What is a controllable expense? A controllable expense is one that provides proactive property management an opportunity to generate meaningful financial impact. In this definition many will then consider “every expense” as a controllable expense. That is too far-reaching.
While you can bid insurance and challenge real estate taxes, these expenses remain firmly fixed based on factors out of the control of management. Does that leaves…everything else?
No. We still have to narrow the scope to items that can have real impact on NOI; we want our efforts to have meaningful financial impact. So here I will ask your to disregard with prejudice assumptions such as; eliminating property management altogether (a pipe dream as there is no such thing as an asset that manages itself) and self-insurance (for deep pocketed owners only anyway).
Note the wording; “controlling” controllable expenses. Too often there is a focus on eliminating expenses that are detrimental to operations under the guise of controlling. Sure, you can cut grass just once a month, but the negatives outweigh the brief dip in the expenditure. How many leases lost in the interim?
Let’s go a little deeper segregating expenditures as fixed and variable. Fixed expenses are those necessary to operations; utilities, safety, taxes and insurance (again) and property management.
So how do you decide which items to focus on in terms of controlling expenses? Start with your largest dollar outflows and look at cutting these as a percentage of X. Consider contracting fixed-rate pricing on such items as lawn care, painting, a fixed-rate service call for repairs for consistent calls such as HVAC and plumbing. On all of these items, based on the dollar volume your asset generates…you should never be paying retail price points for service on property.
Select a meaningful dollar amount in terms of savings; an annual target, an amount that makes the time required to obtain the savings a worthy cost/benefit endeavor. Savings of $10,000 from a $50,000 line item far outweighs $1,000 from $5,000.
Example: A fixed-priced contract to paint all units at a set price regardless of size (1, 2, 3 bedroom) with a built-in year-over-year savings over the prior year for this expenditure. Remember also that some “single cuts” have multiple year effects in terms of costs savings. Insulation for example, one time expense, multiple years of energy savings.
Variable expenses include maintenance and make-ready as these “vary” depending on need (and age of the asset, and quality of construction and ownership and management methodology).
Negotiate a discount with local service providers based on being a consistent customer. Make them your “exclusive” service provider in exchange for preferential rates.
This article is intended to be informational only and does not provide legal, financial or accounting advice. Read over 300 articles about multifamily intended for owners, operators and investors at Multifamily Insight. See video at John Wilhoit.com.