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When investing in a rental property, you are actually buying the property and the income that your property generates.

It's often easy to value the house based on the price-per-square-footage. However, in real estate investing, it could be harder to use a rent role to measure the value of your income stream. This is especially true during economic volatility and unusual market conditions.

When do you use a rent roll, and how do you read it so that you can properly determine the value of your property before buying or selling?

What's a Rent Roll?

A rent roll shows you the rental income from any real estate asset. Typically, the rent roll is constructed for any real estate that produces an income, such as multifamily buildings, commercial properties, and single-family homes. Usually, commercial real estate includes shopping centers and office buildings, as well as land that's leased for agricultural use.

Though some people see a rent roll as a simple-to-read document, the information on the rent roll is used in various financial performance formulas for rental property. This includes the gross rent multiplier, cap rate, internal rate of return, and net operating income.

Whether it's a multifamily property or not, you must keep detailed financial records, and the rent roll helps you do that.

How the Rent Roll Works

How does a rent roll work? Generally, rent rolls can be property-specific or may be developed as the master rent roll for your entire rental property portfolio. The exact information shown when you create a rent roll can vary based on the property type. However, a good rent roll includes this information about the rental property:

Rental Property Information

  • Market or zoning area of the property (suburban, urban, mixed-use, residential)
  • Type of property (multi-unit, single-family, etc.)
  • Property address
  • Name of the management company or property owner

House and Unit Data

  • Lot size
  • Number of bathrooms
  • Number of bedrooms
  • Square footage
  • Unit number (1, 2, A, B, etc.) if that property offers multiple rental units
  • Additional features (freestanding storage shed, back yard deck, two-car garage, etc.)
  • Other amenities (near greenbelt, HOA, swimming pools, etc.)

Tenant Information

  • Rent concessions provided by landlord to tenant
  • Lease end date
  • Lease start date
  • Complete lease term
  • Security deposit that's held by the landlord
  • Prepaid rent
  • Past due rent
  • Date the rent was paid
  • Additional tenant expenses (storage fee, parking fee, pet fee, etc.)
  • Monthly rent
  • Name of tenant
  • Monthly income if known

Tenant Rental Income Summary

  • Total annual rent collected (pest control, landscaping, other annual fees to charge tenant, extra rental income, etc.)
  • Total monthly rent collected

Rent Roll Example

Spreadsheet software, such as Google Sheets and Microsoft Excel works well when you want to create a rent roll. A rent roll indicates when the lease began, includes the property address and any rental concessions. It also lists the square footage and property type.

Click here to see a sample template that you can copy and edit.

Where the Data Comes From

There is a lot of information on your rent roll document. However, the data for the rent roll comes from only a few sources:

  • P&L for annual gross income and monthly gross income
  • Lease agreement or tenant file from rental units
  • Appraisal report for size and number of rooms
  • MLS listings (if property was bought from your real estate agent)
  • County tax assessor (zoning, lot size, property size)

Who Uses Rent Rolls?

There is much more to the rent roll than you initially see. Many real estate agents focus on the balance sheet and P&L, but the rent roll for the rental property can offer a surprising amount of information on just one page.

Ultimately, a rent roll is your all-purpose document, and it's used by income property managers, buyers and sellers, lenders, commercial real estate investors, and landlords. With that, some government agencies might require a rent roll, too.

Sellers and Buyers During Due Diligence Process

A look at the current rent roll can tell a prospective buyer or seller whether that property has been stable in generating gross rental income. With that, when you compare the fair market rent to what the tenant currently pays, you can see the potential for increasing the house's value by raising the rent.

If your tenant's lease is up for renewal soon, a seller can proactively extend it and could sell their property at a higher price. This is because the tenant is now stabilized for another year.

Ultimately, some buyers pay more for comparable properties when they know that the future income stream is fully predictable. Therefore, this part of the due diligence process is crucial.

Landlords and Property Managers

Your rent roll offers an early warning sign to owners and managers that there could be a problem with the tenant.

If they start paying rent late or are slow to pay regularly, this is a red flag. You have the security deposit in case but don't want to use it if possible. With that, you can't raise rent prices if you know that someone isn't likely to pay it in full.

