Any time you underwrite a multifamily deal, you want to receive the list of all the current tenants in the building, along with their lease terms. This document is known as the Rent Roll. The rent roll, as stated in the name, has the rents that each of the tenants pay, along with the lease start and end dates. Other important information can be seen in the picture below, which I will break down for you, with some important notes to make.
As you can see, each row has a unit number, with the tenants name (which I’ve blacked out), along with the size of the apartment (Square footage), lease term and other relevant information.
Why do I need all this information?
I want to highlight a few important points about the rent roll that you may not see without a deeper understanding.
- Lease End Dates: Make sure they are spread out
What I mean by this is the following: If you have a 10 unit building, and 5 of the 10 leases are expiring in May, and the tenants decide not to renew. What happens if you can’t fill those 5 units as quickly as you thought? If this happens, you could be stuck with a 50% vacant building for an extended period, significantly hurting your overall cash flow during those down months.
- Try to have all leases expire between May and September
Especially in cold weather areas like NYC or Michigan, most people do not want to pick up and move in the dead of the winter. For that reason, you want all your leases to expire in the summer, when people tend to pick up and rent new places. According to apartmentguide.com, 65% of moving happens between may and august. Another note, if you have a vacancy come in winter and your tenant moves out, you will likely be stuck paying the heat in that apartment for a few months, wasting away your cash flow you once thought you had.
- Size of the apartments matter
When analyzing a new deal, if you see the 2 bedroom, 800 sq. ft. apartments on your rent roll are renting for $850/month, this means the sellers are getting $1.06/sq. ft. ($850 divided by 800 sq. ft.). When you go look at nearby comparable rents to see if there is room to increase the rents, do not be fooled by a 2 bedroom apartment renting for $1100. Take a look at the size of the unit. Is it the same 80 square feet as this deal? If it is, then great! You might have a good deal. If you see the units at the other property are 1095 sq. ft., then you will see that the other property is achieving about $1.01/sq. ft. What this means for you is that your rents are at about the market rents, with little room to force the rents any higher.
While the rent roll is extremely valuable to your underwriting, it pales in comparison to really understanding the rent roll and what it means for your next deal. If you have more questions, please feel free to reach out.