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It's that time of year again. It’s time to prepare your revenue and expense budget for 2010. This article will give you some market information to help you prepare the expense portion of your budget for next year.
The table below shows the trend in actual costs for 20-unit and larger apartments in the Puget Sound region. The source is our annual Apartment Expense Report, where we collect information on actual line-item expenses for more than 80,000 apartment units in the region each year.
Expenses will vary based on a number of factors, including property age, size, and location. We'll discuss each of these variables later. The table shows selected line-item expenses for the past three years. Any expense shown in the "low" column means that 25% of the properties spent that amount or less. The "high" column shows that 25% of the properties spent that amount or more. And the "median" column means that half the properties spent more and half spent less.
First, look at how your costs have changed over the past three years compared to cost changes in the market. Are any of your line-item costs climbing faster than the market? If so, you should spend some time figuring out why your costs are rising faster.
Second, compare your costs last year with the 2008 line-item costs in the table to see where you fit. Are you in the low, median, or high range? Based on your knowledge of your property and how it generally compares to other properties, decide if your costs are in the right range. If they were lower and you didn’t skimp on anything, don't worry. But if they are higher than they should be, at least compared to the market, you'll need to spend some time figuring out why and how to get that cost under control.
The table shows costs for all sizes and ages of properties all over the Puget Sound region. Wouldn't a 30 unit property located in Shoreline built in 1968 have different costs than 200 unit building in Belltown built two years ago? Yes. So wouldn't it be better to look at actual costs and trends for properties similar to your property based on location, age, and size? Yes.
Our Expense Report lets users do just that. Subscribers can create detailed custom reports online zeroing in on exactly the market area they want as well as the property size range and property age range they want to compare against.
But even if you don't have access to the report, you can still learn a lot from comparing your performance with the results in the table. You will just have to make some subjective adjustments.
Small properties cost less to operate. At least they do based on the way we all treat expenses for them. This just happens to be the wrong way. Our industry seems to develop some strange ways of doing things. Or we’re just really good at rationalizing.
For one thing, smaller properties may not have on-site managers. They may not even have a professional property manager. And some of the owners of smaller properties do work on them that managers of larger properties hire out.
That explains the lower costs for smaller properties. But it doesn’t justify them. If the owners of these properties don’t hire managers, they are doing the work themselves. That cost isn’t in the budget. But it should be. They didn’t just buy a piece of real estate. They bought real estate plus a part- or full-time job. So, if any of this describes your management style, simply make adjustments to the management, repairs, and decorating costs in the table. Consider how much time you are spending in these management and maintenance roles and allocate a cost for your time, at least for the purpose of accurately measuring your costs compared to the market.
Some costs vary by location more than others. There are wage differences between Lakewood and Redmond that will have some impact on maintenance, decorating, and capital expenses. But material costs have been commoditized by the big box retailers, so the overall differences should be minor. Still, it’s valid to make a very small subjective adjustment if you are clearly in a much higher or much lower wage market.
The major cost differences resulting from location are real estate taxes, utilities, resident management, and professional management. Unfortunately, there's no simple way to make a subjective adjustment for utilities. But it’s easy to make adjustments for the other costs.
Real estate taxes vary in part because of differing millage rates, but mostly because of different property values. Both resident and professional management costs are significantly influenced by the amount of rent a property generates. Therefore, all three of these costs should be analyzed based on the "% EGI" shown in the table. That's the percent of effective gross income, or gross revenue after vacancy, concessions, and credit loss. If you analyze them this way, you have adjusted for most of the location differences as well as a lot of the property age differences.
