Financial Reports
One of the primary responsibilities of a property manager is maintaining financial reports, including an operating budget, cash flow report, profit and loss statement, and budget comparison statement.
Operating budget
An operating budget is the projection of income and expense for the operation of a property over a one-year period. This budget, developed before attempting to rent property, is based on anticipated revenues and expenses and provides the owner the amount of anticipated profit. The property manager and owner uses the operating budget as a guide for the property’s financial performance in the present and future.
Income
Income includes gross rentals collected, delinquent rental payments, utilities, vending contracts, late fees, and storage charges. Any losses from uncollected rental payments or evictions are deducted from the total gross to arrive at the total adjusted income.
Expenses
Fixed and variable expenses include administrative costs (including building personnel), operating expenses, and maintenance costs. Fixed expenses that remain constant and do not change include employee wages, utilities, and other basic operating costs. Variable expenses may be recurring or nonrecurring and can include capital improvements, building repairs, and landscaping.
Cash flow report
A cash flow report is a monthly statement that details the financial status of the property. Sources of income and expenses are noted, as well as net operating income, and net cash flow. The cash flow report is the most important financial report because it provides a picture of the current financial status of a property.
The formula for arriving at cash flow is as follows:
Gross rental income plus other income less losses incurred = Total Income
Total income less operating expenses = Net Operating Income before debt service (e.g., mortgage payments)
Net operating income before debt service less Debt service less Reserves = Cash flow
Profit and loss statement
This is a financial picture of the revenues and expenses used to determine whether the business has made money or suffered a loss. The statement is created from the monthly cash flow reports and does not include itemized information.
A formula for profit and loss statement looks like this:
Gross receipts less Operating expenses less Total mortgage payment plus Mortgage loan principal = Net profit
Budget comparison statement
The budget comparison statement compares the actual results with the original budget, often giving either percentages or a numerical variance of actual versus projected income and expenses.
Renting the Property
Setting rental rates
Rental rates are influenced primarily by supply and demand. The property manager should conduct a detailed survey of the competitive space available in the neighborhood, emphasizing similar properties. In establishing rental rates, the property manager has four long-term considerations:
- The rental income must he sufficient to cover the property’s fixed charges and operating expenses.
- The rental income must provide a fair return on the owner’s investment.
- The rental rate should be in line with prevailing rates in comparable buildings in the area. It may be slightly higher or slightly lower, depending on the strength of the property.
- The current vacancy rate in the property is a good indicator of how much of a rent increase is advisable. A building with a low vacancy rate is a better candidate for an increase than one with a high vacancy rate.
A rental rate for residential space is usually stated as the monthly rate per unit. Commercial leases including office, retail, and industrial space rentals are usually stated according to annual rates per square foot.
An elevated level of vacancy may indicate poor management or a defective or an undesirable property. On the other hand, a high occupancy rate may mean that rental rates are too low.
Collecting rents
A property manager should accept only those tenants who can be expected to meet their financial obligations. In addition to contacting credit bureaus, the selection process involves calling financial references and, if possible, interviewing the former landlord. Eviction history is now also checked.
The terms of rental payment should be spelled out in the lease agreement, including:
- time and place of payment,
- provisions and penalties for late payment and returned checks, and
- provisions for cancellation and damages in case of nonpayment.
The property manager should establish a firm and consistent collection plan. The plan should include a system of notices and records that complies with state and local law.
Every attempt must be made to collect rent without resorting to legal action. Legal action is costly and time-consuming and does not contribute to good tenant relations. When it is unavoidable, legal action must be taken in cooperation with the property owner’s or management firm’s legal counsel.
In Illinois, specific legal procedures must be followed in taking legal action against a tenant.
In addition, Illinois law has specific provisions regarding the maintenance and payment of interest on security deposits. Property managers (who must have broker or managing broker licenses) must put security deposits in a special escrow account, in the same way that real estate licensees must handle earnest money. The security deposits must be deposited in the escrow account by the next business day after a lease is signed, and this must be recorded in the journal and ledger. This escrow account is a non-interest-bearing account unless the property is residential with 25 or more units, in which case interest must be paid to the tenants.
Maintaining Good Relations with Tenants
An effective property manager establishes a good communication system with tenants. Regular newsletters or posted memoranda help keep tenants informed and involved. Maintenance and service requests must be attended to promptly, and all lease terms and building rules must be enforced consistently and fairly.
The property manager must be able to handle residents who do not pay their rents on time or who break building regulations. Careful record keeping shows whether rent is remitted promptly and in the proper amount. Records of all lease renewal dates should be kept so that the manager can anticipate expiration and retain good tenants who otherwise might move when their leases end.
