Rent roll : 9 things investors must include and why important.

7 min read

What is Rent Roll? and why is it so important?

What is a rent roll? Here is a definition.

Rent roll is a document that shows the financial and operational situation for “Rent collection” of your properties such as how many of your tenants paid “on time”. Which tenant still owes you how much of their rent.

Here is an example of rent roll.

Rent roll example

If you use a rent collection software like Beaver, everything will be automatically done but it is always great to learn why you need it.

Ok, now you understand what it is but why is it so important? The most important reason why you need a rent roll is this document is one of the most critical documents to “discuss or negotiate” based on the numbers on rent roll. There are other important documents such as financial documents (Balance sheet and Profit and Loss statement), title related documents, or deeds. What is the most important item in real estate business? RENT. yes. Rent roll can give you the details about rent collection situation.

When do you need a rent roll?

The answer is all the time if you want to effectively manage your properties. But when is it actually required? That is when you buy or sell your property and when you need to borrow money from someone or institutional lenders.

Rent roll is one of the “MUST” documents that you need when you consider to buy or sell a real estate property. You would request a financial statement but you will also need a rent roll separately for many reasons which I will explain in details later.

Of course rent roll is not the only document you need to show but I can say this is one of the most important documents you prepare when you like to buy or sell a property and when you need to borrow some money from your lenders.

You have to submit a rent roll not only when you buy a property. Some lenders require you to send some rent roll periodically to monitor the rent collection situation.

It is also great to learn how to recognize rent income in terms of accounting. You can always learn basic accounting and bookkeeping.

Who needs a rent roll?

  1. Buyer
  2. Seller
  3. Lender
  4. Landlord (Monitor rent collection until sell the property)

Buyer : needs a rent roll to see if the seller has actually collected rent. As a buyer, you would want to know which tenant has not paid rent on time if you would buy the property with the existing tenants. You can ask questions based on the rent roll. Your seller may have hidden something they would not like you to know. If they are hiding something, things will not add up on the documents.

Seller : needs to prepare a rent roll to show how much they collected rent. There will be things that you would like to hide as a seller but I highly recommend you not to do that. If you hide something and that becomes a significant issue after the transaction, you would be liable for it. Clean and honest rent roll will make the negotiation smoother. The time is money!

Lender : definitely needs a rent roll. They of course review other documents such as title related documents and deeds and definitely financial statements such as balance sheet and profit and loss statement but what do people care about the most in the financial statement? Yes, it is revenue which is rent.

They do analyze the rent roll to see the collection rate, gross amount, late fee, net amount and who is lagging to pay rent. They can make the decision if this property will be reliable to

Landlord : Isn’t it the same as seller? Yes, it is sort of. I listed this separately because you should keep tracking rent collection while you manage your rental properties. You can just prepare rent roll when you sell your property but the information may miss something if you prepare suddenly with limited time.

It is always better to prepare early. That way you can have a high accuracy and more effective date to present. The more effective data the higher probability and the faster to close the deal.

9 things you must include into a rent roll.

  1. List of units and tenant (only for internal)
  2. Types of units
  3. Current lease information
  4. Rent amount
  5. Dates of rent payment and method
  6. Security deposit
  7. Reflect additional but meaningful factors such as free rent
  8. Comparison or historical relevant information
  9. Great summary

1. List of units

The first thing to start off is the list of units and tenants. But the name of tenants is actually for internal user only. For external use, you should not list of the names of your tenants. Nowadays, the personal information is very sensitive and it is alway better not to disclose what is not absolutely necessary.

What you need is just the list of units. If you have 5 of one-bedroom apartments and 3 of two-bedroom apartments. Your items should be 8. You may think how about multiple tenants under one lease? Good question. Some buyers may want to know but I would say you would not have to include the information. The more succinct data the better it is.

2. Types of units

Now let’s add types of units. Examples are

  1. The overall type such as one-bedroom or two-bedroom.
  2. Square footage
  3. Special accommodation if relevant

These information is very helpful when you like to analyze what type of unit has higher rent collection rate or lower rent collection rate. If three-bedroom units have lower rent collection rate, there may be a reason in that area. Even there is no issue, now you have some data to discuss with the counter party.

3. Current lease information

As I wrote earlier, I highly recommend not to include the tenant’s personal information as much as possible to external use. However, it is very helpful to show :

  • Lease type such as 1 year lease or 2 year lease or Month to Month
  • Lease start date
  • Lease end date
  • Number of renewals if applicable

When you buy a turn-key property, if you see lots of leases that have close lease end dates, you need to think if you can get tenants fast enough. Number of renewals show that the tenant has lived there for a long time. That could be a good indication that the property is a good property.

