Tips to Get in the Best Budgeting Shape for Next Season
It always seems like we are waiting until the last possible minute to get in shape for summer – sometimes getting prepared for multifamily budgeting season feels the same way. We may not be all the way to Budgeting season quite yet, but it is time to start to put together our plan.
Sometimes we can be our own worst enemies, which is what makes budgeting so painful. But many pain points can be avoided. The beginning of budget season doesn’t have to be hard to swallow. Identifying and correcting processes that can help make property management budgeting feel more comfortable is the first step.
Here are eight ways to make the season less painful:
1. Make preparation time count
Poor preparation often results in a rocky budgeting process. Don’t expect to just sit down and knock out a budget without being aware of market conditions, including economic forecasts for your sub-market. Marketing, demographic, and economic changes impact leasing and retention and, in the end, profitability.
Research prior to committing to revenue is critical. Corporations moving in and out of your market can have a substantial impact on the bottom line.
2. Set clear objectives and targets
Ever try playing darts blindfolded? Just try to hit that bullseye (and watch people take cover).
It’s important to provide clear objectives and targets for your budget preparers so they have direction. Ask questions like “What are the expectations for income growth and expense control?” Also, “Is the property under review for renovation and how will that impact income and expenses?” For novice budgeters, this is critical information. Written guidance, checklists with what is expected, and guidance on how to use your budgeting model are critical to success.
3. Property management budget training
We work in an industry where turnover happens a lot. So, getting a good training plan in place ahead of time will make getting new employees up to speed on the system. It is always a good idea to train even veteran staff members on the system. The Budgeting system is not used every day so everyone could use a refresher. Incorporate item into training like the objectives and market research vs. that were talked about above.
RealPage Budget Training options:
- RealPage Learning Portal
- Free Webinar via the RealPage Training Calendar
- *Paid Private Webinar Training
- *Paid Full Day Budget Bootcamp
*Please contact your RealPage Sales Representative for more information.
4. Forecasting is a comprehensive process, not folly
Projecting losses and gains and year-over-year growth without knowing your starting point is dangerous. Failing to forecast prior to budgeting eliminates all real hope of getting a true idea of YOY performance. Being able to compare end-of-year revenue at the beginning of the budget cycle is important. If starting numbers aren’t correct, you will be writing variance explanations each month to your owners.
While expenses are usually easier to project, forecasting end-of-year market and effective rents, Loss to Lease, concessions, vacancy, and bad debt can be a challenge. For example, forecasting economic occupancy at 90 percent to finish December and starting the January budget at 95 percent or boosting Gross Potential rent more than the minimal amount could cause the remaining budgeted revenue to be off substantially for the entire year.
5. Avoid averaging or annualizing
Taking an average or annualized amount and budgeting it equally for each month makes expense-line items messy. Seasonality, move-ins/move-outs, and resident retention impact various line items. Utilities, turn costs, and other income are line items that should never be averaged. This is a common mistake made by novice budgeters that asset managers often complain about.
Also, remind budget preparers that just because an expense or income event happened one year does not mean it will repeat. Timing issues, staffing changes or shortages, one time supplier refunds or major repairs such a boiler system may be a one-time occurrence and shouldn’t be factored into the budget.
6. Take the blinders off before budgeting Capital
Property managers who have spent any length of time on a property may be so accustomed to seeing an issue that needs fixing that it becomes invisible to them. Property walks, therefore, are critical to identify Capital issues that need to be addressed and budgeted. Walk interiors and all the way around buildings, common areas, signage, flags, models, and office areas.
While it is very unlikely that everything will be addressed, it may bring things to light that were otherwise ignored. Also have someone perform a light check at night and look for potential safety risks resulting from poorly lit areas. Be aware of any city or state regulations that might impact common areas.
7. Consider historical values when budgeting
While reviewing a preliminary budget for the first time with a property manager, I asked why an expense line that did not appear to have any historical value was budgeted. For example, a $500-a-month expense would surface out of the blue on an expense line that had previously been zero. “We always budget that just in case,” was the reply. Just because you have always done something, does not make it the right choice. Unless, the budget item can be justified, don’t just plug a number in to be on the safe side.
8. Speak the truth and back up the budget with solid comments
Quality commentary and explanations throughout the budget process are important to selling the game plan to owners. Budget preparers should avoid statements such as “based on historical trends” when explaining a line item. Cite specific trends so the numbers hold water. For example, explain that payroll increased 15 percent because of staff shortages in the previous year. Solid comments will reduce review time substantially and speed along the budget process.
Budgeting and forecasting are skill sets, and managers should invest time in their teams to ensure time spent is meaningful. Pre-budget season preparation will make it much simpler to forecast or see into the future. A solid budget is one that takes into consideration past and present trends, as well as market conditions and property knowledge.
Budgeting doesn’t have to be painful. Learn how RealPage Budgeting can help.