The goal of every real estate investor is to make money! That said, tracking and evaluating that investment is critical to success. Property management firms and landlords alike turn to rent rolls as a means to do just that. So, what is a rent roll, and how will it help property owners drill down into every penny of their investment? Join us below as we discuss the benefit of a rent roll in real estate, tips for evaluating ROI potential, plus the top mistakes to avoid before they kill your profits!
What Is a Rent Roll in Real Estate?
It is no secret that keeping detailed financial records is important for investors and landlords. In short, a rent roll serves as a statement of rental property value. It easily allows landlords to view rent due, late fees, and lease terms while providing a snapshot of expected and historical income.
That said, it also helps owners determine whether the rental rate matches the current market value or can be increased at renewal. One great feature is that a rent roll is broken down by property or unit. So, it is far easier to see the bigger picture of a tenant’s payment history and take action as needed.
Who Benefits from a Rent Roll in Real Estate?
Many individuals reap the benefits of a detailed rent roll in real estate. So, let’s take a look at some of these individuals and just how this document helps in various situations.
- Property Managers – Analyzing a rent roll and each property’s performance allows managers the opportunity to make adjustments. In turn, this helps to increase profitability. Furthermore, seeing a detailed log of transactions and information at your fingertips is a more efficient way to complete daily operations.
- Potential Investors – If you decide to sell the property, potential investors can use the rent roll to analyze income performance. Knowing what to expect based on the property’s financial history can prove to be the deciding factor in their choice to buy – or not.
- Investment Owners – When a property management firm handles the daily operations, owners utilize a rent roll to help make decisions regarding their investment. For example, if the rent is under the market rate, owners may consider some minor renovations as a means to boost rental rates and profit.
- Banks and Lenders – Are you looking to refinance? Well, prepare to send a rent roll to the bank or lender. These institutions use rent roll in real estate to profit-earning potential and the stability of an investment property. Also, keep in mind that a rent roll in real estate tracks gross income and does not factor in such items as mortgage payments, insurance, taxes, utilities, or maintenance.
What is Included on a Rent Roll?
Now that you know what a rent roll is and how it is used, let’s delve a little deeper. Some property management software complies and creates a rent roll for you. So, if utilizing these programs is in your budget, it is definitely worth considering the investment.
However, a rent roll is easily created using an Excel spreadsheet. Therefore, once the basic outline is in Excel, all landlords need to do is input the information as it comes. Keep in mind, every property is different, and some may require investors to track additional information. However, continue reading below to learn the basics of setting up a rent roll in real estate.
The document heading should include information that identifies the property and the owner for ease of use. So, ensure it includes the following at minimum –
- Property Owner Name
- Rental Property Address
- Management Company Name (if applicable)
- Unit Identifying Specifics (should exactly match the lease)
- Tenant Name
Information to Include on a Rent Roll Spreadsheet
- Square Footage – Knowing the property’s square footage is vital to running side by side comparisons of local competition or other units in your portfolio.
- Beds and Bath Count – How many bedrooms and baths help determine rent and compare rates or profitability against other similar properties on the market.
- Security Deposit Collected – Record the amount of security deposit collected from the tenants at move-in.
- Rental Amount Owed – Enter the rental rate due for each month.
- Additional Tenant Charges – Record additional tenant charges apart from the monthly rental rate such as pet fees, utility charges, late fees, or parking. Also, do not forget to notate what each charge is for.
- Rental Amount Paid and Date – Enter the amount and date of any payments towards rent or other fees to maintain a running credit or balance due.
- Rent Totals – The total rent due and collected needs to be recorded for each month and each year for the property. This offers landlords a quick reference guide to how their tenant is doing with payments.
- Lease Start Date – Add the date the lease started.
- Lease-End Date – Track the date the lease ends so you can properly anticipate and prepare for renewals.
- Comments or Notes – Use this area to add notes on the specific unit or tenant needs and track expected increases.
