Rent roll finance can be a great way for real estate agencies or property management businesses to source cost effective finance to fund the growth and working capital of their business.
What is rent roll finance?
If you’re reading this article, chances are that you know what a rent roll is though for those not in the industry, a rent roll is a collection of properties for which a property manager has the management rights. The property manager is then paid a management fee to manage the property for the landlord that forms part of the rent roll.
A rent roll is a liquid asset that can be traded in part or whole. There is a standardised methodology used in valuing a rent roll that is based on a multiplier of the net recurring property management income.
Rent roll finance is a type of commercial finance whereby lenders use the value of the rent roll as security for a loan. Similarly to buyers and sellers of rent rolls, the lenders will apply a valuation on a rent roll based on the relevant multiplier and lend a certain amount (usually up to 70%) of this valuation.
Rent roll finance can be used to fund the purchase of a new rent roll (sometimes up to 100% of the purchase price if using your existing rent roll against the loan), used as equity for a residential or commercial property purchase, or as growth or working capital for a real estate or property management business.
Lenders assessment criteria for rent roll finance
The key credit criteria that lenders will look at when assessing a rent roll finance application will vary between lenders though the following are a few of the focus areas that are common across most lenders;
- Characteristics of the rent roll – this will include a variety of factors such as the number of properties, geographic region, vacancy rates, arrears and concentration of landlords to assess the likely stability and growth of the rent roll income;
- Valuation of the rent roll – most lenders will require an independent valuation on a rent roll (that will also factor in the above rent roll characteristics) prior to finalising a loan facility (though some lenders will carry out this valuation internally);
- Profitability of the business;
- Management experience in running a rent roll and property management business;
- Current position with the ATO – as rent roll finance is effectively a loan against the goodwill of the business, lenders will typically want to see a clean ATO payment history and no current tax arrears. There may be some exceptions to this and in some instances, the lenders may consider paying out an ATO debt with the loan proceeds; and
- Personal financial position of the directors and owners.
The above will also largely determine whether a major bank, non-major bank or private lender will be the most suitable lender for your business. CreditSME has a strong understanding of how the different lenders and non-bank lenders will assess a transaction and can therefore quickly and effectively match your business up to the most suitable lender and secure the most competitive rent roll finance terms available.
Typical rent roll finance terms
The following outlines the typical terms for a rent roll finance facility;
- Loan size: $250k to $20m
- LVR: Up to 70% of the rent roll valuation
- Interest rates: 5% to 7% for bank and non-bank (private lenders 8% to 15%)
- Loan term: 10 years (private lenders up to 3 years)
- Repayment: Principal and interest or interest only
- Establishment fee: 0.5% to 0.8% of the facility
- Other costs: An up-front valuation and documentation fees will be applicable with some lenders
Some lenders (including all of the major bank lenders) will also require their clients to use their own transactional banking services (including trust accounts). They may also have a strong preference for their clients to use certain property management software including in house systems so these factors will also weigh into the decision for the most suitable rent roll finance lender for any business.
The best rent roll finance provider for your business?
The best rent roll finance provider for any business will depend on a number of factors including some of those mentioned above. CreditSME has a strong understanding of the property management sector and the different bank and non-bank lenders and can quickly advise the most suitable lender and the best loan terms available and manage the loan approval process for your business through to completion.
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