The Importance of Creating a Property Budget
Do you own one or more investment properties? If you are, you should consider creating a property budget.
Creating an operating budget for commercial property can be a time-consuming affair, but it is a strategic move for any property owner. This step allows you to be in charge of your finances; it will enable you to predict your properties’ changing budgetary needs and adapt to any challenges.
Additionally, a solid budget allows you to track the property’s performance over the long term. Having these figures in hand is crucial for planning for your future as an investor.
Top 5 Reasons for Creating a Property Budget
There may be endless reasons for creating a property budget: having a written record of your fiscal goals and a set of plans for your properties provides inimitable gain for the landlord. However, there are some obvious reasons why creating a set budget can be beneficial.
Below are our top five reasons for creating an operational budget for an investment property.
Setting a Baseline
Probably the most crucial reason for creating a well-planned property budget is to be able to assess in a quantitative way how the property is performing. By budgeting for estimated needs and reporting actual figures, you can determine what’s realistic (and what may not be).
With a properly constructed property budget, you and your property manager can compare the actual income and expenses to the budgeted income and expenses for your property.
Comparing projected income versus expenses should be straightforward. Once you have a baseline, you can compare any deviations from that amount and better shape your plan. After all, even the best property manager can’t always account for unpredicted expenses.
Some things a baseline can help with:
- Leasing projections: is your property maintaining the average occupancy rate set by the budget? Is the property exceeding or falling beneath the average occupancy rate of your market?
- Future profit projections: having a budget plan can show areas where your property can generate more revenue. You could consider rent increases or a utility reimbursement program (tenant pays utilities)
- Reserves: having an operational budget will also highlight what of your income can be put aside for future use, for things like renovations.
Keeping Tabs on Budget vs. Actual Expense On a Regular Basis
Having a properly formulated property budget can help you keep tabs on your budget vs. your actual expenses regularly. Indeed, at any time, you can check in with your property manager and make sure that actual costs are not dramatically exceeding costs budgeted.
If actual expenses exceed budgeted expenses, this is an excellent thing to discuss with your property manager. So long as you’ve formulated your budget with care, there should always be a reason for actual expenses exceeding budgeted expenses.
Questions about discrepancies in actual vs. budgeted expenses could lead to taking a closer look at operational needs and other factors.
Allocating Retail CAM Charges Based on Budget
Common Area Maintenance (CAM) charges, now often simply referred to as operating costs, can be steep, and having money set aside to deal with these charges can be vital to staying in the black.
As a retail property owner, your CAM charges will relate to maintaining the common area walkways, the shopping center’s facilities, and all of the various elements serving the shopping center. These elements include the roofs, adjacent parcels, outdoor areas, and all other structural elements.
Having a properly formulated budget will allow you to set aside money for projected CAM charges. Furthermore, if CAM charges are much higher than you anticipated, it might be time to gather your team and strategize on how to lower costs.
Making the CAM Reconciliation Process Smoother
Anyone who knows about owning a commercial property knows about the pain of CAM reconciliation. Ensuring accuracy in your CAM reconciliation calculations can save you a lot of money, but this level of accuracy takes a long time.
If you have a property budget, the CAM reconciliation process can go a lot smoother. Why? Your estimations will anticipate all of the CAM reconciliations required. At the very least, this gives you a head start on calculating the actual CAM reconciliations when the time comes.
Ability to Compare and Contrast Budget On a Year By Year Basis
Finally, creating a property budget will allow you to compare and contrast your budget on a year-to-year basis. Comparing and contrasting your budgets is an excellent way to track your various properties’ trajectories and make long-term plans.
In this vein, creating an annual property budget will allow you to see your market’s changing circumstances and enable you to predict how your budget might need to change as the market changes.
How Do You Set Up a Property Management Budget?
At its most basic level, a property management budget is a record of your projected expenses against your projected income for a fiscal year. A well-formulated property management budget should include provisions for unforeseen expenses, long-term capital projects, and the financial details of a changing marketplace.
To set up a property management budget, you should sit down with your property manager and talk through a strategy for income and expenses, as well as for increasing revenue in your property.
Many property owners these days manage their budgets through online software. This is a fantastic idea: budgeting software is designed with the property owner in mind and allows you to keep track of all your financial activity in one easy-to-use portal. For budgeting and reporting needs, there’s nothing simpler than automating the back-end so you can focus on other elements of property ownership.
Where To Go Next
There are elements of investment property management that require you to be hands-on and really put in the work. But the good news is that outlining — and sticking to — your property budget is easier than ever with the right tools.
With an easy-to-use software like UnitConnect, you can formulate a budget, keep track of tenant charges, and run financial reports, including income and expense reports. It’s simple to get started, and you’ll never stress over CAM reconciliation or budgeting obstacles again.