The Expenses and Budgets Report: Part 2

On Wednesday, we covered the first half of Dupre + Scott‘s annual Budgets issue of Apartment Advisor. Check it out for some general information on budgets and expenses, and for some in-depth info on vacancies.

Today we’re covering the rest of the issue. We’ll be talking more in-depth about expenses…but also about our favorite part of budgeting: income! Let’s jump right in.

Concessions and Credit Loss and Operating Expenses, Oh My!

Dupre + Scott list plenty of ways to lose money in their report. But try not to worry too much; generally there was good news, with only moderate percentage increases in 2011 and/or over the past ten years.

First there are concessions, which 27% of properties offered in Fall 2011. The average was $528 per twelve-month lease. The use of concessions has been falling recently; in 2011, concessions ate 1.2% of gross rental income.

Then we have credit loss, which tends to sink as the rental market gains strength. It averaged 0.7% in 2011–that’s the lowest it’s been since 2008. Investors sometimes forget to allocate for credit loss; while it’s nice and low at the moment, it can’t be ignored entirely!

Other expenses include real estate taxes (increased 1.2% in 2011, eating 9.4% of gross income); insurance (yearly average hasn’t actually increased since 2003); owner-paid utilities (jumped 5.1% in 2011 to $964/unit); resident management (negligible increases at $625/unit); office administration (up 1.4% to $144/unit); turnover (up less than 1% to $780/unit); and repairs (also up less than 1%). While there were others as well, we won’t list all the nail-biting details here; suffice it to say that total operating costs and capital expenses rose 2.7% in 2011; that’s 3.4% compounded annually over the past ten years.

Enough of That…What About Income?

First of all, when Dupre + Scott talk about income, they’re referring to Effective Apartment Income: that’s your total income, with financial vacancy, concessions, and credit loss subtracted. As they put it, EAI is basically “the actual rent collected for the year.” It excludes other sources of income, such as parking fees. And we have good news on this front–in 2011, EAI increased 4.4% from the previous year, hitting $9,825/unit.

And what of those other sources of income? These include laundry money, parking fees, late fees, nonrefundable deposits, and more. These averaged $962/unit in 2011–that’s a whole 8% more than 2010. While Effective Apartment Income has only climbed 2% compounded annually over the past ten years, other income has climbed 13% in that time. Let’s hear it for parking and laundry!

The Whole Story

So now that we’ve taken both expenses and income into account, we can talk about Effective Gross Income. Dupre + Scott define EGI as follows:

After taking into consideration all of the additions and deductions to the scheduled gross income discussed above, we’re left with Effective Gross Income–that’s what goes into the bank.

And there’s good news on this front as well–EGI went up 4.8% in 2011, hitting $10,750/unit. It’s increased 2.5% compounded annually over the past ten years. Due to these numbers, Dupre + Scott have forecasted gains for the next three years: 2% for 2012, 2.8% for 2013, and 2.7% for 2013.

And that’s the news from the Expenses and Budgets Report. Comments? Questions? Weigh in below.

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