Budget season is everyone's favourite time of year. Just kidding! Real estate investors look forward to this time like they do tax season, having a root canal done, or spring cleaning. They dread these things because most of them require a significant amount of effort to do right.
Creating a budget for an apartment building isn't the easiest. There's a lot of thought that goes into it, back and forth between relevant parties, and revisions. It doesn't help that the information is often obsolete the moment after it's finalized by everyone.
Even when it looks clean and tidy on your spreadsheet, your apartment investment budget can change in a heartbeat. Budget-breakers like unexpected increases in vendor costs, an upgraded software program, or unforeseen repairs can launch your original budget into the overflowing trash can.
Tips for Real Estate Investors on Creating Budgets
We know you don't look forward to doing this task, but here are a few tips to help you get through the process!
1) Don't do it all at once: Some people are like that. When they have a job to do, they sit down, focus on the task, and get it done in one go. What you want to do, and what will make your life easier, is making the budget a work in progress. Project the budget spend for the remainder of the year and add it to the year-to-date actuals. Evaluating these numbers with a sharp eye will provide the base for the beginning month's revenue performance and the calculation for year-over-year performance on the real estate investment. When you take the time to review the monthly trends of the year-to-date performance beside your projected budget, you can see potential movement before it's set in stone.
2) Don't create one too early: Sometimes the first draft of a budget can be requested as early as September for review. However, it doesn't take into account four more months of income when it attempts to predict 16 months out. After a lot of back and forth, a budget is usually finalized in December or early January. If you create a budget too early, you can portray an inaccurate picture of your building's finances.
3) Train and communicate: When creating a budget, you want to make sure you know what you're doing, what the expectations are for the upcoming year, and that your calculating tools and templates are properly working. If you attempt to create a budget without the proper guidance and tools that calculate accurate year-over-year costs, you'll end up putting less money in the bank for the New Year, but you'll spend more on your apartment building. When you do that, the NOI of your real estate investment will decrease, which you don't want to happen. To prevent that number from falling, ensure you know how to create a budget properly and communicate with other involved parties. Have a pre-budget meeting, and discuss philosophies on revenue, growth, and capital expenditures. When everyone is on the same page, creating a budget will be easier.
4) Don't allocate every waking moment to this task: Yes, this job needs to be completed, but it shouldn't be your 24/7 focus. The information on a budget can become outdated as soon as it has been printed. Take some of the time you allocated for this and put it towards other things on your to-do list. Some individuals can waste hundreds of hours on budgets; think of what they could have been doing in the meantime! As a real estate investor, you need to ask yourself if the hours you've put into the creation of your budget justify the end result or if they could have been used elsewhere to help increase the performance of your apartment building.
Budgets are hard and tricky to see to fruition. Every single dollar needs to be evaluated, calculated, and checked. You'll never be able to prepare for unforeseen expenditures accurately, either. A perfectly accurate budget doesn't exist, but if you follow our tips, you can be close.