Margins Calculation – Know Your Profitability Per Unit5 min readReading Time: 4 minutes
Most operators have difficulty answering a straightforward question: what are your operating margins and profit on a unit basis?
Even if the question may seem simple, it’s not. Property management is a complex business, with revenues and costs coming from different stakeholders in different periods. Also, some revenues and cost accounts are recurrent, making it easier to forecast but even more complex to calculate the profit. Add the fact that tenants may skip paying some months’ rent, and you will find yourself with a big question mark when answering such a question.
Thanks to our experience in property management, we have found a formula to calculate the margins on a per unit and aggregate basis.
Start from the Revenues
As all the Cash Flow lessons we did teach us, the first line is the revenues. Again, this is easy because this is usually the rent collected from each unit.
However, you may collect additional sources of revenues, for example, selling other services to your tenants.
What is essential here and for the costs section is that you are careful about effective collection dates. Collection dates mean that you need to consider the day you get money in the bank from each source. It can be somehow recurrent (i.e., rent collection) or non-recurrent (i.e., using an additional service).
Here you should carefully consider weekends and holidays, so you’re not unprepared if rent collection is on Saturday. In this case, be sure that you won’t’ see any bank transfer on your account before Tuesday.
Put the Attention on the Operating Costs
The cost section is the section we can control because we decide what to spend on. Therefore, this section has to be the most consideration because it will affect margins the most.
We will see here a breakdown of all the main cost accounts, and we will see for each one what you can do and how you can calculate it.
The management fee or passive rent
You will incur this cost if you do property management or subletting. However, if you own the property, good for you; this is all profit.
This cost account refers to the money you pay to the apartment owner to rent his apartment or the fee he gets from the management.
It would help if you were careful in setting a payment date distant from the rent collection date. This process allows you to cope with eventual late tenants. For example, if you set the rent collection date from tenants on the first of the month, and then you agree with the owner to pay him on the 5th, you will have a short window to manage those late tenants. However, you will encounter a weekend or a holiday period, and you will be in serious problems.
Usually, landlords collect rent from tenants at the beginning of the month. The owner is then paid during the middle of the month or later.
What do I do with existing agreements with owners?
If you have already set up some agreements, go to them asking for the payment date to be a little bit later in the month.
They are interested in just one thing: having the money in their bank. So it is nonsense for you to stress collecting all the rents in the first days of the month. It is also better for them, the owners if you take your time managing the rent and then wire the money to the owners.
Alternatively, you can have the tenants pay the owner directly. This solution has the advantage of getting the money straight away, but then you will have to get your fee from the owners.
Also, payment cannot apply to subletting; the tenants need to pay you and not the owner as per the contract.
Here is where it gets tricky. First, bills are challenging to manage because some are recurrent and some are not, with different time frames in terms of billing.
You get a fixed amount from the tenant, so that’s ok. But then, you need to consider managing a very complex aspect of your business: the balance.
The balance considers the inflows from the fixed income you get from tenants and the cost of each bill. Here you should treat each statement differently, but most of all, have a dedicated strategy in advance [link the article for all-inclusive rent].
Mention to the condo fees
Frequently, tenants pose problems on the condo fees management and who has to pay for them. There are clear rules set in place from the start, and it is better to inform the tenants right away. The problem here is not who pays for that, but why the tenant should pay it.
They don’t want to pay for something for no reason.
The solution is either the tenant pays for it and gets reimbursed, or your state pays for it in advance. The landlord will refund this solution by charging a premium on the rent.
If your complexity is high enough, you will have a staff. Landlords must distribute their costs alongside all your units.
An exciting idea is calculating your Average Net Revenue per employee, taking out the operating costs (passive rent and bills). In this way, you get an idea of the profitability of each staff member, especially if you dedicate each of them to different units.
Reason on a per-unit basis
Now you can calculate the margins and the profitability per unit. Margins Calculation is a very complex problem with an easy answer, and remember, it can be made even more straightforward through Estelle.