An outgoings audit should be an important part of your property management and leasing services. As part of the audit, you can understand the efficiencies of the property when it comes to occupational expenses. That will then help you with attracting new tenants to the property and retaining current tenants in the mix.
Any leasing expert should be able to understand and interpret property occupancy costs for the property type and the location. That can and should be done as part of the listing process and in preparing for the marketing of any vacancy.
Ask for all of the details relating to the property in today’s terms. The financial history of the property will help you understand occupancy costs over recent time. The current property budget will also help you in that analysis.
It should always be remembered that property outgoings form an important part of the rental structure and the net return for the landlord. You can compare outgoings and expenditure ratios across similar properties in the same location, and in that way understand the marketing potential for any single vacancy.
The averages should always apply when looking at the expenditure or outgoings comparisons. Any property with higher levels of outgoings for the property type will be more difficult to lease; on that basis you are likely to find that any tenant in a lease negotiation will push for a gross rental structure, thereby avoiding the pressures of outgoings volatility.
Gather the Outgoings and Expenditure Facts
So it is the case that occupancy costs will have an impact on the interests of new tenants as they are considering entering into any new lease within the managed or leased property. Here are some ideas to help you understand occupancy costs and the impact that they are having on your listed investment property, be it for property management or leasing purposes.
- Understand the impact of rates and taxes – A good part of the expenditure commitment in any investment property will be devoted to rates and taxes. Those numbers will change each year based on property values, and the levels of taxes to be applied to the property type and the location. In many cases you will find that the proportion of outgoings devoted to rates and taxes will be approximately 1/3 of the overall total.
- Review property values – In any property market you will find factors of change and upgrade. When property values are on the increase, the rates and taxes will also be escalating. On that basis you will need to estimate the future change in property values when you set any budget for the financial year.
- Get a copy of the property budget – In every financial year there will be a property budget set for both income and expenditure. That budget should be tracked monthly and quarterly against the actual levels of income and expenditure by tenant and by property. Assess the current levels of outgoings activity and the variances to budget.
- Look at historic expenditure trends – The history of the property over the last few years will give you some trends and comparisons when it comes to expenditure. You can see how the changes have occurred within repairs and maintenance, rates and taxes, maintenance contracts, and breakdown activity.
- The age of the property – The listed property should be assessed for age and redundancy. The older the property, the greater the demand when it comes to maintenance and repairs. An older property will also require renovation and refurbishment strategies to be structured into the budget for the financial year.
- Newly constructed properties – With any investment property recently constructed there will be warrantee defects periods impacting the costs of repairs and maintenance. Those warrantee matters will usually skew the maintenance budget to a lesser figure than the industry average for the property type. When the property comes out of the warranty period, the outgoings will become more ordinary and typically escalate. Be very careful when working with newly constructed properties and structuring the outgoings costs into the rental estimates.
- Capital Items – Every property will have issues of capital expenditure to be managed and timed. Capital items are usually of a large and significant nature where factors of plant and machinery need to be replaced. Most capital items are not of a repairs nature, however they do have to be budgeted. Look for those items and understand how they impact property cash flow for the landlord.
- Look at property occupancy – Changes to property occupancy will impact operational costs. There will be greater demands on property performance, usage, and wear and tear. The expenditure budget should reflect the intensity of property occupation and use.
- Understand property usage – Every tenant will have restrictions or covenants on property occupation. The permitted use within their lease document should be adhered to. If the tenant places particular demands on property function, then that fact that should be allowed for within operational expenditure budgets.
- Review regional risks and changes – In some locations you will find factors of risk having an impact on operational costs. A good example would be a property located near a river where flooding could be a common problem. That fact will have a cost impact on annual expenditure. Another example would be road access or changes to car parking in the vicinity of the property. If the local council or municipality changes public policy on motor vehicle access and/or car parking in the area, then the cost of property on-site parking and associated outgoings will change.
So there are plenty of things to look into as part of undertaking an outgoings audit. When you have all the facts of the property and the location, the accuracy of the process can be greatly improved; in that way you can help the landlord achieve and understand better levels of net income.