requires more investigation. In some cases, it can point to red flags of a rental property and alert future investors to long-standing issues they might not have otherwise been able to identify. In other cases, it invites a potential investor to ask more questions and research the property further.

When evaluating a rent roll, it’s important to consider the information in its larger context. “You really have to look at an apartment building or an investment as an ecosystem. What’s going on and why?” Boyd said.

Related Articles

Related Articles