Welcome to the first installment of InvestProp’s Minnesota Multifamily Monitor. MMM will offer Minnesota apartment investors and owners real world buy and sell advice. The Monitor will be published Monday of each week to be read in 5 minutes or less.
Tip #1: Always Confirm the Income in a Rent Roll.
OK, so you or your broker have signed a confidentiality agreement and have obtained a rent roll from the Seller or the Seller’s broker for a specific apartment property. Congratulations, good first step. Your next step is to dump those rents into your spreadsheet or model, right? Wrong. You first need to know what the numbers do or do not represent. They could be more misleading than helpful. Here are a few tips:
1) Determine the rent roll date. If the rent roll is even a few months old, who knows what rents are in-place now. Ask for an updated rent roll dated after the most recent completed month. This way, you can underwrite value based upon true and accurate “in-place” rents.
2) Request a “Tenant Status Report” or “Aging Report.” This needs to be done in the Purchase Agreement (Look for a follow-up MMM to focus on purchase agreement clauses). It seems counter-intuitive, but just because there are tenants in place does not mean the tenant has the capacity to continue to pay rent when and if you own the property. The standard rent roll may not contain this information, so you may otherwise not have access to it. It is entirely plausible to close on a property then find out multiple tenants cannot pay rent. When this happens, you are not only out rent, but hundreds or thousands extra to re-take possession through housing court. To make matters worse, the Seller may have kept the security deposit at closing, and you are negative cash flow month 1. Ouch!
3) Request a Certified Rent Roll. This request also needs to occur in the Purchase Agreement. With a Certified Rent Roll, a corporate officer, individual, or finance professional will have to sign and state that under penalty of perjury, the rent roll is true and accurate. This is the safe way to go. Make sure you or your broker ask for it every time.
That is it. Let me know what you think. Offer your comments here.