What should the budget for your property include?
A solid budget is the financial blueprint for your property. Make sure it takes into consideration both current cash inflow and outflow, and planned expenses for the future.
Budgeting for Your Property
Although time consuming, the budget is the blueprint that will tell you the direction of your property, including how much cash you can expect to receive monthly.
If done properly – it will also tell you how much rent your tenants should be paying you…both basic rent and operating costs.
Oftentimes, tenants approach us and say how happy they are with the building and we don’t need to put any funds into upgrading or maintaining the building. Other tenants will offer to look after certain maintenance items themselves such as HVAC.
What landlords need to understand that while this approach will definitely reduce operating costs and keep tenants happy, this approach will ultimately hurt the Landlord.
What can happen is that a property is not pro-actively maintained and then the tenant leaves at the end of their lease. The landlord now has a property on their hands that they can’t lease up because it’s in poor shape. They suffer the vacancy and are also required to inject capital to bring the property up to par.
If the property had been maintained all along this would not be the case.
For Commercial properties – If you have a net Lease, the tenants pay for the costs to run the building.
At the same time – landlords must walk the tight rope between making sure their properties are well run but also ensure that the tenants can still afford to pay the operating costs.
Your property manager should have a budget ready for you to review three to four months before your building year end. If not, you should be following up with them to determine what is holding it up.
For landlords that have larger regional or national tenants, the revised rents notices should be sent to them in plenty of time before the year-end so that there is no hold up with their internal accounting departments and you. This way the landlord will get the rent on time.
The property manager should compare costs on an item by item basis with other competing buildings. There are many resources for your comparison and your property manager should be able to advise you on this.
Other than the usual budgeted items such as janitorial or landscaping, other Items to consider would include:
- Cost of Leasing Agent
- Annual Roof Inspections
- Insurance Appraisal versus a Valuation Appraisal
- Tax Assessment Reviews
- Capital Projects
- Amortization Scheduling
- Infra-Red Heat Scans and Vault Servicing
- Roof Anchor Inspections
- Indoor Air Quality Testing
It is very important for the landlord and the property manager to be on the same page with regard to the property. The budget can be a point of connection between the owner and property manager. If your property manager has not called you and invited you on a walkthrough of your property with an eye to the budget, you should call them and arrange to meet.
This audio recording was created in October 2013; the transcript has been updated to reflect practices in 2017.
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