When you manage commercial real estate, the outgoings within the property will require focus and financial control. When the property market slows or gets tougher, managing the outgoings is really important; the outgoings form part of the financial strategy for the landlord and will impact the net income for the property. If the outgoings get too high, the property will be hard to lease and hard to sell.
Set Some Rules
You can split the outgoings into a number of categories and this is normally done to identify and track the cash flow by expense streams. Most importantly there are two sides to the outgoings equation. Some of the items will be controllable and others will be uncontrollable. This means that the landlord can exercise control on only some of the outgoings.
The uncontrollable outgoings are those which are imposed on the property and have to be paid without any opportunity for cost savings, adjustments, or budgeting. Those uncontrollable items are normally council rates, land tax, and water rates. To a degree, insurance and energy costs will also fall into that category although some cost controls are possible with these items.
To manage the property outgoings effectively it pays to adopt a process similar to the following:
- Create a budget for the property prior to the commencement of financial year
- Track your expenditure to budget monthly. Adjust expenditure when you see a need and reason; early adjustment prevents bigger blowouts.
- Look at the history of the property expenditure over the last few years to identify any excessive spending or items that are beyond the averages in the local area. The history of the property will allow you to adjust your budgets and cash flow expectations.
- Make sure that you have removed the capital expense items from the normal repairs and maintenance for the property.
- Talk to the owners of comparable properties in the same area. The outgoings between your property and their property should be similar. If not, you need to know why and take steps to fix that. Share information of outgoings costs with other similar property owners for this very reason.
- Monitor the annual valuations for rating purposes. When these valuations are done, you will soon see the statutory charges and council rates rise soon after. It is not unusual for landlords and property managers to dispute the valuation in an effort to keep the statutory charges at a lower rate.
In preparing an expenditure budget for the property, you should time the expenditure so that the larger costs are expected; hence ensuring that the cash flow is suitably adjusted in preparation.
The controllable outgoings are those that the landlord can exercise decision and timing. Normal items of repairs and maintenance together with the contractor maintenance will fall within this category. If the landlord chooses to delay the expenditure with the controllable outgoings, then they can spread the impact of those items on the net monthly income from the property.
In summary, the property manager working on behalf of the landlord should exercise due care and diligence in the budgetary process for property expenditure. A well-managed landlord cash flow in an investment property is a correct balance of income against expenditure given the tenancy mix pressures on the building and the existing vacancy factors.