Financial Planning for Property Management: A Complete Guide

Every year, during the late summer, the real estate industry starts planning its finances and budget. Property experts spend months preparing budgets for managing properties in the coming year. These finances help track the cash flow, from adding new amenities to regular maintenance. Whether you are new or experienced, learning property management well and enhancing your financial planning skills is important. This guide helps you understand property management finances, what they include, and tips for creating your own. 

What is a Property Management Financial Plan? 

A property management financial plan is like a list showing a property’s income and expenses. It helps keep track of finances and plan future spending. Property experts or property managers prepare this annual operating plan for the property a few months before the upcoming fiscal (financial) year.  

What is Included in a Property Management Plan? 

Creating a financial plan for a property involves considering several things. Generally, these considerations can be divided into two main categories: 

1. Property Management Income 

Almost every multifamily property has one common thing: collecting rent from residents, which makes up most of the property’s income. However, rent might not be your only income source. You might also receive other types of income, known as additional income. 

Additional sources of income for multifamily properties can include: 

• Amenity access fees 
• Application fees 
• Property damage fees 
• Late payment fees 
• Early lease termination fees 
• Credit Card processing fees 
• Furniture rental 
• Laundry 
• Pet rent/fees 
• Laundry 
• Onsite vending machines, coffee bars, etc. 

When making the list of your annual finances, make sure to include every source of income your property generates. This helps you see accurately how much cash your building earns each month. 

1. Gross Operating Income (GOI) 

Your property’s gross operating income (GOI), also called effective gross income (EGI), is your total income, including rent and additional income. It is what you get when you subtract estimated lost income (from empty units) from your gross potential income (GPI).  

Gross potential income (GPI) is your property’s maximum revenue under ideal conditions. It is the amount you’d earn if everything went perfectly, without any vacant units or credit losses.  

So, GPI – expected lost income = GOI.  

You can estimate your expected lost income by analyzing data from previous years and data from competitive properties. 

2. Income Projections 

In addition to the income, you already track, your annual operating budget needs to predict income. This prediction should include: 

1. Future rent increases: Are you planning to increase rental rates for existing or new residents? 
2. Filled vacancies: Are you expecting more, fewer, or a similar number of vacant units next year? How will this affect your average occupancy rate and potential income from filled vacancies? 
3. Fee increases: You can increase revenue by adjusting various fees. For example, raising the price of community laundry services by $0.50 or $1.00. 
4. Projected lease renewals: Estimate which current leases are likely to be renewed in the upcoming fiscal year. 
5. New fees: Explore opportunities to generate extra income through new charges, such as implementing a common area maintenance fee. 

Consider your current vacancies and expected lease renewals when forecasting next year’s income. Utilize data to inform your projections accurately. 

2. Property Management Expenses 

Managing a multifamily property involves several expenses essential for maintaining the building and providing for residents. These expenses fall into three distinct categories that require consideration. 

1. Operating Expenses (opex) 

Operating expenses are the regular costs involved in maintaining your property every day. The higher these expenses are, the more income you will need to generate. Your operating expenses may include: 

1. Property taxes 
2. Maintenance of common areas and staff offices 
3. Insurance 
4. Contracted services like cleaning, landscaping, and security services 
5. Supplies (including office supplies, cleaning supplies, etc.) 
6. Utilities (including RUBS)

However, not all expenses related to the property are considered opex, even if the owner or management company pays them. For instance, non-operating expenses could include capital investments, marketing expenses, loan refinancing, and consultant fees. 

2. Capital Expenditures (capex) 

Each building needs continuous upgrades to remain safe, up-to-date, and attractive to tenants. Refraining from regular maintenance hampers competitiveness, lowering rent and diminishing returns.  

Hence, every property must allocate funds for capital expenditures, which are significant investments to enhance the property’s appeal and functionality. These expenditures cover large-scale replacements, expansions, renovations, and upgrades.  

Examples of capital expenditures include: 

1. Replacement of HVAC systems 
2. Installation or upgrade of security/access control systems 
3. Elevator installation or replacement 
4. Building additions 
5. Addition of amenities like a gym or a rooftop deck 
6. Renovation of units or common areas 
7. Large-scale preventive maintenance 
8. Proptech systems

Remember, capital expenditures can be capitalized, allowing you to either spread the investment cost over its useful life or deduct the entire expense in the year it occurs. Your choice depends on your specific circumstances, as one option may offer tax advantages over the other. 

3. Marketing & Advertising 

Regardless of your property’s quality, efficiently filling vacancies requires marketing efforts, which come with costs. Thus, it’s essential to budget for marketing and advertising expenses.  

Expenses to include in your advertising budget: 

1. Digital advertisements on platforms like social media, Google, and third-party websites. 
2. Printed advertisements in local newspapers, magazines, flyers, and posters. 
3. Expenses for promotional gifts and merchandise for outreach marketing. 
4. Wages for content creators if you employ a content marketing strategy. 
5. Fees for listing your property on rental listing websites. 
6. Consider increasing your budget during periods of high vacancies to boost marketing efforts. 

How to Budget Real Estate Management? 

After listing down all income and expenses for your property, it is time to develop your annual property management budget. Understanding your current financial situation lets you plan for new investments and explore methods to generate additional income. 

There are additional steps beyond adding operating expenses and income that you will need to follow. 

To budget real estate management, you must also: 

1. Calculate Net Operating Income  

Your annual operating budget helps calculate the net operating income (NOI).  

Net Operating Income = Gross Operating Income – Operating Expenses  

Note that the NOI here is pre-tax and excludes capital expenditures, depreciation, and income taxes. So, you need to compute and deduct these factors from your NOI. The result represents your net income (NI). 

2. Plan for New Investments  

As a property manager, you likely have numerous ideas for enhancing your building, whether it is installing a new video entry system or renovating the lobby with updated flooring. 

Make the most of budget season by bringing your ideas to implementation. Identify the most valuable investments you wish to undertake and incorporate them into your budget. This shows that you have researched thoroughly, considering the costs and benefits of the products or services you want to purchase. 

 3. Prepare Multiple Versions of Your Budget 

Preparing multiple versions of the annual operating budget may require some additional effort, but it is important for expert property managers. Each version should be created based on different assumptions. 

For instance, create one budget assuming rent rates rise, and interest rates fall and another assuming the reverse scenario. This approach provides flexibility for both favorable and adverse situations. 

Boost Your Financial Planning With BFPM 

Elevate your financial planning with BFPM! Our expert team specializes in maximizing your property’s profitability. We at BFPM ensure the financial health of your properties by effectively managing budgets, accounting, rent collection, maintenance and repairs, and taxes. Whether you’re managing a single property or a portfolio, we offer tailored solutions to streamline budgeting, expense tracking, and revenue generation. With our proactive approach, we help you stay ahead of market trends and capitalize on opportunities to boost profitability. 

For any queries related to property management or budgeting, contact BFPM.