A Closer Look at Expenses on Profit & Loss Statements
In 2024, saving money might come back into vogue for landlords and HOA managers. As rent rises slow and vacancies start to increase, you may look to the other side of the balance sheet to improve financial performance.
While it’s essential to maximize rental income, it’s equally important to track how money is spent on each line item. Because costs are sneaky and your materials, taxes, fees, marketing, staff salaries, and more are constantly rising.
And new landlords can learn a lot about their business through expenses, and about how to control losses and profit erosion. It just seems like expenses get out of control more easily than rent revenues rise. Enjoy this landlord guide to expense management.
Let’s review your essential areas of expense:
Administrative Expenses
Advertising and Marketing – Traditionally, property managers advertise rental vacancies on local newspapers and online rental listing sites. Increasingly, many property managers are turning to social media such as Facebook, LinkedIn or are advertising on apartment listing sites such as apartment.com, Zumper, Zillow, or Trulia.
Advertising online generally costs less than traditional advertising and generates more leads. Using a syndicated listing service can help you save money and attract better tenants.
Salaries and Benefits – this is one of the largest areas of operating expenses. To make a competitive compensation package and to attract prospective candidates, you may consider offering base salary plus free or a discounted rate apartment unit. To motivate your leasing staff, you may structure a bonus or commission system when they are able to meet the occupancy goal.
Payroll Taxes – the higher the payroll amount, the higher payroll taxes you are required to pay. Normally it’s safe to budget 1% of the total payroll as payroll taxes.
Office Supplies – the cost of toners and maintenance contract for your multi-function photo copier could be high; consider refilling ink cartridge and print on both sides of paper to generate cost savings and support environmental protection.
Accounting Services – accounting is part of the overhead cost that you may either hire a staff or subcontract to a 3rd party to provide bookkeeping, financial report generation and analysis. If you are operating a small size of property portfolio, consider subcontracting accounting service.
Legal Services – in some occasions, property managers may need an attorney to prepare notices or other documentation for eviction; Keep in mind that attorneys may charge from $250 to $425 per hour of their services, depending on their experience and expertise. An eviction proceeding may cost around $5,000.
Landline, Mobile & Internet services – check with your service carrier whether discount is available for bundling office phone, work cell phone, and internet service or signing a long-term contract.
Computer Services – you may either hire a staff or subcontract to a IT service company to monitor your server and provide support services if needed; if you subscribe to any property management software, make sure they do not have penalty for set up or cancellation as well as other hidden charges when you migrate your database to another supporting system.
Insurance – review your insurance policy annually to assure you get sufficient coverage with a reasonable cost for landlords insurance.
Workers Compensation Insurance – The modification rate plays a critical role in determining the worker compensation premium. If mod rate is 1, you are at the industry average. Your target mod rate should be less than 1 and it can be achieved by a decreasing trend of incidents and claims.
It’s recommended that you work with your insurance broker or carrier to fully understand how to read your workers compensation report.
Landlord Utilities Expenses
Electricity Costs – consider upgrading your existing lighting fixtures and electrical appliances to energy efficiency models; For larger size of properties, you may also consider installing solar panels.
Check with your local utility company to identify any energy saving or rebate program. Perform a payback period analysis before investing in environmentally friendly fixtures.
Gas Costs – Boilers may be eligible within energy rebate programs; A life expectancy of a boiler is about 5 years.
Water Utility Costs – consider replacing current fixtures with low flow toilets and faucets. Install water aerator to consume less water.
Sewer Utility Costs – Since sewer charges may be calculated in tiers, the higher water usage may lead to higher sewer charges.
Repair and Maintenance
Janitorial Supplies – do remember that a higher cost may incur for environmental-friendly products.
Garbage – check and assure you order the right amount of trash, recycle, and compost bins. Check the pick-up schedule to avoid any overcharges.
Landscaping – you may generate savings with drought-tolerant landscaping. Hire an arborist to provide regular tree trimming and maintenance service.
Repair Supplies – purchase through national company such as HD Supply may give you competitive pricing.
Repair contracts includes plumbing, electrical, fire alarm monitoring, fire sprinkler inspection, boiler repair. Consider conducting a bidding process every 3 years to obtain competitive pricing from your vendors.
Elevator Maintenance – typically the maintenance contract can range from 5 to 10 years. Pay extra attention to the terms of the maintenance contract; if you decide to terminate contract prior to the expiration date, you may be required to pay off the rest of the contract. If the elevator is subject to major rehab, you may not have the flexibility of hiring another contractor for the project.
Financial Expenses
Interest Payment – it’s a good idea to work with your banker to get the best interest rate since the Fed has recently lowered the federal fund rate by 0.5%.
And with all these paths of outward flows of money, you realize it’s a serious business matter.
The best way to manage it is with a professional level property management accounting app that helps visualize your financial outflows and alerts you to issues and future payables.
Good reporting and preparation can go a long way to helping you keep your financials balanced.
Need help with accounting software decisions. Call our sales team today: 1.415.800.1245.
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