Apartment Budgets: Rental Income

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

Apartment BudgetsFull 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

 

Author: Mike Brewer

Out to put a dent in the multifamily universe. Love compelling conversation...