Homeowners usually buy houses based on the price-per-square-foot, but real estate investors think a little differently. When it comes to purchasing property, real estate investors are interested in the potential cash flow a property may generate. A popular tool used to evaluate profitability is called a rent roll.
A rent roll is a consolidated report that tells an investor who the tenants are and how much they pay in rent. A rent roll also discloses which tenants have paid their rent, and when the last rent payment was received.
Additional information on a rent roll includes if a unit or home is occupied (important for multifamily investors or single-family home investors with a large portfolio of rental properties). A rent roll details tenant occupancy length, lease expiration data, tenant payment history, and the amount of refundable security deposit.
Rent rolls can be created for any type of income-producing property – such as a single-family home, a multifamily property, or a short-term rental. A consolidated rent roll report may also be used for groups of rental properties at the portfolio level.
Benefits of Having a Rent Roll
Real estate investors interact with property managers, lenders, and prospective buyers when the time comes to sell. Each party uses the rent roll report to see the current rental income a property is generating. The rent roll also may be used to understand whether current rental income might increase or decrease.
1. Benefits for Investors
The rent roll helps owners and investors maximize cash flow by revealing if a tenant is past due on the rent and if late fees should be assessed. If a tenant has a history of paying the rent late, it may be an early warning sign that it’s time to start looking for a new tenant. A rent roll will also show which leases are coming up for renewal in the next few months so that the tenant may be signed to a new lease well before the expiration date.
2. Benefits for Property Managers
Property managers handle the day-to-day details of rental property ownership, such as rent collection, tenant communications, and making sure the property is well maintained to help value increase over the long term. By using a rent roll, property managers can see if rent is paid in full and on time.
3. Benefits for Lenders
Lenders use the rent roll to help calculate the debt service coverage ratio (DSCR) when a borrower applies for a rental property loan or when the current owner wants to refinance. The DSCR tells the lender how much additional cash is left over after the operating expenses and mortgage payments have been paid.
DSCR is calculated by dividing the net operating income (NOI) by the mortgage debt service payment. A lender determines the NOI by taking the gross rental income reported on the rent roll and subtracting the property operating expenses reported on the income statement.
4. Benefits for Buyers
Buyers also benefit from an accurate and up-to-date rent roll. When a rent roll is properly prepared, it is easier for a buyer to predict if future rental income will change based on the payment history of the tenants. Buyers can also use the rent roll when conducting due diligence and analyzing possible real estate investments.
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