An Investor’s Guide to Rent Roll
A rent roll is one of the most important tools for analyzing a prospective investment. Here’s what you should look for.
When you’re considering investing in a commercial property, the status of the current tenants and their leases will have a major impact on the initial value and the future net operating income of the property.
Knowing how to read a rent roll, and understanding which factors you should pay most attention to, will help you make the wisest possible investment decisions.
What Should a Rent Roll Include?
A rent roll should provide an overview of every tenant currently occupying the property and the details of their leases. In particular, rent rolls typically include the following information for each tenant:
- Unit number
- Lease start date
- Lease expiration date
- Type of Lease
- Monthly base rent
- Rate per square foot
- Renewal options
It should also mention any other details that might affect a tenant’s lease, such as right of first refusal or right of first offer.
Things to Look for When Reading a Rent Roll
If you know what to look for, you can learn a lot from a building’s rent roll. In particular, a rent roll can help you assess the risk associated with investing in this property and the income you can expect to generate from it.
Using a Rent Roll to Evaluate Risk
There are a number of factors you may see on a rent roll that could indicate a higher level of risk for this particular property. These include:
Expiration Concentrations: Are multiple leases set to expire around the same time? This can create risk for investors. If multiple tenants decide to not renew their leases in the same month, it may be more difficult to fill the empty units.
High Vacancy Rates: If vacancy rates are high for no apparent reason (such as renovations or a number of prospective tenants in the midst of the application process), this could suggest that there is something wrong with the property or that rent is too high. It also increases the risk for prospective investors, who will need to fill these vacancies as quickly as possible in order to increase the property’s net operating income.
Tenant Concentrations: If one tenant leases the majority of the property’s square footage — such as in a grocery-anchored retail property, for example — this can increase risk for investors. If that tenant does not renew their lease, it will have an outsized impact on the property’s net operating income, compared to a property where the rent is more evenly divided among tenants.
Using a Rent Roll to Predict Future Income
At the most basic level, one of the important things a rent roll will show you is the gross income a property is expected to generate. You can calculate this by simply adding up the annual rent of all current tenants.
Beyond this, rent rolls can also be used to identify opportunities to increase the property’s income. For example, if one property has a lower rate per square foot than a comparable property in the same neighborhood, this suggests that you might be able to raise rents and increase your profits.
Rent Roll and Weighted Average Lease Term
Another useful insight that a rent roll can help you calculate is the Weighted Average Lease Term (WALT). The WALT measures the average amount of time left on all the property’s current leases combined.
This metric is useful for underwriting, because it helps you understand how much work you’ll have to do to keep occupancy rates up. A smaller WALT indicates that you’ll need to do more work with leasing the property in the near future.
A commercial property’s WALT will vary depending on the asset. At Excelsior Capital, we look for a WALT of at least three years for flex properties, and at least five years for office buildings.
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