Basics of property management finance
- 1. Basics of Property Management By: Emily Goodman- Shortall, CPM, ARM
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- 3. Site Management There’s never a dull moment in the life of a residential manager. From hiring new employees, balancing the budget, overseeing construction projects or keeping the apartments leased, every day brings a new challenge and problems to solve. 3
- 4. Site Management • Knowledge of property-specific considerations and key site management themes will position the site manager for success. • Managers must understand site management considerations for a variety of residential property types as well as key site management themes that apply to all competency areas. 4
- 5. Site Management • Site managers are critical to the success of the property. • The variety of activities and broad range of skills used on a daily basis make site management a challenging and rewarding career. • Site managers are responsible for daily property operations, hiring and coaching employees, managing budgets, dealing with unexpected maintenance issues, screening residents, and collecting rent. 5
- 6. Finance Accounting and Budgeting Skills 6
- 7. Finance Finance concepts include accounting and budgeting functions that are necessary to meet the owner’s goals while providing a foundation for day-to-day operating decisions. 7
- 8. Accounting Oversight and execution of accurate and efficient accounting procedures ensures the financial health of the property. Property managers must be able to identify and understand accounting concepts as needed to meet the owner’s objectives for the property’s performance and to provide a foundation for making day to day operating decisions. 8
- 9. Real Estate Investors Real estate investors purchase income-producing property for two primary reasons: 1. Speculation: A short-term holding period that is high risk and potentially high reward. 2. Investment: A longer-term holding period with lower risk. 9
- 10. Real Estate Managers • The central role of a real estate manager is to maintain or increase the value of the asset for the owner. • To accomplish this goal, real estate managers generate and use financial information as part of their daily job responsibilities. 10
- 11. Real Estate Managers Roles and responsibilities: • Collect rents and verify receipt of goods and services. • Use information about leases and expenses in preparing annual operating budgets. • Assemble information and maintain records on trends in marketing and leasing, delinquency rates, resident turnover, and competing properties. 11
- 12. Accounting Real estate managers should be aware of the three basic ways that income and expenses are recorded in accounting. The differences center on when income and expenses are declared: • Cash basis • Full accrual basis • Modified accrual 12
- 13. Chart of Accounts • A classification of account items by type of income or expense as well as by accounts receivable and accounts payable and by assets and liabilities. • Properties with different amenities may track income or expenses for that amenity, making the chart of accounts vary slightly by property. • The property management firm typically designs a standard chart of accounts based on Generally Accepted Accounting Principles. 13
- 14. Expenses • Expenses involve many different functions, therefore separate line items are set up under various classifications. • For example, landscape services appear under the larger category called “Operating & Maintenance,” while “Management Fee” shows up under the category named “Administrative.” 14
- 15. Accounts Receivable and Accounts Payable • In addition to classifying and arranging account items, the chart of accounts classifies and arranges items according to accounts receivable and accounts payable. • Accounts payable and accounts receivable are short-term debt that is expected to be settled during the current accounting period. 15
- 16. Assets & Liabilities By analyzing the stability of the rental income stream, the value of a property can be understood. A real estate manager often needs to review a property’s assets and liabilities. Assets and liabilities are a basic division in accounting. • Assets: Economic resource that produces benefits. • Liabilities: Debts or obligations. 16
- 17. Purchasing Purchasing is a way to monitor expenses for supplies, services, and materials. Various forms may be used to ensure the control of purchases made and money going out to pay for those purchases. These forms include: • Purchase orders • Statements • Invoices 17
- 18. Purchasing Managers may opt to use accounting software to manage income and expenses. Software functions can include: • Tracking cash and accrual transactions • Maintaining charts of accounts • Automating entries • Forecasting and tracking budgets • Tracking purchase orders • Generating invoices While accounting software provides automation, it cannot provide the discernment and critical thinking required from managers. 18
- 19. Budgeting Budgets are itemized projections of income and expenses. Managers use budgets to plan and control a property’s operations. • Budgets cover a defined time period (not always a year) • Budgets estimate income and expenses • Budgets are forecasting tools and financial measures that allows the manager to report on performance • Budgets are the basis for setting goals, planning to accomplish the goals, and assessing how well goals have been achieved 19
- 20. Budgeting • Budgets act as a road map to achieving goals and objectives for the property. • Managers must have the skills to prepare budgets, develop forecasting, and conduct analysis of variances to meet the owner’s objectives. • Managers use budgets as a main source of information for making decisions about profitability. • Budgets give a picture of a property’s financial activity. • Specialized budgets are used for decision making about financial areas and risks. 20
- 21. Forecasting Forecasting is an essential step in budget development. Forecasting involves thinking about how costs arise and classifying them accordingly. • Fixed costs: Stable expenses that are fixed amounts that don’t change with occupancy. Insurance and real estate taxes can be considered fixed costs. • Variable costs: These expenses fluctuate based usage. Electricity and water are typical variable costs. 21
- 22. Cash Flow • Cash flow is defined as the amount of spendable income from real estate investments. • Cash flow is the amount of money available after all expenses and debts have been paid. • Cash flow is an indicator of overall financial health of a property. • By achieving maximum cash flow for the owner, real estate managers benefit through rewards and recognition. 22
- 23. Financial Reports • Financial reports capture information about income, expenditures, assets, and liabilities of a property. • Financial reports portray past events in an format that communicates information readily to persons inside and outside the organization. • Accurate information is the foundation of decision making, and reports to the owner should be comprehensive and accurate. 23
- 24. Financial Reports Monthly financial reports: • Income statements • Collection reports • Vacancy reports • Delinquency reports • Cash flow statements • Variance reports Annual financial reports: • Cash flow statements • Year-end income • Balance sheet • Check register • Payables report 24
- 25. Capitalization Property managers must be able to apply capitalization techniques to project the market value of a property. Income capitalization: • Is the market valuation of a property based upon a one-year projection of income. • Estimates the value of a property by applying a proper investment rate of return to the annual net operating income expected to be produced by the property. 25
- 26. Capitalization Rates Capitalization rates vary. Demand for types, quality and future potential of properties influence the capitalization rate. • For example, a residential property with a strong operating history and an excellent future potential may sell at a 7% capitalization rate, while a small multi-family building may sell at a 9.5% capitalization rate. • Average capitalization rates for property types are sometimes listed in newspapers. 26
- 27. Capital Capital is defined as money or property available for investment. Types of capital include: • Capital assets • Equity • Liquidity • Working capital • Capital expenditures • Capital reserves 27