By Meeghan Fuhr
Managing cash flow is arguably the most important task for investment property owners, particularly for those in the small-balance market. Yet despite its importance, many investors don’t take the time to thoughtfully prepare an accurate budget, causing serious cash flow problems.
When it comes to budgeting for multifamily properties, maintenance and repairs can be difficult to estimate. It’s important to consider the age, condition and size of the building, and to factor in additional costs.
Mitigate Periods of High Vacancy
Kate Good is a nationally recognized expert when it comes to multifamily properties. Having spent more than 20 years leasing apartments, Good developed a strong understanding of what renters look for, and she has successfully applied this knowledge as partner & senior vice president of multifamily development and operations at Hunington Residential.
For big repairs and replacements, Good recommends doing an annual inspection. “Each year I do a total property inspection and take note of items that are out of warranty and items that will have warranties expiring in the coming year,” she said. “If I notice something may need to be replaced, I get a quote and account for it in my budget. For items with expiring warranties, I call in the supplier to inspect with me. It’s amazing what they can offer when you are proactive and still in warranty.”
For small-balance owners, a vacant unit could have a detrimental impact on cash flow, so it’s imperative to account for this ahead of time. According to Good, the key is to be realistic. “It’s extremely important to adjust for seasonality when it comes to vacancy,” she said. “Summer months will typically always have lower occupancy rates, and it’s important to adjust for that in your budget, as opposed to assuming stable occupancy throughout the year.”
There are ways to mitigate periods of higher vacancy, too. “Definitely control and stagger lease expirations,” Good said. “You don’t always have to be locked into the typical 12-month lease term. We try to stagger our expirations so we don’t have a ton of leases coming due at the same time, and we will sometimes do 14-month to 20-month lease terms to avoid this.”
Watch the Market
Good also said it’s important to look at what’s going on in the market. “We have seen a lot of construction recently in Houston, and this could have a serious impact on occupancy rates for existing properties in the area. To prepare for scenarios like this, you should save more in the budget for the coming year.”
Another tactic is to offer concessions. Because vacancy can hurt small properties more than larger ones, small-balance owners may want to offer higher concessions than their larger counterparts to avoid the losses associated with empty units.
The biggest expenses for multifamily properties are typically labor, debt and real estate taxes. The cost of debt can depend on a number of factors, such as the owner’s financial situation, their experience owning and managing properties, and the type of organization they choose to finance their properties with. Real estate taxes are handled differently for every municipality, but it’s important to be mindful of them to avoid over-assessments.
Use the Workforce
The current labor shortage in particular has been generating a lot of buzz because it is substantially increasing the cost to develop new properties and maintain or update existing properties. However, there are people willing to work, if you are willing to train them.
“What I do is hire labor without experience, and then I train them myself. These workers are cheaper because they don’t have experience, and they will often stay with me for future projects,” Good said. Training your own labor may not be an option for all small balance owners, but when possible, it’s a good way to keep costs down while training workers to your liking and creating a loyal workforce.
Preparing a budget and managing cash flows for small balance owners can be a difficult but necessary task for a successful investment property. In the end, the best thing you can do while creating your budget is be realistic.
“Don’t take the easy route and just divide annual expenses by 12,” Good said. “It’s important to account for seasonality, and look for ways to be as accurate as possible.”
Keeping your budget in the back of your mind throughout the year can help in the long run, too, according to Good. “Taking notes all year long and keeping those notes in a file, a practice referred to as clustering, will make budget season more productive and a lot less stressful.”