The Property Management Budget: A Closer Look
An in depth look at what makes a successful property management budget… well, successful
Instilling trust is the best way to ensure success as a property manager. You want the buildings you represent or the buildings you hope to represent to be able to trust that they are in responsible hands. To be clear, by buildings here we generally mean the decision makers in buildings such as landlords and board members. Landlords need to be able to trust that you as a property manager have a great overall grasp on the operations of a building and have a cushion in place to handle any emergencies that may arise. This ‘cushion’ is known as the property management budget, and is what we will focus on in depth in this blog post.
A great deal of the property managers work is to forecast and estimate the costs of maintaining and improving client properties. Remember, buildings are depreciable assets… meaning they deteriorate over time. If you leave something to wither away, no one will want to occupy your building. Thus, there are costs that are associated with keeping your asset in as tip-top shape as possible to ensure it will be on the top of potential tenants’ lists to move in to. These costs must then be balanced so that clients can expect a profit from their operations. Obviously, the more successful your budget the closer your estimated expenses are to your actual expenses… this is an art that requires years of experience and understanding of how properties work. Below we will outline different components of a property management budget:
The majority of a property manager’s work and expenses will come from day-to-day operations of the building. With help from the owner, the property manager will prepare a detailed budget that will outline the resources needed to go about the daily operations of the building. More often than not, as you are more experienced this budgeting will come easier from building to building. The owner is simply there to assure you are on track and to include any building specific needs into the overall picture. The main functional areas of the building that must be included into the cost structure of the building include expenses for tenant services, repairs and maintenance, and administration. These must be forecasted as accurately as possible in order to get a clear picture of the resources that must be allocated once matched up with the average rent roll, the main source of consistent income in the property. If forecasted properly, your income will exceed the necessary costs from operation.
Avoiding obsolescence of any kind is very important to the owner of properties, and thus the property manager. Properties that do fall into obsolescence will experience much lower rents and will be significantly less attractive in terms of return on investment as the property ages. Think about it… if you lay your eyes on an old rundown building, odds are you are turning your back to it. The capital expenditure section of the budget is what mainly constitutes this ‘cushion’ we mentioned earlier. This cushion is very important because capital expenditures are very hard to forecast as more often than not they occur as a result of emergency management or out of the blue based on tenant needs. Hence, it is paramount to have a sufficient amount of funds in your budget to accommodate any last minute capital expenditure needs if necessary. These expenditures may include renovations, remodeling, addition of more modern appliances, etc. and overall will help maintain and increase rental income and overall aesthetic of the property. There are also certain tax advantages that can arise as a result of undergoing capital expenditures. For example, they may be capitalized – meaning the cost is spread out through the useful life of the improvement – or fully deducted throughout the year of the expense. Through the help of a certified accountant, owners and property managers can determine whether expenditures are capitalized or fully deducted. A deeper understanding of these advantages will go a long way in preparing an ideal budget for your property.
This day in age requires a competitive advantage anywhere you can get it. A big way to step up among the rest is having a legitimate marketing campaign to spread awareness and gain new tenants. Marketing/advertising and consistency go hand in hand. As a result, this consistency is something you must take into consideration when formulating your overall budget. The advertising portion of your budget will consist of maintaining online listings and ads that prove you have a successful track record of happy tenants occupying your building. Sometimes there are lulls in business/occupancy and thus you may have to reamp your marketing campaign and pump out ads more than usual. In this case you must have this ‘cushion’ in your budget to accommodate for any last minute increases in advertising. This is something you should definitely include in your budget considerations.
Overall, in order to budget accurately the property manager must have a very well-rounded understanding of real estate markets, especially in the neighborhoods their properties are located in. Some of the trends they should get down to a science are comparative properties and features such as average rental rates, average maintenance expenses, etc. Use your experience to come up with your own benchmarks to judge your budget by and couple it with the specific needs of your building (based on # of units, curb appeal, etc.). Be as thorough as possible estimating maintenance, repair, and improvement expenses so that you will establish an appropriate ‘cushion’ in times of need. Really focusing on the budget aspect of managing will yield a profitable property with maximized rental prices relative to the competition. Remember…. Income over expenses is the overall goal!