A Sluggish Economy Affords Time to Evaluate Operating Expenses
Go' Jujitsu' on your property's operating costs
Even if you think your commercial or residential income property is performing well, a sluggish economy affords the greatest opportunity to create a better bottom line by cutting operating costs. Vendors and suppliers are eager for new business or are more than willing to discuss ways in which they can keep your business. If you, as property owner, or your professional manager don’t seem to have the stomach or the time to scour every line item on the P&L, or every contract in the file, than hiring a professional “stream liner” may be the best way to strengthen the financial position of your property for years to come. Investors and property owners need to realize that savings add up and they add up quickly. Sometimes you find thousands of dollars in savings right away, but mostly it’s the smaller amounts saved 15 times over that add up quickly and begin to improve your bottom line. Don’t trivialize even a $100.00 in savings, take it and try to find more $100 savings. Here’s the payoff; find $100 in savings 15 times and that’s $1,500 a month. Annualized, that monthly savings ($1500 x 12 months) adds up to $18,000.00 a year. Apply a Market Capitalization Rate, for this purpose we will use 9% and apply that to your annualized savings ($18,000/. 09) and your property has just realized an added value of $200,000. If you are analyzing expenses for a property valued at $2,000,000, that’s a 10% increase in your property’s value.
Yes, this may be a time-consuming process so start with the largest expenses first; if you own larger, ($5,000,000 in value or more) multifamily or commercial properties and have employees and benefits to contend with then work out incentive based pay plans. This provides the ownership with a bit of a hedge in case the property has a tough year. Insurance can be another large expense and policies need to be examined thoroughly not only to make sure that coverage is adequate but to also make certain that your property enjoys the most competitive rates available. Maintenance of the property is another line item on the P&L that can greatly affect operating costs, especially Heating, Ventilation and Air Conditioning commonly referred to in the industry as HVAC. It is important to work closely with your service companies and to establish a routine maintenance schedule. Routine service agreements can hold the service company more accountable for higher cost maintenance issues that might have been averted if routine maintenance had been performed properly and in a timely fashion.
There are Dollars in the Details and it takes time to root them out, patience to study them and perseverance to negotiate and realize the savings. Perhaps along the way you can convert a management culture of complacency to a culture more enthusiastic to streamline expenses and property operations.