Understanding Rent Rolls: A Key Tool for CRE Investors

Before you dive into the world of commercial investment, having a clear picture of what you’re getting into can help you avoid unnecessary obstacles and make the most of your portfolio. Taking advantage of a rent roll can help you do exactly that.

The document provides a snapshot of a property’s tenant lineup and income. This article is your guide to understanding what to look for in a rent roll and warning signs that you shouldn’t ignore.

What is a Rent Roll?

A rent roll is a detailed list of all tenants in a commercial property as of a specific date. It helps property investors and managers get a look at the income an asset is generating. Annualized income is calculated by multiplying each tenant’s monthly rent by 12 and totaling those sums.

Requesting a rent roll is an important step in commercial real estate due diligence because it allows you to go beneath the surface of a 12-month financial report to discover how a property performs on a monthly basis. That gives you a better idea of what you’re getting into if you choose to add an asset to your portfolio.

What Information is Included in a Rent Roll?

Tenant details: A rent roll should include each tenant’s name or business name, their unit number, the square footage they occupy, contact details and their industry.

Lease information: You’ll need lease information for each tenant, including the start and end dates of their contracts, the term length, renewal and extension options and escalation clauses. That gives you an idea of the income stream you can expect if you choose to invest.

Financial insight: Aside from base rent, a rent roll will include cost per square foot, common area maintenance charges, expense reimbursement, property taxes, tenant insurance coverage and outstanding balances.

Occupancy status: It’s essential to know which units are leased and vacant in a commercial property so you can determine how reliable your income will be before you sign any paperwork. A rent roll should indicate if any of the occupants are on monthly leases and whether they intend to renew or vacate so you can prepare to find replacements.

Why Rent Rolls Matter for CRE Investors

This type of documentation covers every touchpoint that matters to you as a commercial investor: property valuation, occupancy, cash flow and lease underwriting. Without it, you run the risk of flying blind and entering an investment that’s not what you expected.

A rent roll grounds your projections in hard numbers that don’t inflate returns based on best-case scenarios. You’ll see what’s actually coming in and how many tenants you have, so you can anticipate your next steps in optimizing your venture.

If you seek financing, lenders will require a rent roll to cross-reference lease documentation and confirm the viability of your returns. Commercial property income directly affects the amount a lender is willing to offer, too.

As an investor, you also need a rent roll to identify gaps in returns. Based on the information, you may find that some tenants are paying below their projected rate or that the property’s earnings lags behind the market average. That gives you opportunities to make changes or find an alternative property before you sign any paperwork.

Common Rent Roll Red Flags

Below-market rates: This could mean that you’re facing legacy tenants who are used to paying outdated rates or a weak market that isn’t conducive to higher rent. Below-market rent could also suggest a previous owner’s attempt to retain tenants without considering potential market appreciation.

Multiple monthly tenants: You could face unstable income if several of your tenants are operating under month-to-month leases. Unlike renters who are locked into multi-year agreements, short-term occupants can exit with little notice. That leaves you with a space that’s not generating revenue for an unknown period of time.

Lease expirations: Take note if a rent roll reveals multiple leases are set to expire around the same time. That may be the result of leasing the property all at once or a failure to stagger contracts or negotiate extensions. Either way, you’ll face a rollover risk that could result in lost income if those tenants decide not to renew.

Unexplained vacancies: A lack of occupancy without a clear explanation should raise some eyebrows. There may be an issue with the property that the seller isn’t being forthcoming about, such as poor maintenance, unit configuration, environmental concerns or overpricing.

Reporting inconsistencies: It’s important to compare rent rolls to leases and financial statements to determine if there are any discrepancies in the property’s net operating income. Finding some could suggest poor property management or record-keeping, which is never a good sign.

Let DRK and Company Evaluate Your Investment Opportunities

With our team’s decades of combined experience, DRK and Company is well-versed in navigating commercial real estate brokerage and investing. We live and work in the area, so you can rely on us to know the ins and outs of the Columbus CRE market. Let us handle the rent roll requests and negotiations so you can focus on making the most of your investment portfolio. Learn about our services and reach out to discuss details.