Whether you have one rental or are managing a large property portfolio while juggling multiple bank accounts for each property 🏡, a well-planned budget will help you effectively manage your cash flow and help you prepare for future expenditures with an eye towards growth potential and profits. 🚀
If you’ve never thought about budgets or budgeting for your rental business, you may feel like you’re floating adrift at sea with no direction — this article will help you navigate those waters with some budgeting tips and strategies to help you back to solid ground. 🧭
IN THIS ARTICLE:
What is the purpose of budgeting for property managers?
A well executed budget for your rental business will help you:
Forecast rental income, property upkeep expenditures, and business expenses
Identify and set attainable financial goals for growth and investment
Predict fluctuations to help you pivot towards profitability
What signifies success when you think about your property management activities? Is it pure profit? 💰 Perhaps you count success by growth from adding to your portfolio of properties, taking on clients, health and safety of your tenants, maintaining and improving on your properties, or the satisfaction of providing much needed housing. 📈
Likely, it’s all the above and then some.
But how do you know if you can sustain profitability, have the resources to maintain your assets, and have funds available for growth?
The answer is budgeting! 📝
If you’ve never looked at budgeting for your rentals, let’s start with the basics.
Comprehensive budget basics for landlords
There are two main areas to consider when budgeting for your rental business: the day-to-day operations and your long term goals.
If we go back to the analogy of navigating waters, your operating budget represents the day-to-day care for your ship and the actions you take today to navigate the current conditions. Your capital budget would be the equivalent of long term planning for the maintenance of the ship, adding to the fleet of ships, or planning for your next big adventure.
In other words, an operating budget is made up of out-of-pocket expenses (OPEX) that are necessary to maintain your real estate property day-to-day. These expenses typically include:
🏠 Rent and maintenance of an office
💧 Utilities: internet, phone, electricity, water, etc.
🏦 Financial fees associated with banking, including credit card transaction fees and bank account service fees.
That said, the above isn't an exhaustive list. You may have other operating expenses that are more varied and depend on your situation, such as the cost of gas if you need to travel, commissions to real estate agents and brokers, and professional fees (CPA, bookkeeper, attorney).
Capital budgets help you forecast and plan for capital expenditures (CAPEX). Here, you will account for funds needed to maintain, build and acquire physical assets, as well as any major purchases or multi-year use items. Common CAPEX items include:
Rental property acquisition
New rental construction
Multi-family property fixtures and lighting
New or improved amenities
and other items you can depreciate over time
So, an operating budget tells you what you’ll need on hand to cover the cost of operating your rental business. Whereas a capital expenditures budget plans for future growth, improvements, new projects and big ticket items.
If you work for a property management company, the capital budget will likely be taken care of by the head office — while property managers will need to put together operating budgets.
Private landlords, on the other hand, need to consider both budgets. In some cases, both an operating budget and a capital budget are bundled together under a master budget plan. This would include things like historic financial reports, vendor contracts, and other important information.
Combined, information from both the OPEX and CAPEX can help you acquire loans for larger capital expenses, renegotiate mortgages, and lower your insurance premiums.
Property manager’s guide to budgeting
The only way to see where you are going is to know where you’ve been and where you are right now. When budgeting, that means identifying what has financially occurred and what is happening currently with your rental income and expenses. 🔍
Let’s take a look at the tasks needed to put together a budget and some tips and tricks to help you through the process. 👇
Budgeting tips for property managers
The process of budgeting doesn’t have to be difficult or complicated. Here are some strategies to make budgeting for property managers easier. Your first step is the planning session.
Make a plan ✍️
Budgeting as a property manager is an ongoing process much like many landlord endeavors. It’s easy to get caught up in the day-to-day hustle and bustle of property management and push off this important task.
To keep your budget top-of-mind, schedule times into your calendar 📅 to:
Create a budget
Review ongoing income
Monitor ongoing expenses
Review and conduct contract negotiations
Look at efficiencies and cost cutting opportunities
And periodic budget reviews
Research and review data points 🔍
To draft a budget, you’ll want to grab these common property management reports.
Rent roll 🏠
A rent roll is a snapshot of your tenants’ balance. It shows you market rents, current rental rates, and any delinquent tenant ledger amounts.
Property performance 📊
A property performance report (also known and occupancy rate reports) will give you a snapshot of each property's performance over a period of time.
Expense reports 🧾
You can pull expense reports that consolidate all the expenditures from a time period by property or by bank ledger. If you have a large portfolio or want to dive deeper into your expenses, you could pull category ledger reports that line item expenses paid under specific categories.
Other information to have on hand would be salary information and any expected changes.