How to Tell if a Property Will Be Profitable as an Investment?
Real estate investment comes with inevitable risk. That said, investors can mitigate risk by doing their homework with the help of a few key metrics. So, join us below as we discuss a few formulas every investor needs to know.
Calculating Investment Cash-on-cash Returns
Cash-on-cash return calculation measures a property’s profitability. However, keep in mind that this equation does not account for repairs, mortgage, or capital expenditures. Ideally, landlords are looking for a cash-on-cash return percentage of at least 8% to 12%. So, let’s take a look at how to calculate this below.
- Step 1: Gross Income – Operating Expenses = Annual Net Income
- Step 2: Annual Net Income / Purchase Price = Cash-on-cash Return (convert to percentage)
Pro Tip: Looking for an easy way to calculate property returns? Check out the free Investment Property Calculator from AARP.
1% Rule – Evaluating Potential Rental Income
Understanding profit margins may potentially sway your decision between listings. The 1% rule states that the gross yearly income should be equal to or greater than 1% of the total purchase price. This simple formula helps investors ensure the property they choose generates sufficient income to cover expenses.
50% Rule – Anticipating Expenses
Not even the savviest landlords can avoid expenses. The 50% rule allows investors a way to estimate operating expenses versus gross income. Therefore, the idea is to plan for 50% of all gross income to go towards various expenses and operating costs. Some of these expenses include, but are not limited to:
- Property Taxes
- Landlord and Property Insurance
- Maintenance Expenses
- Owner-Paid Utilities
- Vacancy Loss
- Management Fees
- HOA Dues
Profit-Killing Mistakes Every Landlords Needs to Avoid
When it comes to real estate investing, profitability is king. While preparation is key in real estate deals, you could be losing money in ways you never imagined. So, with that in mind, continue reading below as we list some of these common profit-killing mistakes and how to avoid having them chip away at your bottom line.
- The Location is Mediocre at Best
- You Didn’t Crunch the Numbers
- Spending Money You Will Never See in Returns
- Skipping the Tenant Screening
- Not Charging the Right Security Deposit
- Endless Turnover Equals Endless Vacancy
- Maintenance Issues Fall by the Wayside
- Not Completing Inspections
- Slacking on the Paperwork
- Forgetting that Business is Business
The Location is Mediocre at Best
Location, location, location – it is, after all, the first rule of real estate. Location is significant to renters looking for convenience and amenities as well as what the property itself has to offer. So, if the location fails to make the cut on safety, schools, or proximity to transit, dining, and shopping, investors are in trouble.
Therefore, undesirable areas mean a property will take longer to rent or may not attract the high-quality tenants every landlord wants. This all adds up to lost income, so choose your location carefully! If the property is already a rental, use the tools available to see how it has been performing in the past. A rent roll in real estate can provide a wealth of information on a potential listing.
You Didn’t Crunch the Numbers
Calculate and then recalculate when considering a property for investment potential. The important thing here is, to be honest with yourself and follow the numbers. So, if the calculations do not add up to a profitable property, then move on to the next. Otherwise, skipping this vital part of an investment real estate transaction could leave you with only barely enough rent to cover expenses and no profit. Furthermore, continue running the numbers each time a lease comes up for renewal. This ensures it is still in line with local rental market value.
Spending Money You Will Never See in Returns
Not every upgrade will provide rental property owners the return on investment they seek. So, any renovations need to be thought out carefully. Keep in mind that it is a good idea to avoid luxury or overly custom designs that will not appeal to a wide audience in a rental. So, take a look at the local competition and the rental rates different properties command. Then, stick to neutral colors, durable materials, and adding value with multi-function storage or spaces.
Skipping the Tenant Screening
Having a reliable tenant who pays rent on time and takes care of your property is every investor’s goal. So, to help make that a reality, landlords need a comprehensive screening process. Skipping this step of verifying a tenant’s income, rental history, creditworthiness, and criminal background leave landlords vulnerable. Therefore, devoting time and effort to screening helps to prevent issues and even evictions down the road.
