Moses Kagan on Real Estate

Why you always ask for a detailed rent roll

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If you spend a lot of time looking at apartment building listings on the MLS, you will eventually notice an extremely annoying trend: Brokers who list the total amount of rent generated by the building but not providing a detailed, unit by unit breakdown.

Why do they do this? It’s probably some combination of laziness and incompetence. The laziness piece is obvious: Who wants to take the time to type in a bunch of numbers like $433, $731, etc.? The incompetence piece is also pretty easy to explain: They’re thinking that buyers are only looking at the GRM and the cap rate, both of which are based on the total annual rent roll, not the rents of the individual units.

Why is this not OK? If there’s one dead horse I beat every week on this blog, it’s the importance of doing your due diligence on a building before you buy it. Here’s a perfect example: The total rent on a building can mask wide variations in the strength of the income stream.

Let’s say you hear about a rent-controlled 4plex with four one beds in Silver Lake where the total monthly rent is $4000 / month. The natural assumption is that each of the units is generating $1000, right? In that case, you’re thinking that the rents are low, so you’ll probably have minimal tenant turn-over and therefore no/low vacancy, making the building a low risk investment.

But what if I told you the distribution of rents was $450, $550, $1500 and $1500?┬áHere’s the problem with a building like that: The low rent tenants are obviously never leaving. But the high rent units are definitely going to have normal turn-over and therefore normal vacancy. And they represent 3/4 of your total monthly rent. So this building is a much different proposition from the one above.

I don’t mean to imply that you shouldn’t buy buildings where the rents are mixed. But you should definitely go into them with your eyes open. And having your eyes open means knowing the distribution of rents BEFORE you offer. If more brokers understood that, fewer of them would get emails from me nagging them to send through the detailed rent roll, wasting their time and my time.


Written by mjkagan

05/31/2012 at 5:27 am

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