Remember to look at your contracts for details indicating future price changes such as upcoming office rent increase, utility price increases, lawn care, advertising, etc.
Calculate rental income 🧮
Grab those income and rent roll reports to get a picture of what you can expect to come in for the year. In most cases, look at the average over time (ie: a 12 month period) to consider expected revenue. Use your monthly average as your guide. Remember to factor in upcoming rent increases.
But if income varies greatly due to seasonal tenant turnover, use a longer period of time to find your monthly average to get a clear picture of expected income.
Rental income comes in the form of rents received by electronic payment options like ACH or credit cards, cash, checks, money orders, and cash payment alternatives.
But it doesn’t stop there, you could also be collecting:
Appliance rental fees
Credit card transaction fees
Storage rental income
Vending machine income
Revenue from selling ad space in your newsletter and website
Insider tip: If you have considered alternative income streams, take a moment to think about how you can add these and other income generating ideas to your rental business to help your bottom line.
Remember to budget for ongoing and one-time expenses 💲
In your budget, you’ll want to account for those items that come up periodically or perhaps only once a year such as:
Paying someone to check your fire extinguishers
HVAC seasonal maintenance
Budgeting for the unexpected
It’s hard to anticipate the unexpected but a good rule of thumb is to plan for the worst but hope for the best when it comes to the unknowns of property management. So, try to think about what could go wrong and add a line item in your budget for a contingency fund. Unanticipated large expenses that can catch you off guard include:
Large plumbing issues (broken pipes, burst water heaters, septic failures)
Natural disasters – think what you’ll need while you wait for insurance to provide resources
Structural issues like roof repairs and replacing garage doors
Repaving after ground shifts and earthquakes
Tree concerns such as falling limbs and root damage
Changes in inflation and consumer price index (CPI)
Identify new budget categories 💡
Budgets include goal planning for your rental business. You’ll want to budget for new amenities and future upgrades like adding pet facilities or a playground, switching from traditional keys to a smart lock system, and upgrading security systems and features.
What other ways can property managers create, monitor and improve a budget? 🤔
Once you have a clear picture of your income and expenses, plan for the unexpected and for your future goals, it’s time to see how you can influence your budget with time and cost saving measures to maximize profits.
Money saved is money earned right? Budgeting your time and finding efficiencies can help bring down costs. Here are some more budgeting tips:
Allocate time to building great tenant, owner, and vendor relationships. 🤝 Great relationships can save you both time and money.
Review services annually such as trash removal, cleaning, landscaping and lawn care, property and business insurance, as well as internet and phone service contracts for ways to capitalize on renewal or unadvertised discounts.
Speaking of service providers, don’t be shy to ask them for their expert advice on cost-cutting ideas!
If it makes sense for your business, invest in energy-efficient appliances, lighting, and engage in energy-efficient practices to help keep costs down.
Set performance goals for tenant turnover timeframes and lease renewal rates. The faster you are able to fill a vacancy, or better yet, have a good tenant renew their lease, the better!
Lean into automating many of your tasks. 🤖 Invest in property management software that has robust features that free up your time. Most property management software providers all have common features like communication tools, integrated tenant screening, financial reports, and more.
A property management software 💻 can help by simplifying your budgeting process. The only way to get accurate financial data is through reliable financial reports and a great property management software makes tracking income and expenses and pulling those financial reports a breeze.
When evaluating property management software, be sure to look for one that has the best customer service and client support, is easy to learn, and has all the robust features you want. Remember, software tools don’t have to be expensive to be efficient and helpful.
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Common budgeting mistakes
Knowing what to look out for in budgeting for your rental business will help you keep on track. 🎯
The first and biggest mistake is to not budget at all and simply hope for the best. 🤷🏻♀️ Too many property managers still operate with this mindset. If that’s you, imagine how much healthier your profit margins could be if you spent a little time on budgeting.
Being on autopilot can blind you from possibilities of new revenue streams, cost savings, discounts, efficiencies for time savings, and more. If you prioritize budgeting habits you’ll be set up for greater success because it will force you to evaluate all your systems, processes, and business relationships.
Another common mistake is to let the fear of the unknown get in the way of creating and maintaining your budget. You might feel like this is a daunting task, and you’re not alone. A study from the Certified Financial Planner Board of Standards (CFP Board) found that 59% of Americans surveyed are not tracking their spending and two-in-five have never had a budget. 🤯
So it’s likely many property managers and landlords haven’t started down the path of budgeting for their rental properties.
The good news is that you have resources to help you get started. You can find expert advice on finances and budgeting 🤓 plus other educational resources provided by your financial institution, property management blogs, and local or state real estate boards, housing commissions, and rental associations.