A rent roll is the one document in a multifamily sale that describes the building as it is rather than as the seller would like it to be.
It is also the document most often skimmed. The summary line gets copied into a spreadsheet, the unit rows get a glance, and a building that is sitting a sixth empty gets valued as though it were full.
What is a rent roll?
It is a list of every unit in the building, one row each, with what that unit is renting for and under what terms. On a 5 to 20 unit property it is usually a single spreadsheet page.
A seller’s pro forma is a projection. A rent roll is a record. When the two disagree, the roll is the one with signed leases behind it.
What should each row tell you?
A thin rent roll gives you a unit number and a rent. A useful one gives you six things, and it is worth asking for the missing ones.
- The rent on the lease. Not the asking rent, not the market rent. What this tenant agreed to pay.
- Whether the unit is occupied. An empty unit still has a rent written beside it on most rolls.
- When the lease started and when it ends. Four leases ending in the same month is a risk the headline rent does not show.
- The deposit held. You inherit the obligation to return it, so it should transfer to you at closing.
- Concessions. A unit let at $1,295 with two months free is really letting at about $1,080 for the first year.
- Arrears. A tenant three months behind is listed at full rent on a careless roll.
Lease dates and concessions are where the quiet problems live. A building can show a strong rent roll and still be a month away from half its tenants leaving.
A worked example: six units, one empty
The example building is a six-unit asking $675,000. Five units are let and one is empty. Taxes run $8,600 a year, insurance $5,200, and the owner pays $600 a month for water, sewer and shared power. The analysis sets aside 5% of the rent roll for repairs, 5% for replacements and 8% for management.
Here is the roll, with what the leases say beside what is actually arriving.
| Unit | Rent on the lease | Coming in this month | |
|---|---|---|---|
| 1, two bed | $1,250 | $1,250 | |
| 2, two bed | $1,250 | $1,250 | |
| 3, one bed | $1,100 | $1,100 | |
| 4, one bed | $1,100 | $1,100 | |
| 5, two bed | $1,295 | $1,295 | |
| 6, two bed, empty | $1,295 | $0 | |
| Each month | $7,290 | $5,995 |
These are example figures, not a forecast for any market.
The gap is $1,295 a month, or $15,540 over a year. A listing that quotes $7,290 of monthly income is not lying. It is describing a building that does not exist yet.
How does the roll turn into net operating income?
Take the full rent roll, allow for empty time and non-payment, then take off every running cost. The mortgage stays out of it, because the loan is yours rather than the building’s.
| A year | |
|---|---|
| Rent roll in full (6 units, 12 months) | +$87,480 |
| Empty time and non-payment (6%) | −$5,249 |
| Property taxes | −$8,600 |
| Insurance | −$5,200 |
| Water, sewer and shared power | −$7,200 |
| Repairs (5% of the rent roll) | −$4,374 |
| Replacements (5% of the rent roll) | −$4,374 |
| Property management (8% of the rent roll) | −$6,998 |
| Net operating income | +$45,485 |
That $45,485 against the $675,000 asking price is a 6.7% cap rate. The full method is in how to calculate NOI on a rental property.
But read what that figure assumes. The 6% allowance is a normal year’s worth of turnover. It is not the empty unit sitting in front of you.
What does the empty unit actually cost?
Change the allowance from 6% to 17%, which is what one unit in six works out at, and the building looks different.
NOI falls from $45,485 to $36,154, a drop of $9,331. The cap rate at the asking price falls from 6.7% to 5.4%. With 20% down at 7.5% on a 30-year schedule, monthly cash flow goes from $15 to a loss of $763.
One empty unit moved the valuation by more than $130,000 at a 7% cap rate. That is why the roll gets read line by line.
The multifamily calculator takes the roll unit by unit, and each row has a Rented or Empty switch. When more units are empty than your vacancy allowance covers, it says so directly: the figures below are what the building earns once that unit is let, not what it earns today. Both numbers are worth knowing. Only one of them is true this month.
For how to set the allowance in the first place, see what vacancy rate you should use.
What does a lender do with the rent roll?
Less than you might hope, and with more paperwork.
Fannie Mae asks for a copy of the fully executed lease agreement where leases transfer to the buyer, supported by an appraiser’s Form 1007 or Form 1025. Where the lease rents do not line up with market conditions, the lender has to write an analysis explaining the difference. Then, on a purchase, it counts 75% of the gross rent as income and subtracts the property’s own payment, taxes and insurance.
So a lease at an optimistic rent does not help you much. The appraiser’s market rent caps what the roll is worth to the underwriting, and a quarter of the rent disappears before anything is counted at all.
What to check before you trust it
Ask for the leases themselves, not only the summary. Then check four things against the roll:
- Does each lease match its row? Rent, dates and names. Errors here are usually careless rather than dishonest, and they still change your numbers.
- When does each lease end? Map them across the next 12 months and look for clusters.
- What deposits are held, and will they transfer? Get it in the purchase contract.
- Who is behind, and by how much? Ask for a payment history, not an assurance.
Then enter the roll as it stands, empty unit and all, before you enter it the way the seller describes it. If the deal only works on the second version, you are buying a plan rather than a building.
For the wider analysis once the roll is in, work through how to analyze a multifamily property, or start smaller with how to analyze a duplex.