The Numbers
It all comes down to the numbers. Be it an operational spend or a big capital spend, it all comes back to a math problem to be considered and or solved. At that and the prompting of one of our accounting team members at Mills Properties, I will be dedicating Tuesday to the numbers.
Walking Through an Apartment Budget Top to Bottom
We are going to take apart one of our budgets by defining each and every line item, one at a time, over the next year or so. Yes, we really have that many line items. The thought is that over time we will, as a group, gain a very deep and thoughtful understanding of the line item definitions, relationships and things that drive each. We will learn tips and strategies to move income and expenses in the right directions.
Speaking Greek
Full admission – numbers are not my favorite part of the multifamily business. I can do it. I understand the relationships. And, I know how to move them in the right directions. But, as much as I try, I am just not the analytic left brain thinker. I am as far from pragmatic and methodical as you can get. I am a right brain thinker, creative in nature and never like to do the same thing the same way twice. Numbers are the work side for me.
I say all that to say this, this will be as much an education for me as it will hopefully be for you. So, comment away. Call me on the carpet when I am off. Add to the conversation when you see fit. Do it under the premise that you will be helping tons of people get a confident understanding of our financial game plans.
Apartment Rental Income
Item of note: I am working from a non-revenue management model.
This is the top line. This is where it all starts. Some call it market rent, others call in the pixie dust sprinklers as the line is really meaningless.
Rental Income can be defined as the maximum rents at 100% occupancy. It’s the number you would collect if every single unit were physically occupied and everyone paid their rent at the full value of the lease.
Where do we derive the number? It really is made up. In all fairness it is predicated on your comps in the market place. We like to think of our comps as the three to five communities that you lose the most leases to. I like to think we make the market and the comps predicate their tops lines accordingly. Whatever the case, it’s a market generated number.
When does it change? It can move down but more often than not it moves up. It is predicated on a good number of factors to include broader things like the economy, jobs and household formations. Or more minutely on the classic supply and demand factors set inside of seasonality. And, it is down on a unit type basis. If you are very highly occupied in a specific unit type then you should raise. If you have tons of inventory with little to no demand – you keep the rents neutral. That last sentence might drive you to think you should lower rent. And, in some management companies that would be a true statement. For us, we leave it in place and compete with concession – which we will discuss in a future post.
What is the fastest way to move this line item up-up-up? By being remarkable.
Perspectives
I have left a number of perpectives out of this post and maybe treaded on others – please keep the discussion going in the comments section below. My accounting friends will love you for it and I will thank you for the education.
Your, digging into apartment budgets, multifamily maniac,
M
0 Responses
Great easy explanation of market rent. You have perfect timing, too. I just started discussing budgets yesterday in class. Going to share with my students! Thank you!
Thank you. Our goal with this year long odessy is to bring some personality to the numbers. We would love to see you and or your students chime in from time to time. You are always welcome.
Have a compelling day.
M
Even though to some the Gross Potential Rent line might mean nothing, I think it provides an analytical tool to identify if your rents are set at the right dollar amount, which really helps from an accounting standpoint to be able to identify how much debt the property can carry, if the property can support monthly expenses, etc. If you don’t have a good starting point to know how much rent you can collect at a property it is difficult to make informed decisions.
If you are renting every unit at market rate to me that would signify that you really need to re-evaluate your market rents and very possibly have the ability to raise the rents and generate more income, which would mean greater cash flow, better payoff to investors, etc.
If you cannot rent even one unit at market rent and are having to give away huge amounts in concessions it lets you know that it is time to consider your rents are too high. Why were they originally set at the amount they were to begin with? Are your market rents in line with the competitors in the market? If so, why are they getting the rent but you are not?
Obviously, you cannot make your decisions for the property based on this one line item alone but I think it is a great tool to give you that beginning starting point of what the property can actually generate in income, if it is set at the correct dollar amount.
A long time ago I was told something that has stuck with me. Why would you want to set your market rents at a rate that is attainable without much effort, you always want to keep them a little out of reach to make sure that the team at the property is always trying to get that extra dollar and they don’t pass up an opportunity to produce more income just because it’s easy to get the rent listed as it is.
CK – you rock! Thank you for taking the time to add to our Rental Income discussion.
You make some very good points. Speaking to the last one – In one of my former lives; we were urged to keep a 10% margin between reality and the top line.
Hope to see you back here as we move through this budget discussion.
M