Keeping an accurate budget is a vital part of being a successful landlord. No matter how many units you have or how much money you make, producing a solid budget is a must. A rental property budget is about more than keeping track of finances. It’s a path through the future, a plan for expansion, and a safeguard against the market’s curveballs. Here are some starting points on how to get your rental finances in order, create a one to five-year plan, and set a budget that will help your business grow.
Crunch the Numbers
First, you have to figure out where your rental finances currently stand to set a property management budget. This involves taking account of the factors influencing your profits and expenses.
Your forecast income is an excellent place to start when budgeting a rental property. There are two parts of forecast income: your scheduled income and your effective gross income. Scheduled income is how much money you’d be making in rents with 100 percent occupancy. In short, the maximum amount you could expect to earn per month. Effective gross income, on the other hand, accounts for the realities of vacancy. For this category, you calculate your income, including anticipated rent delinquencies and income from other sources such as fees. To do this, calculate your occupancy rate for prior years by dividing your actual rental income by the scheduled income.
Once you have scheduled income and effective gross income calculated, you can get a sense of your maximum profit under ideal circumstances compared to the income you usually receive.
Now that you have an idea about what kind of income to expect, it’s time to figure out your projected expenses. As a landlord, there are many types of costs you need to track. Here are a few of the big ones:
- Fixed expenses are costs that do not change based on vacancies. These include property taxes, hazard insurance premiums, and regularly occurring costs like wages paid to your employees.
- Variable operating expenses are costs you can control and are also influenced based on your number of tenants. These can be broken down even further into recurring expenses like maintenance, repairs, and utilities or non-recurring costs such as repairing damage from fire or flooding.
- Reserves cover periodic replacements like new roofing, new appliances, and new carpeting.
To find your true net income, deduct expenses and reserves from your effective gross income.
One number that every landlord should always keep in mind is the break-even point. This is the occupancy level at which your gross income is equal with your expenses — aka, the point at which you’re not losing money. The quick way to calculate this number is by using the variable cost ratio.
Start by subtracting your variable operating expenses from your scheduled gross income. Then, divide your fixed costs by that number. Once you have this number, you know the absolute minimum number of tenants you need to ensure you’re not losing money on your investment.
Measure Your Current Performance
Once you’ve hashed out all the numbers and know your break-even point and scheduled income, you’re ready to sit down and get a more accurate idea of how your property is currently performing.
To start, find properties similar to your own in terms of size, the number of units, amenities, and rents charged. Review the average operating expenses of these comparable properties and compare them to your operating expenses in previous years. If these properties are more profitable than your own, it might be time to look at what these landlords are doing differently and adjust your strategies accordingly.
Looking at similar properties is also a valuable way to estimate future expenses. Compare their previous budgets to actual profits/losses to see how their expectations have measured up in the past. This can help you chart a course forward with your property.
Then take a look at your numbers. How does your actual income compare to your scheduled income? Are there times when you haven’t hit your break-even point for the month? Gauging how your rental is currently performing compared to previous years or other similar properties is a great way to set goals for growth.
Set Your Operating Budget
At long last, you have everything you need to start working on the budget itself. One of the most critical considerations when budgeting a rental property is setting goals. What is your ideal vision for the rental property you’re managing? Do you envision making large-scale improvements and increasing the rent, or maybe just eliminating vacancies so you can make profits more reliable?
When you sit down to make your budget, consider the next one to five years and set quantifiable milestones for your budget. Make sure you leave enough flexibility in your budget so that you can adjust periodically on how the market conditions change. Your budget should begin with analyzing the market and your property’s income-producing qualities and conclude with your projected income and expenses. Include any projections for improvements, modernizations, or rehabilitation you intend to do on the property in the coming years.
A Good Budget Takes Lots of Work
Creating a comprehensive budget for yourself takes lots of research and attention to detail. And, of course, it can be challenging to get an accurate estimation of what your occupancy and income will be for the coming year. If the pandemic has proved anything, it’s that the future is unpredictable. After spending so much time creating a plan, it can be disheartening when the changing market throws all your hard work into the air.
If you’re looking for assistance budgeting your rental property, Rent Portland Homes by Darla Andrew is here to help. As long-time property managers in the Portland metro area, our job is to take your property’s budget and produce results that are even better than its current output. Our years of experience with a wide variety of Portland properties means we know how to help a rental property perform at its absolute best. We help shorten or eliminate vacancies through professional marketing to find you the best, long-lasting tenants. Our quality and cost-effective maintenance partners help ensure your property is always in peak form, saving you money on forecast expenses.
If you’d like to hear more about how Rent Portland Homes by Darla Andrew can help you get the best use of your rental property, reach out to us today at (503) 515-3170 or fill out the contact form on our website to request more information.