When I was a college basketball player over 20 years ago, my coaches stressed visualizing positive results. I remember the difference which a positive attitude meant to my free throws when I walked up to the line and instead of thinking “don’t miss,” I said to myself, “sink this.” Renowned coach Jim Valvano had his North Carolina State team practice cutting down the nets (the ritual after winning a championship) at their very first practice of the season. Months later, they cut them down for real after winning the 1983 National Championship.
Positive thoughts alone don’t win championships. Meticulous planning and focus of attention are essential as well. Legendary coach John Wooden said that “luck is the residue of hard work.”
As we enter 2014, how will your properties perform? Will they be champions or will the results be subpar?
As all properties and markets are different, let’s discuss the strategies necessary for successful operations. First, we must define what a successful year looks like. I compile the previous 12 months numbers (commonly known in our industry at the “Trailing 12”) and break it down from top to bottom.
Here is my check list for the income generation:
1. Are your rents at market? It is important to know what the comparable units in your submarket are renting for.
2. Are your rents level? Is there a big difference between what you are charging for two similar units?
3. What was your vacancy, delinquency and concession loss? Were those better or worse than the market?
4. If there is on-site personnel, have you evaluated their performance and their compensation? Be careful not to be penny-wise and pound foolish with the team at the property as they are the most important people other than you in the operational equation in my opinion.
a. Consider a competitive compensation structure with a generous bonus system which rewards the team in a way that aligns your interests with theirs. For example, giving bonuses based on collections and not simply rentals. A new warm body occupying your apartment doesn’t do you any good if they are not paying.
5. Do you see positive momentum in the rents? If so, budget increases during the year.
Once these questions are answered, you are ready to budget what a successful 2014 will look like for your rental collection amounts.
The check list for expenses also continue with a review of your Trailing 12:
1. On a macro-level, did you have any expense items which jumped out as surprisingly high? Often times when I am considering buying a property, I notice that roof or plumbing repairs grab my attention. After due diligence, it is clear that a major capital expense to replace either of these systems is needed which will drastically lower the expense item in my budget going forward.
2. The biggest line items are typically property taxes, insurance and utilities.a. For taxes, can they be contested as too high per the local laws? If so, in many areas around the world, there are services who will handle this for you and their payment is a percentage of your savings.
a. For taxes, can they be contested as too high per the local laws? If so, in many areas around the world, there are services who will handle this for you and their payment is a percentage of your savings.
b. Insurance should be bid out annually to ensure that you are getting the best coverage at the best prices.
c. Regarding utilities, there are several ideas:
i. Can these be lowered making you a more green owner with more green in your pocket? In Las Vegas and Austin, we changed our landscaping to “zero scape” which will cut our water bills. In Las Vegas, the city heavily subsidized this procedure.
ii. There are often utility programs (i.e. lighting and insolation) which are subsidized by the utility companies or government which can lower the property’s usage.
iii. Can you submeter or institute a RUBS (resident utility billing system) whereby the residents pay for a portion or all of the utilities? When people pay for something, they are far more likely to monitor its use and thusly it is common for usage to go down after the payment responsibility transfers.
3. Have you negotiated with your biggest subcontractors? When you are going through your last 12 months of expenses, you might be surprised how much you paid for painting, flooring, plumbing and landscaping. Bidding the services out annually is healthy.
As you review your expenses, be careful to make sure that your property looks sharp. You want to be able to compete favorably with your competitors who will be vying for the same residents. Be realistic in your spending so that you do not cut your nose off to spite your face. This includes taking care of your residents.
It is nice to include at least some amount of money for resident appreciation. It can be for prizes at Halloween or a community building activity where a BBQ is hosted or sandwiches are catered.
I recommend breaking the budget down for all 12 months and then comparing the year-end 2014 totals with your 2013 results. Hopefully your budgeted profit will be up from last year.
Now that you have completed the budget, it is important to review on a monthly basis. When I go through my numbers, I do it via a budget comparison which shows how the properties are doing that month and also year to date against the budget I created. Adjustments often have to be made during the year for unforeseen situations but that is what property and/or asset management is all about.
If you take the time to define and plan for success and then actively review that plan throughout the year, you will enjoy positive results. Good luck as you enter the 2014 season with your building(s)!