Every year, I get the privilege of helping companies create their annual budgets, and in the process, I’ve found a few things that help me get the best results. Here are some tips that may help you as you plan your 2017 property budgets.
1. Assign Responsibilities
This is one of the most important steps. Get all the people involved with spending the property’s money involved in reviewing or editing the budget. This creates a strong ownership in every area of the budget.
I like to start with the property manager. She knows most about her property. Next, the regional manager should carefully review and edit what the manager has entered. Human resources, meanwhile, should enter the payroll, insurance, and payroll taxes. Accounting adds the mortgage payments, taxes, insurance, and contracts. Then, the final review is done by the controller or CFO.
Above is a sample budget schedule, from its initial stages in September through its finalization for presentation to the company owner in early December.
2. Conduct Adequate Research
Before you start inputting numbers, gather all relevant historical information, including current rents, current occupancy, trailing–12-month financial reports, salary information, and utility price increases, if known. Look up the contracts for items such as lawn care, advertising, software, copiers, and similar products and services; you should have a handle on the things that don’t change during the year.
3. Determine Any Applicable New Budget Categories
Pull the team together and discuss the budget template. What changes should be made? Which categories should be added or deleted? For example, this year my team met and decided to change significant categories in marketing to better delineate our spending in digital platforms such as Google, Facebook, and Apartments.com.
4. Compare Your Numbers Against Market Data
Depending on the size of your market(s), there should be some benchmarking information available on costs per property and/or cost per unit. The Institute of Real Estate Management (IREM) publishes per-unit data for most major markets, a good tool for comparing your budget with your market. Use that information to see how your property stacks up and where potential savings could be found.
For example, when we compared the trash-collection costs for one client, we discovered they were more than 50% higher per unit than at their peer properties. It turned out our client was paying an additional $4,000 per month because the properties had too few trash bins. Trash was piling up, forcing the sanitation company to come three times a week. This resulted in a monthly billing increase of $6,000.
After researching various options, we determined that the cost for additional bins would be $40 a month per bin. Seeing this, the client ordered eight more bins and the trash company only had to come twice a week. By spending $320 month, our client saved more than $6,000 a month.
Are there any areas of your budget that seem abnormally high compared against the market? It might be worth it to do some research to find out.
5. Create a First Draft
Create a draft budget by developing a best estimate in each expense category. This will help you move forward with the overall budget and prevent you from getting bogged down by one category for which you don’t have exact numbers. Let your property manager develop this part of the budget.
If you haven’t reviewed your options for creating your budgets using the latest in property management software, it’s worth the effort to check them out. Web-based property management software created specifically for our industry can help increase your budget’s accuracy and ensure you are accounting for all necessary categories. These types of software platforms allow you to model budgets based on the financial and statistical measurements that drive revenue and expenses for your portfolio. Past budget data for each property can be automatically collected, eliminating the need to prepare separate budgeting packages for each property.
6. Review the Draft
Once you have a solid draft together, review your budget for reasonableness. Often, creating graphs can be very instructional by comparing the prior year’s numbers with the current year’s forecast.
Keep your team accountable for their portions to maximize your properties’ profitability and to keep your budget on track.
7. Fine-Tune the Budget at Year’s End
If you finalize your budget in November, take one more look at the occupancy percentage at the end of December. It makes no sense to start out Jan. 1 at 92% occupied when the budget was written at 95%. Change the budget to line it up with where you really are in January. Remember to document the changes and get approval from the stakeholders (for example, the property manager, regional manager, and vice president of operations). Then tell everyone the budget is set in stone, and don’t let anyone change it.
