Budgeting in Commercial Real Estate: Why it Matters
September 29, 2022
Most of us know that having a budget is important—it’s something that we should have. But for commercial property owners, the budget is a crucial piece of your financial plan and performance metrics. In other words, it’s not optional if you want to maintain a successful investment property. A budget allows you to track income, control expenditures, and make concrete plans for growth and development in the long term.
Whether you have five tenants or fifty, a strong budget may allow you to weather economic uncertainty, avoid disruptions to your building’s operations and performance, and maximize the health of your commercial asset. As a trusted provider of commercial real estate financial services, Farbman Group is here to provide our top tips for creating and implementing an effective budget for investment properties.
What to Include in Your Property’s Budget
Creating an effective budget will involve many different factors depending on your unique property, but everything hinges on accurately gauging your building’s value and performance. We recommend keeping detailed records and reports so you can continue creating useful annual forecasts and gaining crucial insights year over year.
Start with Your Gross Potential Rental Income
This figure represents the total gross income that the building would generate if it were occupied at full capacity for the whole year. Think of it as a kind of “perfect world” scenario. Calculate this figure at your current ideal rental rate, and include other relevant income streams such as parking fees, cleaning services, outdoor advertisements, or vending machines.
Add Pass-Through Incomes, Recoveries, and Expense Reimbursements
If you share any of the building’s operating expenses, taxes, or insurance (NNN) payments with your tenants, this is known as pass-through income or NNN income. Add this figure to your gross potential rental income.
Subtract the Building’s Vacancy and Credit Loss
Now that you’ve calculated the ideal income situation for your building, it’s time to work with real-world expectations. Any vacancy in your building represents a loss of potential income, so you’ll need to estimate what portion of your available spaces will be empty in the next year and subtract that from your previous figure.
Take into consideration any leases you know are coming up for renewal in the next year, any tenants you expect may not fulfill their obligations, and the average amount of downtime between occupancies. This portion of the planning process may require revisiting your budget quarterly or monthly, as you may not always be able to predict these kinds of changes.
Once you subtract this amount from your gross potential income, you have your effective gross income figure.
Calculate Your Operating Expenses, Capital Expenditures and Mortgage Costs
Operating expenses are any costs that go toward keeping your building safe, productive, and habitable. These may include expenses such as:
- Utilities (power, water, gas, internet, and phone lines)
- Average expected maintenance and repair costs
- Grounds keeping
- Public works, such as trash, recycling, and snow removal
- Salaries of building maintenance and operations staff
- Real estate taxes and insurance premiums
Capital Expenses may include parking lot replacement, heating and cooling upgrades – those items of a long term nature and depreciation. Subtract the Operating Expenses from your effective gross income to get your net operating income.
After this, subtract your Capital expenditures and mortgage payments. You know your building has an effective budget if this number is positive.
Commercial Real Estate Financial Services from Farbman Group
These are the foundational elements of a commercial real estate budget. But as any investor knows, many other factors can affect your financial forecast: the property’s debt service, one-time capital expenditures, and fluctuations in the market conditions that can be difficult to predict and prepare for. Having a trusted partner on your side to provide budget oversight can help you set a realistic budget and stick to it throughout the year.
Let Farbman Group’s Financial Services team free you to realize your commercial real estate goals with confidence. We pride ourselves on creating strong relationships with our clients so we can help them develop and operate under a budget that maximizes their building’s potential. Learn more about our range of financial services, and get in touch with a professional today!
Michigan’s Trusted Commercial Property Management Company
With more than 40 years of experience and 25 million square feet of property in our portfolio, Farbman Group is the leading commercial real estate firm in the Midwest. We oversee every aspect of property management, from financial services to construction to real estate brokerage and beyond. To learn what our hands-on, transparent, and solution-oriented approach can do for you, call 248-351-4386 or contact us online.
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