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How to Read a Rent Roll: Key Points for Checking Tenant Information

oscar_fudosan

I am Oscar Real Estate, a salaryman in Nagoya who owns multiple income-generating properties within Aichi Prefecture.

In this article, I will write about 'how to read a rent roll'.

The rent roll is one of the most important documents among property sales materials. If you can read it correctly, you will be able to see the 'true profitability of this property'.

What is a rent roll?

A rent roll is a document that lists the rental status of each room in a property. It contains the following information:

Room number, layout, and floor area
Tenant attributes (individual/corporate)
Current rent and common service fees, move-in date, presence and amount of security deposits/guarantee deposits
Type of contract (standard lease/fixed-term lease)
Indication if the room is vacant

What to check first on a rent roll

1. Rent for rooms with old move-in dates

Rooms where the move-in date was 5 to 10 years ago or more may have tenants paying rent lower than the current market rate.

For example, even if the rent for a room occupied in 2015 is 52,000 yen, if the current market rate is 55,000 yen, you can list it for 55,000 yen for the next tenant after the current one moves out.

Conversely, if the current rent is higher than the market rate, there is a risk that the rent will decrease after the tenant moves out. Always compare the rent on the rent roll with the surrounding market rates.

2. Tenant attributes

The risk of move-out differs between individual tenants and corporate tenants.

Individual: Move-outs occur for various reasons such as moving, job transfers, marriage, or divorce.
Corporate: Often used as company housing, with the risk of mass move-outs due to changes in corporate policy.

Properties with many corporate tenants may look stable at first glance, but there is a risk that multiple units will become vacant at the same time due to corporate performance deterioration or the abolition of company housing.

3. Recent move-in dates

Be careful in cases where move-ins are concentrated in the 3 to 6 months prior to the sale.

The seller may have relaxed move-in conditions to 'make the property look fully occupied' with the sale in mind. There are cases where long free-rent periods are set or tenants who would normally be rejected are accepted.

Check the rent and conditions of recently occupied rooms in particular detail.

4. Presence of fixed-term lease contracts

Fixed-term lease agreements do not automatically renew when the contract period ends. While the landlord can request the tenant to vacate upon expiration, the tenant is also free to move out after the period ends.

If a rent roll indicates a fixed-term lease, check its expiration date. If multiple units are set to expire shortly after acquisition, the vacancy risk increases.

5. Succession of Security Deposits and Guarantees

Security deposits and guarantees held from tenants are transferred from the seller to the buyer at the time of sale.

For example, if there is a total of 1 million yen in security deposits, the obligation to return that amount to the tenants when they eventually move out shifts to the buyer. Please verify the total amount of security deposits by cross-referencing it with the sales contract.

Case Studies of Findings in Actual Rent Rolls

I will introduce real-life examples of issues I discovered before acquisition.

Case 1: Rent set 15% higher than market rates
Out of 6 total units, 4 had been occupied for over 8 years. The current rent averaged 58,000 yen, but research into the surrounding market showed rates of 50,000 to 52,000 yen.

It was determined that when vacancies occurred, the rent would drop, causing the gross yield to fall from 6.9% to approximately 6.0%. I renegotiated the transaction price and secured a 2 million yen reduction.

Case 2: 3 new tenants moved in within 3 months of the sale
Looking at the rent roll, 3 out of the 6 units had been occupied within 3 months prior to the sale. Upon confirming with the management company, it was found that all 3 units had a 2-month free rent period, making the occupancy rate a 'facade of full occupancy.'

I requested a re-verification of the conditions for this property and ultimately decided to pass on it.

Rent Roll Checklist

This is a checklist you can use when considering a property.

Have you compared the rent of each room with the surrounding market rates?
Have you checked the rent levels of rooms with old move-in dates?
Have you checked the move-in conditions for tenants from the last 3 to 6 months?
Have you checked the ratio of corporate tenants and their company names?
Have you checked for the existence and expiration dates of fixed-term lease agreements?
Have you checked the total amount of security deposits and guarantees?
Have you checked the duration and reasons for vacancies?

Summary

Here is a summary of the points to check on a rent roll.

Rooms with old move-in dates: Check the difference between current market rates and rent.
Tenant attributes: Concentration of corporate tenants carries a risk of mass move-outs.
Recent move-ins: Check for the possibility of 'full occupancy' manipulation before the sale.
Fixed-term leases: Check expiration dates and move-out risks.
Security deposit succession: Understand the total amount and the future obligation to return it.

A rent roll is not only a document showing 'current earnings' but also a document for 'reading future risks.' By reading it carefully, you can see the true profitability that cannot be understood from the gross yield alone.

For those who want to know more

I have compiled a Kindle book featuring real-life property analysis, how to read rent rolls, and a 50-item purchase decision checklist.

"Complete Records of Property Analysis by an Active Landlord" (Real Estate Investment Practice Series, Vol. 2)

▼ Purchase on Amazon
Complete Records of Property Analysis by an Active Landlord
https://www.amazon.co.jp/dp/B0H3CRJ3HC

▼ Click here for all works in the series

Please search for "Oscar Real Estate" or "Real Estate Investment Practice Series" on Amazon, or check the link in my profile.

This article is based on the author's personal experience. Please make investment decisions at your own risk.

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