As fall rolls around each year, the temperatures drop, leaves change, and property management teams pull out their sweaters and gear up for budget season! We roll off of the leasing high of summer, and excitedly began planning for what the next year will look like.
It Starts With Vision
Before you can start putting your budget together, you need to fully understand the vision of ownership and the expectations they have for the property in the coming year. It’s best to schedule a time to sit down with your owners, come armed with facts about the overall market and submarket your property is in, with a proposed course of action for the next year. If you operated the property for any portion of the previous year, you should have an understanding of what it takes for the property to operate at its full potential.
Discussing the past and present with your ownership lays a great foundation for budgets, but be sure to establish their expectations and goals for the next year too, so you can thoughtfully draft plans for the future. Are there any capital improvements they’re hoping to complete in the next year? What are their priorities moving forward? Understanding where your ownership is wanting to go will help you ensure the budget steers you in the right direction.
I always encourage zero-based budgeting. Starting with a clean slate allows you to truly assess needs versus potentially allowing erroneous or extraneous costs to remain in your budget. In this way, zero-based budgeting can help lower costs by forcing you to examine each section of your budget with a fresh perspective.
You’ll still want to utilize the historical T-12 of your property and benchmark yourself against industry standards to make sure you’re on track (NAA publishes this type of data for almost every market in the country, for example).
Growth is the Name of the Game
One of the most important things owners are looking for is growth from last year; this can either come from increasing revenue or cutting back on expenses. Where we all win in this business is figuring out ways to increase our revenue, one dollar at a time.
When budgeting for your gross potential rent, you should be sure to review the most recent T-12 to see if it is realistic for the property to be at the rent level you are proposing for the coming year. Ownership goals and the current economic climate will impact rental increases and the budgeted occupancy.
As property management professionals, we are always searching for ways to increase our additional income. Take a look at your fees and rents to ensure they’re competitive with your market and submarkets, and budget for increases where you can. If your property is billing RUBS, be sure you’re collecting an appropriate amount. As always, be cognizant of state and local laws.
It’s important to rebid each viable contract to at least three vendors with specific expected scope to ensure an apples-to-apples comparison. Be sure you compile bids from vendors you are eager and willing to use: those who have been tried-and-true at providing exemplary service.
Maintenance expenses are best budgeted by utilizing the knowledge of your lead maintenance at the property paired with the historical spending of the property.
Review your turnover percentages and expenses. Ask questions like: do you supply the contractor with paint? Is this a good (competitive) price per square foot? Do they spray or roll? Do you have sprinkler heads in your units that need to be taken into consideration? Can you do touch up paints, or do you always need full paint services? Asking questions such as these will help you identify potential areas of savings, sometimes even processes that can be streamlined or simplified- saving both time and money.
For additional savings, encourage ownership to rebid their property insurance as well.
Once we’ve completed the zero-based budget, looked to increase revenue, and decrease expenditures, we have our net operating income. Depending on what the capitalization procedure is for your ownership and management, the following items are often capitalized or as we say in property management, budgeted “below the line”. Budgets in property management don’t have “wish lists”, only investments carefully planned and budgeted for by ownership that enable the property to reach its full potential. Some frequently capitalized items include:
· Unit upgrades-If you can achieve an appropriate return for the investment.
· Replacement of flooring
· Replacement of the entire A/C unit
· Repainting of the exterior of the property
· Reroofing of a building
· Parking lot replacement
Review, review, review!
Review your budget from a distance to ensure it is challenging and (most importantly) that you are showing substantial net operating income growth year over year. Having another set of eyes (or a few!) is always beneficial as well to minimize errors and maximize perspective and strategy. Your final budget should be a good reflection of where your property has been, but an even more specific vision of where ownership would like to take it in the coming year. A strong budget will present achievable challenges that can be accomplished and surpassed to align with business needs and owner’s desired outcomes.