A real estate business can be quickly taken to the next level with the acquisition of a rent roll. This gives you instant access to ongoing management fees and allows you to build relationships with potential future buyers and investors.
Borrowing to buy a rent roll is similar to buying a house - there are caveats, policies and guidelines which must be adhered to. The bank will do just as thorough a check on your business as they would with anyone applying for a loan, so it is important to have financial records and details available for inspection.
PREPARING TO APPLY FOR A RENT ROLL LOAN
In most instances, banks prefer to lend to real estate agencies with a proven track record (at least three years of operation is ideal) and up to 200 properties already on their books. If you have done the groundwork and established the right foundations you should be able to demonstrate your agency is on a positive growth path.
Having two to three years worth of financial statements as well as profit and loss sheets will make it easier for the bank to assess your suitability as a borrower. Be ready to answer questions about your previous loan history and to provide evidence of positive cash flow within your business.
Looking forwards, you will be expected to share your business plan and financial forecasts with your lender. They will ask about future earnings potential and risk management plans in order to prove you will be able to pay back the money you borrow.
Finally, you should be able to demonstrate the systems you have in place for successfully managing a rent roll, so plan ahead in this regard.
BORROWING FROM THE BANKS
In general, financial institutions will lend up to 60% of the value of a rent roll. To borrow more than this value, you can consider securing a guarantor or offering additional assets as security to bridge the ratio gap.
When purchasing a rent roll, you can expect to be able to borrow approximately 2.5 times the earnings before interest and tax (EBIT) interest cover in the balance sheet of the purchaser’s entity.
As well as doing the financial calculations and checking profit potential, your bank will assess the previous history of the rent roll, the type of properties listed (apartments, holiday houses etc) and the number of landlords who own properties on the roll. They are looking for quality as well as quantity to guarantee the longevity of your purchase.
If you’re wondering the maximum amount you can borrow to purchase a rent roll, the rule of thumb is banks will lend up to a maximum of 50-70% of the buyer’s business balance sheet under gearing.
As with purchasing property, the lending criteria for buying a rent roll is subject to change. This is why it is important to work with an experienced broker to help you identify the ideal lender and the best rates when applying for a loan.
BDH Solutions are rent-roll agents with over 40 years experience in connecting the right vendor with the right purchaser. Download our information booklet on the new Victorian Minimum Living Standards Legislation