You may have to evict the tenant and have the property pre-marketed to reduce how much downtime there is for repairs and vacancy.

Real Estate Investors for Analyzing Potential Deals

Residential and commercial real estate investors use the rent roll to search for potential in the rental property, verify the current rental income, and anticipate any future problems with cash flow.

When you compare the rent roll to your income line on a profit and loss statement, you instantly notice if the gross income is reflected accurately on the P&L. Once you get the comparative market analysis (CMA), the rent roll report indicates whether the tenant is paying rent at a fair market rent, or if there's an increase available somewhere.

With that, the rent roll helps an investor determine if there might be problems with cash flow. For example, a tenant pays rent late, or their lease is coming up for renewal. These are both signs that cash flow could be reduced if they must be evicted. Your income might temporarily stop, and vacancy rises because the tenant might not renew their lease.

You may find rental properties listed on various marketplaces that include rent roll information. That way, you can see the lease start/end dates, security deposit amount, rent payment status, and more.

Mortgage Lenders and Brokers

Lenders, banks, and mortgage brokers definitely know how to use a rent roll to help them evaluate the risk of approving a loan, opening a HELOC, or making a cash-out refinance. Generally, lenders review their rent roll to determine the future potential for income generation of the property.

For example, you might have a high historical turnover rate and notice the vacancy rates increase too. As the lender, you realize that there are issues with the rental property's condition, the property management company, or the tenant screening procedures.

Five Ways to Use a Rent Roll

It's time to see how everyone can use a rent roll to forecast and measure the potential outcome and performance for their real estate rental property.

To get the best rent roll analysis, you should obtain copies of the document for different periods of time to use as the baseline information. This includes:

  • Annual rent rolls (last two years)
  • Same month a year ago rolls
  • Current month

Tenant Renewals and Turnover

If the tenant's name changes each year or within the same year, your property has a 100 percent turnover rate or more. Ultimately, you reduce cash flow during the vacancy period, and the money has to be spent on leasing fees and marketing.

The question here is why you have such a high tenant turnover rate with lowered renewal rates. When the lease ends, the tenant decides to leave.

With that, you should thin, about the first rent payment because it could take a while. Most property management firms prorate the lease but wait until the next month to collect. Check your current lease details on your prime piece of real estate. Then, look for any signs in your rent rolls that indicate a high turnover and low renewal rate.

Rent Growth

When you compare same-month reports for each year, you can determine if your rental revenue increases and how much. Compare this to the average growth rate in the area to determine how your investment property performs versus others in the same market. As a real estate investor, it's up to you to ensure that these numbers keep rising.

On-time Rent Collection

You should look at the percentage of time between when the rent gets paid and the due date to determine how good the tenant is. This also shows you how able the property management firm is.

On-time rent payments can help you determine if you should renew a tenant's lease. If you've got someone who consistently pays late, it might make sense to proactively market the space for lease and not renew the current lease, especially when the market is strong.

Late Fee Income

Many landlords view the late fee income as "found or free money." It's basically an extra source of income. If your normal rent each month is $1,000 and the tenant pays late, accruing a $100 fee, that $100 is extra money.

However, if you have a property where the tenant consistently pays late, this could be a problem. They may choose to break the lease or require eviction, so you're spending more in legal fees and repairs than what you made in found money.

Evictions Activity

If you see that the real estate has a different tenant each year, you should ask the seller if each one was evicted. If they were, ask them if they left voluntarily or had to be taken to court. That way, you get a better idea of what fees you might have to pay before renting it to someone else.

Conclusion

Real estate investing requires a lot of work and effort, and your rent roll document could be the most valuable tool available. Rental property investors can maximize their gross rental income while improving property performances.

You can get a lot of information from a rent roll report. It's in your best interest to create one as soon as possible. Remember: rent rolls compile a lot of data to help you figure out what's right for your property.

David Bitton

David is the co-founder & CMO of DoorLoop, a best-selling author, legal CLE speaker, and real estate investor. When he's not hanging with his two children, he's writing articles here!