Managing the Money – Multifamily Style
Managing the financial stability of your property is not as hard as it seems. I have found through the years when acquiring properties, the current staffs don’t have a lot of exposure or training in the financial management aspects of their positions. Granted, most come from smaller owners and/or management companies who didn’t get their on-site staffs involved in the financial aspects of running their properties. There’s nothing wrong with that, it’s an owner or management company decision. I on the other hand, want my staffs involved in every aspect of running the properties where they work. I tend to look at Property Managers more as Asset Managers, which means they need to know and understand how everything they do impacts everything else…especially on the financial side.
You’re probably thinking it all revolves around collecting rents, and while true, there is so much more going on you can do to meet your budgetary goals, raise your income and keep expenses in line. You may not have thought about it and you may have, but I thought today I’d share some tips on where you can start looking to help increase your bottom line (which by the way….strong financial performance will reduce your stress just a bit and make your owner’s extremely happy!)
In 2018 I held a 3 day financial management seminar for all my property managers. While we had a ton of fun, went on a secret field trip (standard at all my manager meetings), we also, and most importantly, learned how to manage more effectively and efficiently the financial aspects at their respective properties. I won’t go into all the information that was presented during this seminar, but I do want to share a few tidbits of information on the income side of financial statements I hope will encourage you to do some deeper thinking and look for positive ways to secure the financial stability at your property.
Did you know by getting your move-ins done by the 10th of the month you can have a positive impact on the income side of your financial statement? Do you know why? At the beginning of the month any units that are vacant get “booked” to Vacancy Loss. Then as move ins and move outs occur throughout the month the Vacancy Loss account gets adjusted – money moves in and out. Move ins that happen at the beginning of the month reduce vacancy loss for the current month subsequently increasing your Net Rental Income. Move ins that occur in the middle of the month are a “wash” and, in very non-technical terms, rent on those units gets split down the middle with half going to Vacancy Loss. Move ins that occur at the end of the month have basically no impact on reducing Vacancy Loss, that is until the next month. A move in is a move in, but in order for you to get a jump on positively increasing your Net Rental Income and reducing Vacancy Loss for the current month you need to get those move ins done before the 10th.
Did you know not evicting (under normal circumstances – not with all the new laws governing evictions during the Covid-19 crisis) people promptly for non-payment of rent reduces your Net Rental Income? The longer you let resident stay without paying the bigger the financial loss becomes for the property. Yes, delinquents go up but those are generally accounts shown on the Balance Sheet. Look at your monthly financial statements in the income section under Losses – that large account called Write-Off Rents (or Bad Debt Rents) reduces your Net Rental Income. The money in this account should be equal to the number of evictions which occurred multiplied by (on average considering court timeframes) one and a half months rent for each eviction. For example if rents are $500 and you had 3 evictions that month, the Write-Off Rents for the next month in this account on the financial statement should be around $2,250.
But let’s say you didn’t file evictions promptly, the residents promised they would pay, but never did. You finally got around to filing but the delinquent residents have been sitting without paying for 2 months. Do you know what the amount is going to be in the Write-Off Rents account once they are evicted? Using the same numbers above it will be $3,750! That’s another $1,500 your Net Rental Income got reduced because you didn’t follow company policy and evict promptly.
No one, including me, likes to evict anyone. I absolutely hate it because I realize things happen which can’t be controlled. At the same time though, I have owner’s I owe a high level of fiduciary responsibility to, property mortgages and operating bills (including payroll) that have to be paid. I can’t pay bills if the rents aren’t collected and the units are not occupied.
SIDE NOTE: Occupancy does not pay the bills – collecting rents does!
Did you know that for every $1.00 in delinquent rent at the end of each month you are reducing your property’s cash value by 7%? I don’t know about you, but I do not want to be responsible for reducing the value of my owner’s assets.
Every time you give an concession, waive an application fee or late fee, forget to charge the early termination fee when a lease is broken, forget to forfeit the security deposit when the lease is broken, forget to charge the warrant fee for evictions, you are reducing the income side of your financial statements. It’s not your money to give away!
At the end of the 2018 financial management seminar I gave the property managers a one page spreadsheet showing them three different financial scenarios. The first scenario shows the results of what happens when you don’t use sound proven strategies in the day to day operations at the property (not maximizing move in dates and not filing evictions promptly). The second scenario is getting the move ins done by the 10th of the month but still not following eviction policies (a unit that is not paying might as well be vacant). The third and final scenario is where the property manager got the move ins done by the 10th and filed evictions promptly per company policies.
Personally, I would much rather present scenario number 3…I’ve done my job on the income side to maximize the financial operations of the property and it shows in the increased Net Operating Income.
There are so many things a Property Manager (or any member of an on-site team) can do to have positive impacts on the financial stability of their property, none of which are hard. However, it does require focus and a commitment to using proven strategic operational policies in order to produce solid results.
This week, as you go through your scheduled move ins and move outs, think about all the items which go hand-in-hand with these actions at your property and tie them back to your financial statement account categories. Put some thought into managing notices to vacate – what items associated with this are tied to the income side of your financial statement and what can you do to make a positive impact?
Don’t forget the expense side! There is a laundry list of things you can do to help control expenses. Contrary to some beliefs, utilities are absolutely a controllable expense!
It’s June 1st, you’ve got 25 days to make a positive impact on your property’s financial statements. What things can you think of to make this opportunity a reality?
Make sure you are keeping your fiduciary responsibilities to your owners at the forefront of all you do.
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