November 25, 2014  
 
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Creating a Real Estate Operating Budget

Written by Brent Pace for Gaebler Ventures

A realistic operating budget is absolutely essential if you are going to own and operate real estate. Here are a few suggestions for improving your budget.

When you are operating real estate, it is desperately important to get a solid operating budget.
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Even if you lack experience in property management, there are a few important things you should do to make sure you are getting as much out of your property operations as possible.

Annual reviews

One of the worst things you could do as a property owner is neglecting to audit each of your properties' performance each year. A good practice to get into is to schedule time at the end of each operating year to sit down and review the project's performance and make goals for improvements for the next year. If you are working with a property manager (either your employee or a third party) you can also get explanations for any expenses that look high.

Create a goal

You want to incentivize your property manager to save you money. One good way to do that is to offer the manager a savings clause. Take a look at the current year's spending. Most managers will simply want the entire budget bumped by a certain percent (usually 2-3%) to keep up with inflation. Rather than offering that, tell the property manager that you expect no increases in your budget if at all possible. While this may not be feasible every year, it should be productive if you have not audited your operating budget in some time. Then offer to split any savings you realize in next year's budget with the property manager. For instance, if you spent $100,000 managing the property this year, but he can reduce your costs to $90,000, then in your next annual meeting you will present him with a check for $5,000.

Require three bids

One piece of reporting that will help you keep your manager on his toes is to require him to submit bids to you for each contract or service he hires. A typical office building will have several services contracted out. These could include anything from landscaping maintenance, HVAC maintenance, janitorial supply, janitorial cleaning services, elevator repair and maintenance and more. It gets even more complicated when you have a year with capital repairs included. If you were planning on replacing some sidewalks, fixing your roof, replacing some trees, re-striping your parking lot: these things are all big ticket items.

To help control costs, make sure your property manager is getting at least three bids on each project. It's very easy for a manager to get complacent and simply keep using the same service each time something comes up. It's a huge time saver for the manager. But over time, you will slowly lose price competitiveness if you simply use the same contractors over and over. Get the bids each time, and you will be surprised at the savings it can generate.

Bring some functions in house

Another thing to look at to help you create a better operating budget has to do with bringing some contracts in house. If you own several buildings, why not manage your own cleaning crew? What about landscape maintenance? Couldn't you buy your own equipment and hire some college kids to run it rather than hiring a separate company? While some of these may create more work than it's worth, you ought to at least consider it to make sure you avoid grossly over-paying for some simple services.

Year over year

Finally, remember that the real value in doing this is comparing results year over year. Be sure to follow up and continue holding your meetings at the end of each year and comparing results. Over time this will help keeps your costs down so your buildings run lean and generate cash flow for you and your partners.

Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.

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