Excellent budgeting and forecasting are not only predictive but also provide means for evaluating and improving performance going forward. With our experience creating bespoke models in both “commercial tools” and Excel for several different multifamily rental companies at various points in our careers, we’ve identified four key items that make for great budgeting:
- Purpose-built by industry professionals
- Sits on top of a database
- Regular enhancement schedule
Purpose-built by experienced industry professionals
Given the industry-specific complexities of rental housing, it’s critical that any budget model be built by people with deep business experience in this space. There needs to be a combination of business and technical/analytical skills to create a good model.
Great budgeting cannot be done when somewhat arbitrary assumptions representing aggregations of the underlying business metrics are the key entries. The solution is driver-based modeling for both revenue and expenses.
- On the revenue side, we operate by the idea that key revenue results (e.g. occupancy) are not inputs. Rather, they are the result of more basic inputs, e.g. seasonality, renewals, etc.
- Similarly, expenses should be calculated based on their relevant drivers, not as direct entries. In our experience there are several ways that expenses can and should be predicted, including but not limited to: prior year plus expected annual increase, known costs spread over relevant months, and budgeted/forecasted events (e.g. painting tied to move-outs).
Sits on top of a database rather than a spreadmart
A great budget application allows for all forms of aggregation and ad hoc analysis. Data is brought into a database from the property management system (PMS), and the user interface drives workflow by reading data in from the database and writing back to it. The result is a centralized “single source of truth” for all budget/fore- cast-related data which makes reporting and analysis much easier to do than with connected Excel workbooks (i.e. a spreadmart).
A regular schedule of enhancements amortized over many units
A great budget/forecast application will be built by people who have or intend to have, many units over which they can amortize an ongoing investment. A group of people whose success in sales and retention will be driven by continuous enhancement will have the same energy for a v2, v3, v4, and beyond that they had for their initial v1.
Ultimately, to bring it all together, a good budget model:
- Starts with real and up-to-date data. Connecting with the property management system, this includes in-place rents, known move-ins and move-outs, and upcoming expirations. This serves as the starting point for all budget/forecast calculations.
- Ensures those calculations are based on meaningful drivers for both revenue and expenses, with a special eye towards forecasting occupancy and rents, expense line items, payroll, and capital expenditures. Considerations are also needed for special scenarios like renovations and lease-ups.
- Applies smart calculations using those drivers. In particular, on the revenue side, these calculations are rolled up from the unit level. We strongly advocate a model that takes the known state of each unit from #1 and applies the drivers from #2 to create an expected value (EV) for each home. Those are then rolled up to create the overall revenue forecast.
- Results in a reliable and responsive budget/forecast model we can be confident in!
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