How can you create an accurate and realistic real estate budget?

Creating an accurate and realistic real estate budget is essential for any facility manager who wants to optimize the performance and value of their assets. A real estate budget is a plan that estimates the income and expenses of a property or portfolio over a specific period, usually a year. It helps you to align your financial goals with your operational strategies, monitor your cash flow, and identify potential risks and opportunities. However, creating a real estate budget can be challenging, especially in uncertain and dynamic markets. How can you ensure that your budget reflects the current and future conditions of your properties and the market? Here are some tips to help you create an accurate and realistic real estate budget.

1 Understand your objectives

Before you start creating your budget, you need to have a clear understanding of your objectives and expectations for your properties. What are your short-term and long-term goals? How do you measure your success? What are the key performance indicators (KPIs) that you use to track your progress? Your objectives will guide your budgeting process and help you to prioritize your actions and allocate your resources. For example, if your objective is to increase your occupancy rate, you may need to budget for more marketing and leasing activities, or if your objective is to reduce your operating costs, you may need to budget for more energy efficiency and maintenance projects.

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Dexter Norville

National Director at Jones Lang LaSalle Management
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Big topic question and many people involved from asset managers through to the operational managers. You need to understand what you are building the budget for and then break it into categories. For a single asset it may be easier than say a portfolio but some rule of thumb principals apply. If you have data from the assets actual cost in the previous year its a good foundation but not a fail safe. What is the data telling and what do you expect the usage of the asset to be in the coming 12 months, more occupancy usually equals more cost for example. Less occupancy however does not correlate always into less cost as you need to maintain the asset. Take away any CAP EX and leave in another budget focus on your OPEX. Track your actual costs.

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2 Gather relevant data

To create an accurate and realistic budget, you need to gather relevant data from various sources, both internal and external. Internal data includes your historical income and expenses, your current leases and contracts, your capital improvement plans, and your operational reports. External data includes the market trends, the supply and demand dynamics, the competitive analysis, and the regulatory and environmental factors. You need to analyze and compare the data to identify the patterns, trends, gaps, and anomalies that affect your budget. For example, you may need to adjust your rental rates based on the market conditions, or you may need to account for the impact of COVID-19 on your occupancy and revenue.

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Dexter Norville

National Director at Jones Lang LaSalle Management
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Like I mentioned earlier if you are able to track data from the asset or portfolio on real actual costs this will help you form the basis for the next year's operational budget, factor in tangible increases like inflation, labor costs and others that you know are unavoidable. If you are lucky enough to be able to have data across a larger portfolio or work with a group that can really drill down into benchmarking this will help guide you. Its not a perfect science but when you have a bigger data set of costs across certain asset classes this is powerful and can enable you to feel more comfortable around numbers. Going back to CAP EX its important as its a lifecycle budget to improve/upgrade and requires other data and a different skill set.

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3 Use reliable tools and methods

To create an accurate and realistic budget, you need to use reliable tools and methods that can help you to organize, calculate, and forecast your income and expenses. There are various tools and methods available for real estate budgeting, such as spreadsheets, software, models, and formulas. You need to choose the ones that suit your needs, preferences, and capabilities. However, you also need to be aware of the limitations and assumptions of each tool and method, and validate your results with other sources and experts. For example, you may need to use a sensitivity analysis to test how your budget changes under different scenarios, or you may need to consult with your peers and stakeholders to get their feedback and input.

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4 Review and revise your budget

To create an accurate and realistic budget, you need to review and revise your budget regularly and frequently. A budget is not a static document, but a dynamic and flexible plan that reflects the changing conditions of your properties and the market. You need to monitor your actual performance against your budgeted figures, and identify and explain any variances. You also need to update your budget based on the new information, data, and events that may affect your income and expenses. For example, you may need to revise your budget if you have a new tenant, a major repair, or a change in the market demand.

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5 Communicate and report your budget

To create an accurate and realistic budget, you need to communicate and report your budget effectively and transparently. A budget is not only a financial plan, but also a communication tool that conveys your goals, strategies, and expectations to your stakeholders, such as your owners, investors, tenants, vendors, and employees. You need to present your budget in a clear, concise, and consistent format, and highlight the key assumptions, drivers, and risks behind your numbers. You also need to report your budget progress and performance regularly and accurately, and address any questions or concerns that may arise. For example, you may need to communicate and report your budget using dashboards, charts, tables, and narratives.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Ajit Xavier

Chief Operating officer- Construction Management, Project Management, Contracts Management, stakeholder management. Driving Success in Commercial, Residential, and Industrial Projects.
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If the budget is for FM and is asset based , then Prima facie you need to arrive at the operational cost , which will essentially consist of maintenance (including preventive) cost, consumables, forecasted replacement costs, service cost (both HR & equipment). To arrive at the same, a comprehensive list of equipments it’s make as well as manufacturer, finishing materials etc should be taken through site survey or from the builder themselves with a history of the operation till date for majority of equipment (breakdown history, Warranty terms and validity etc).

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How can you create an accurate and realistic real estate budget?

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4

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1 Understand your objectives

2 Gather relevant data

3 Use reliable tools and methods

4 Review and revise your budget

5 Communicate and report your budget

6 Here’s what else to consider

Facility Management (FM)

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How can you create an accurate and realistic real estate budget?

1

2

3

4

5

6

1 Understand your objectives

2 Gather relevant data

3 Use reliable tools and methods

4 Review and revise your budget

5 Communicate and report your budget

6 Here’s what else to consider

Facility Management (FM)

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