It is well known that Lenders have always favored fully rented properties. In the past, if the rents were coming in no one had any real issues with who the tenants were.
Unfortunately, COVID changed all of that.
With the rent deferrals we had during the lockdown and what seem to be permanent negative impacts on certain types of businesses, the makeup of a property’s rent roll can make a difference in the amount of a property loan, or in the rates the owner can secure. Either of these advantages drive a direct increase in the final NOI and resulting cap rate your buyer will attract. As a buyer’s agent, knowing this, and what to look for, can give you and your client an advantage in your purchase strategy.
Given the choice between two similar properties, if you, as the buyer’s agent, can identify the stronger renter profile, you’ve added value your competition can’t.
Similarly, when your buyer is going to replace the current occupant(s) with a stronger tenant immediately or move their own stronger operations in, the property will be of more value than the seller is building into their asking price.
Effectively you are acquiring the property for a slight discount which can be built into your purchase planning.
Given a $9 million property, where the occupancy profile can be leveraged with the purchaser’s lender to secure just a 10 basis point reduction in the mortgage rate, over 5 years your client has brought in saving of $43,323.
Assuming an average annual savings of $8,665, your client has reduced the property’s NOI by the same amount, increasing the cap rate.
Your client could actually increase their bid for the property by up to $40,000 in a competitive bid process and still be slightly ahead.
The same applies if the stronger occupant profile can be leveraged to a slightly higher loan to value. At just a 2% increase your client is saving $18,000 of their own equity; money that could be put into rent incentives to bring in that stronger tenant or to increase the purchase offer without calling for any more of the buyer’s funds.
There are a number of factors that contribute to the strength of an occupant profile:
- business type/industry (very important post-COVID)
- financial strength
- any advantages the property location adds to the tenant’s business
- number of employees that will utilize the property post-COVID
- credit history
All things that as the property owner your client should want to know for themselves as the landlord.
Is this analysis of the rent roll more work in your property search? Absolutely. But as you can see, it can have a material impact on your purchase strategy to get the best property for your client at the best price.
And it’s a step your competitors will likely not do.
Identifying additional value and using that in your purchase strategy – it clearly makes you stand out from your competition.
If you’d like help assessing the strength of a rent roll or a single occupant or advice on how to best utilize that information with a specific client purchase strategy, feel free to contact us any time.