Investment property owners—especially owners of multiple properties or absentee owners—entrust the day-to-day management of their investments to property management companies. In most jurisdictions, property management companies must be licensed and the owner of the business may be required to have a property management license similar to a real estate broker's and follow the rules of the state's real estate board.
Property managers have a responsibility to balance expenses so that their clients can realize profits. For this reason, property managers typically prepare budgets aimed at estimating the cost of maintaining and improving their clients' properties. The most successful budgets come reasonably close to the actual expenses required to manage a property.
Property Management Operations
The real estate property management company, in consultation with the owner, will prepare detailed budgets for the daily operations of the property. This function involves aspects of all the other functional areas, as it allocates funds for their performance. Not only will the income from rents need to be estimated, but a reasonable estimate of expenses for the other three functional areas will also need to be made. Costs for tenant services, repairs and maintenance, and administration will need to be closely approximated.
Properties that fall into obsolescence will experience lower rents and a less attractive return on investment as the property ages. A long-term budget for capital improvements should be developed. Renovation, remodeling, and more modern appliances will help to maintain and increase rental income in competition with newer properties.
For taxation purposes, capital improvements may be capitalized, meaning the cost is spread out over the useful life of the improvement or fully deducted in the year of the expense. Qualified accountants typically assist property managers in determining whether such expenses are capitalized or fully deducted. Certain tax advantages could result from financing the improvements.
Marketing and Advertising
Through word of mouth can bring new tenants, effective competition in the marketplace will require a marketing plan and advertising budget. Consistency is quite important in advertising. Develop a budget to fund regular periodic ads in media that have a proven track record in generating tenants.
An advertising and marketing budget should also include the cost of maintaining online listings. Budgeting for increased marketing when vacancy rates increase is also a prudent plan. Coordinating increased marketing to announce renovation or improvements is also a good strategy.
Bringing It All Together
The real estate property management company is the agent of the owner and should work closely with the owner to maximize rental income and return on investment for the property. The first step in that process, and quite important, is comprehensive budgeting.
Thorough knowledge of competitive properties, their comparative features, and rental rates is imperative. Plan for renovations and improvements and their funding. Be as accurate as possible in estimating ongoing management expenses for repairs, maintenance, and administration. Maximize rental prices in relation to competition and current market conditions. Hopefully, when all this is done, income will exceed expenses, and you'll be managing a profitable property for the owners.