When managing commercial real estate, on-property expenses will require financial focus and control. When the real estate market slows or tightens, managing expenses is really important; The expenses are part of the landlord’s financial strategy and will have an impact on the net income of the property. If the expenses are too high, the property will be difficult to rent and difficult to sell.
set some rules
You can divide expenses into various categories and this is typically done to identify and track cash flow by expense stream. The most important thing is that there are two sides to the leaving equation. Some of the elements will be controllable and some will be uncontrollable. This means that the landlord can exercise control over only some of the expenses.
Uncontrollable expenses are those that are imposed on the property and have to be paid for without any opportunity for cost savings, adjustments or budgeting. Those uncontrollable elements are normally the municipal taxes, the land tax and the water taxes. To some extent, insurance and energy costs will also fall into that category, although some cost controls are possible with these items.
To manage property expenses effectively, it pays to adopt a process similar to the following:
- Create a budget for the property before the start of the fiscal year.
- Track your expenses to budget monthly. Adjust expenses when you see a need and a reason; early setting prevents larger blowouts.
- Look at the property’s spending history in recent years to identify any overspending or items that are beyond the averages in the local area. The history of the property will allow you to adjust your budgets and cash flow expectations.
- Make sure you have removed capital expense items from normal property repairs and maintenance.
- Talk to owners of comparable properties in the same area. The expenses between your property and their property must be similar. If not, you need to find out why and take steps to fix it. Share expense expense information with other similar homeowners for this very reason.
- Supervise annual valuations for rating purposes. When these valuations are made, you will soon see legal fees and municipal fees increase soon after. It is not uncommon for property owners and managers to challenge the valuation in an effort to keep legal fees lower.
When preparing an expense budget for the property, you should time the expenses so that higher costs are expected; therefore ensuring that the cash flow is properly adjusted in preparation.
Controllable expenses are those that the lessor can exercise decision and opportunity. Normal repair and maintenance items along with contractor maintenance will fall under this category. If the landlord chooses to delay spending with controllable expenses, he can spread the impact of those items across the property’s net monthly income.
In summary, the property manager working on behalf of the owner must exercise due care and diligence in the budgeting process for property expenses. A well-managed landlord’s cash flow in an investment property is a correct balance between income and expenses given the pressures of the tenure mix on the building and existing vacancy factors.