You can analyze which type of lease has a higher rent collection rate. The correlation does not necessarily mean the causation but that can give you something to discuss with the seller.

4. Rent amount

Of course. without rent amount, there is no meaning of rent roll. Often rent roll shows two types of rent amounts.

  1. Actual rent amount that the current tenant pays
  2. Market rent amount

Market rent amount means you may increase or decrease the rent up to this amount. The source could be from anywhere. Maybe you can get it from brokers in the area. You can take some numbers from online property search engines such as

5. Dates of rent payment and method

This is super important. You should show the dates those rent were actually paid. If this particular tenant is always late. You may have very hard time dealing with them. Just looking at the dates of rent, you will have an idea how easy or difficult to collect rent from these tenants.

You should also consider what kind of method do the sellers use to collect rent? Lately, a lot of landlords or property management companies use online rent payment software. It is much easier for landlords to collect rent online and those softwares give you more data and easy to track the rent collection situation in general. If the seller has been collecting checks or even money order, you will have more work to collect rent if you buy the property.

6. Security deposit

I recommend this to be included in rent roll. A lot of landlords keep security deposits in the separate bank account from the main bank account you use for the daily operation. It is important to track the security deposit properly.

If you are buying a turn-key property, let’s say you did not check the security deposit properly. After you buy the property, when one of your tenant leaves, they demand the security deposit. You realize that you did not receive security deposit for the lease from the seller. You cannot demand the money from the seller if the seller insists that he or she did not receive the security deposit. Now you have to cover the security desposit.

In order to avoid this situation, you should always check each security deposit with each lease before buying the property.

7. Reflect additional but meaningful factors such as free rent

Sometimes there are some conditions or discounts apply to some of your properties. One good example is “free rent“. When the demand is not so high, landlords use free rent to get tenants as soon as possible.

The reason why the landlord gives free rent is because he or she does not want to lower the rent. The rent amount stays the same. If the rent is $1,000, the yearly rent income should be $12,000. If you give 1 month free, now your annual rent income becomes $11,000. Why would the landlord not lower the rent to $916 ($11,000 / 12)? No they would not like that because you will negotiate the lease based on the rent amount next year.

If there is a legal restriction on the increment of the rent, it will be very difficult for the landlord to bring the rent back to the previous level. Let’s say the landlord wants to charge tenant $1,050 next year. If the landlord lowers the rent to $916 first year, and the next year, $1,050. The increase is over 14% year over year. If the landlord gave one-month free, the rent, on the document, stayed the same so the increase will be only $50 from 1,000 which is only 5%. Now you know why the landlord prefers the free month method to give tenants discount.

As a buyer, you would definitely need what the rent income would represent accurately. If the free month was included in this particular lease, how much can you expect for the next year? You can prepare a lot of things in advance before even buying the property.

8. Comparison or historical relevant information agains market or previous year

When you invest in real estate, you would not only look at the current business data. You invest in real estate because you believe the the property value will appreciate over the years. In order to predict the future value, first you need historical data.

You can always check if the rent has been increasing over the years or staying the same. If you see a decline in rent amount, that is obviously a yellow flag for you.

Comparison against the market is how much you are charging against the market in the current business environment. If your rent is $1,000 for one-bedroom but the market average is $1,200, you should ask if the seller has been just missing out the difference or there is a reason why the rent has to be lower than the market average.

Comparison against historical is to see the historical performance of the property. You can use this data to make a forecast of the future performance. If you see a decline over the years, its an obvious ref flag. If you see the rent escalation over the years, you should analyze if the trend will continue going forward.

9. Great summary

It is great to have all these details but when you have multiple deals to look at, it is better to see the summary of the rent roll.

It should list the important high level numbers such as

  1. Number of units
  2. Number of units in types such as how many one-bedroom and two-bedroom apartments
  3. Overall rent collection rate
  4. Occupancy rate
  5. Material matters to discuss

Once the buyer and the seller have good understandings of the overall situation of the property, you can have a better discussion for the things that both sides care more about.

It is always better to have honest and clean information. Hiding things will create a bigger issue later and you will end up losing money.

Conclusion

Rent roll is one of the most important documents when you sell or buy a property. It is not complicated but without property information, the document is useless.

When you buy a property, you should come back to this article and see if these information is on the rent roll provided by the seller. If not enough, you should definitely ask for more information. If the seller shows yellow flags, just back off the deals. You have more transparent deals to choose from.

As a seller, I highly recommend you not to hide anything. If you have something you may want to hide, just disclose with a clear explanation why the issue happened. The investors hate uncertainty the most. If you explain things properly, they will consider it as a risk. Risk is not uncertainty. All investors have tolerance on risk. If their tolerance level is high, they will still buy your property if the risk is properly disclosed. Hiding always makes it worse.

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