Not Charging the Right Security Deposit
Like completing tenant screening, charging the right security deposit provides peace of mind to landlords. This deposit helps to cover damages beyond normal wear and tear. Typically, a security deposit is equal to one or up to 2 months’ rent. Not charging a security deposit or only charging a small amount as a means of appealing to renters will backfire in the end. So, there are three factors to consider when deciding how much deposit is right for your property.
- What is a reasonable amount compared to the local competition? – Research local competition in the area and see what others are charging. If the rental rate is similar, but your deposit is twice as much, this could deter tenants.
- Does the security deposit amount abide by state or local laws? – Most states have laws that regulate how much security deposit a landlord can charge. So, knowing these laws allows you to avoid the hefty fines and consequences of violating state regulation.
- What does a deposit cover? – Understanding what a security deposit covers help to determine the amount to charge. The deposit can apply to unpaid rent as well as damages beyond normal wear and tear. That said, always retain copied of receipts and proof of any damages in need of repair.
Endless Turnover Equals Endless Vacancy
Simply put, the longer it takes to turn over a property, the longer a landlord will wait for a paying tenant. So, time is of the essence! Expenses quickly add up, and you will want to ensure you set aside funds and have contractors ready to turn over the unit efficiently. Failing to do so costs both time and profit.
Maintenance Issues Fall by the Wayside
Protecting your valuable investment property takes proactive action from landlords and cooperation from tenants. So, if you think allowing maintenance needs to go unchecked or unrepaired is saving money, you are mistaken. Not only does not completing repairs give the tenant leverage to withhold rent potentially, but your property condition also suffers. Instead, schedule seasonal preventive maintenance check-ups for major systems and promptly address repair requests.
Not Completing Inspections
Move-in and move-out inspections are essential! Otherwise, how will a landlord know what damage the tenant has caused and what may have been a pre-existing issue? This comparison is critical to determining if any of the tenant’s security deposit can be withheld to cover said damages. Therefore, always complete a detailed walkthrough, checklist, and take photos for both the move in and move out to avoid the dreaded, “he said, she said” situations.
Slacking on the Paperwork
If you want to have a successful business, much of that depends on keeping complete and accurate records. Whether it is a rent roll in real estate or signed contracts, this is not the area of your responsibilities to slack on. Start with a legal lease that is tailored to your particular rental needs. Also, it is a good idea to have the lease reviewed by a qualified attorney. Furthermore, consider utilizing rental property management software to help track expenses, prepare for tax time, store applications and leases, process work orders, and record tenant communications.
Forgetting that Business is Business
A landlord needs to always remain professional while providing excellent customer service. That said, a tenant’s problems are not always a landlord’s problems. This is particularly evident with rent collection. While it is easy to become sympathetic to a tenant who has fallen on hard times, the lease terms must be upheld. Not only do these issues negatively affect a landlord’s bottom line, but it can also violate Fair Housing Law. Keep in mind; every tenant must get the same treatment. Therefore, if you make an exception on a late fee for one but not another, this could be viewed as discrimination. So, remember that the lease policies are there for a reason, and that is to protect your business.
The right balance of preparation and ongoing concerted effort has the potential to create a profitable business. Additionally, using a rent roll in real estate along with tried-and-true formulas for calculating profitability is vital to a landlord’s success. Hiring a professional rental property management company is another helpful step towards your financial goals.
Bay Property Management Group has the tools and experience to provide owners peace of mind that daily operations are under control. Our team offers concise reports available anywhere at your fingertips via a convenient owner portal. Our comprehensive screening and lease process mean we have a less than 1% eviction rate. We are so confident that we can lease your property to a quality tenant that we offer a 6 Month Tenant Guarantee! Give us a call today to find out how professional rental management can tap into your property’s potential.