Now that budget season is done, are you so exhausted from the grind of herding all the cats in Excel, or are you taking a moment to plan ahead for next year? If you’re in the latter category…and you know you should be …then here are 3 common mistakes we’ve seen in the many dozens of budget models we’ve reviewed when it comes to rental revenue.
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This mismodeling is often driven by the need to simplify models in Excel. Not that you can’t budget at the unit type level in Excel…it’s just a LOT more complex and thus harder. We’ve thus seen some of the larger operators in our industry simplify their Excel-based models to budget at the community level leading to at least three key challenges:
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As with community-level modeling, this is often an intentional simplification to make it easier to build Excel models. But just because it’s easier doesn’t make it correct. Building a true expected value (EV) model taking into account month-to-month (MTM) leases and the possibility of multiple leases per year due to short lease terms and/or early terminations is complex, and that’s exactly why simpler models will usually introduce unnecessary variance!
We’ve seen models that don’t take into account demand (occupancy) seasonality, rent seasonality, or both. This will obviously cause variances, especially in those markets that are highly seasonal like the Northeast and Northwest. Another classic mistake is to have seasonality but be unrealistic about it. If your budgets show occupancy and rent both growing in the fourth quarter, then you are almost certainly making this mistake. With very few exceptions, we’re lucky to hold onto occupancy with slight rent reductions in Q4.
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Bonus #4: Missing the renewal strategy
For those of you using revenue management systems or strategies that involve “capture rates” (the percent of the gap between new and expiring rent to “capture” in the renewal offer and/or minimum increases), a common mistake is to use exactly those parameters in their budget model. This inadvertently implies that there will be absolutely no negotiation on renewals. We’ve typically found that, even in companies with policies against negotiation, it’s still unwise to assume for budget purposes that renewal offers will never be adjusted downward.
There you have it! Either build or buy budget applications with the following characteristics:
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Featured image by Towfiqu barbhuiya on Unsplash.