Best Practices to Put Budgeting Expenses On the Right Track
Projecting revenue may only seem like the hardest part of multifamily budgeting. The reality is that more mistakes are made in planning operating expenses, and those miscues can cause some unnecessary angst explaining variances to owners each month. Getting the numbers right requires thoughtful planning and goal setting, and sometimes a little luck.
But planning for expenses at the property level has gotten a little trickier. As an industry, we are hiring property managers who tend to be more marketing focused and less financially experienced. The result can be that some items get overlooked or aren’t stated correctly because of lack of information or cutting corners. Variances that require an explanation usually ensue. And nobody likes to explain them, even if they are positive.
A few best practices can put budgeting expenses on the right path to improving accuracy and heading off variances.
Don’t always budget an expense the same as it was last year
Budgeting operating expenses should be dynamic and not repetitive. While there are a few expenses that are constant each year, the majority should be budgeted based on goals for the property.
To achieve a budget number, you must define what the expected result is, what is necessary to make it happen, and how much you need to invest to get there. For example, your goal may be to increase occupancy by 3 percent. So, what is that going to take? More ready units, better curb appeal, training for your leasing staff or a marketing campaign?
Now determine what the cost is to do those things and the optimal time of year to put your plan in place. Notice the word “plan.” Yes, friends, the No. 1 tip for best budgeting practices is to set goals and plan. It’s not about budgeting the same as last year and expecting a different outcome.
Understand the relationship between cause and effect of operating expenses
Ben Franklin said, “Beware of little expenses; a small leak will sink a great ship.”
Big expenses often get the most attention, but move-ins and outs, weather, demographic and market changes, city inspections, and staff all impact expenses. Cold winter, higher electric and gas bills, higher-than-normal exposure in lease expirations can result in larger turn costs. Changes in city regulations or a very cranky inspector can cause havoc to a budget.
Look at lease expiration trends, and ask yourself if it’s better to spend more to retain a resident or can you improve performance by absorbing the turn cost and charging a higher rent.
The worst thing you can do is not be informed and then just average last year’s expenses and call it good.
Details make for successful budgeting
The final best practice is budget with reasonable detail and explanation. What I mean by this is be careful not to generalize expenses.
For example, let’s say that last year you spent about $1,000 per month on advertising. So why not budget the same this year? Well, first consider what you got for $1,000, and will it be the same each month. Are there months you need to invest more in advertising, or was there a one-time cost last year you do not need to repeat. Don’t forget about the potential for cost increase. All things to consider.
Start by breaking the account down and think about what you want to do, then add detail rows for the line item to clarify how the money will be spent. Also remember to provide a written explanation or comment. You may not revisit that budget item for several months and forget why you budgeted a line item. Good comments will also speed up the review process.
Budget season starts every year with good intentions, but even the best companies can easily get off track. If you have had the same process every year and you’re still explaining too many variances, it’s time it’s time to look at that process.
Budgets are benchmarks and a goal line. Decisions based on budget need to be balanced and ensure performance success. Budgeting is really about planning and goal setting.
For a successful outcome, sit down with your team and discuss the objectives for the property before even typing in a single budget value. Get bids, and look at operation and financial trends.
Using a good multifamily property budgeting software can easily make all of this information visible in one simple platform.