Author: Tim Moegen
November 16, 2022 - 4 MIN. READ
Fixed costs, variable costs, and unexpected costs can all impact on your carefully budgeted maintenance plan. And, with rapid changes in the supply chain, the increasing unpredictability of these costs could cause one to exceed their overall budget for a given multifamily property. Combatting rising building and repair costs associated with your multifamily properties can often require continual effort and investment. But property owners and managers are not alone in this endeavor. This article explores these expenses in detail and provides some ways to ensure that they do not derail your property’s budget and value.
Introduction
When purchasing a multifamily property, one should expect a certain amount of up-front and ongoing expense. And there are often a number of unexpected expenses for a variety of reasons. Examples include supply chain issues, inflation, rising building and repair costs, and changes to the single-family housing market. Each of these can work against you to throw your carefully crafted budget into a tailspin.
Fixed costs
Every multifamily property bears certain fixed costs that tend to vary little on an annual basis.
- Taxes: Unless your property is reassessed on a regular basis, your real estate taxes are predictable from year to year.
- Insurance: Insurance premiums increase or decrease based on actuarial tables influenced by your building’s age, state of repair, and location, making them predictable.
- Planned Maintenance: Additionally, fixed utilities costs and basic upkeep and caring for tenant concerns all figures into the maintenance budget. Most multifamily units allocate a portion of the rent toward maintenance costs to ensure this cost is covered.
Variable costs
Multifamily properties have variable costs in critical and unavoidable areas.
- Utilities: If fuel prices rise, as is the current situation, you will spend more than budgeted to heat and cool your property.
- Unplanned Maintenance: Buildings that operate at or close to capacity also require more frequent repairs and maintenance. Elevators are used more often, parking areas need to be re-sealed regularly, etc.
- Renovations: You know that your units need to be renovated periodically. What you may not know is what the latest trends are to attract desirable tenants and what associated renovations and improvements are necessary and how much they will cost.
- Labor: Formerly considered a fixed and predictable cost, labor costs have grown increasingly variable as turnover in multifamily properties has grown and multifamily properties are finding it difficult to retain high achieving and valuable employees. Many multifamily properties have turned to using perks, signing bonuses, and higher salaries to attract/retain staff in the current labor market. This has lead to unpredictable and variable labor costs.
Unexpected costs
This final cost category is a catch-all for economic volatility, both within the United States and worldwide.
- Interest Rates: The Federal Reserve raised interest rates to curb inflation, but its tentacles run deep into the multifamily market. As operating costs rise, so do prices for families. Rental increases can no longer cover expenses as families can no longer afford to pay rent.
- Housing market: Just as many renters were preparing to purchase a home after spending several COVID years working remotely, the housing market rose through the roof with first-time buyers entering bidding wars with low-interest mortgages. Now that rates are climbing, those prospective buyers need to stay in the rental market at a time when investors can least afford to create more rental units.
- Supply chain issues: Many multifamily developers report that supply chain issues continue to disrupt the industry. Supply scarcity has driven costs up by as much as 40% and caused delays that last as little as 30 days to as long as six months.
- Natural disasters: Hurricane Ian will impact the multifamily housing market in Florida and surrounding areas. Like every natural disaster, Hurricane Ian will leave people homeless, raise costs for remaining houses and decimate the affordable housing market.
Mitigating the effects
With rising operating costs in multifamily properties, combined with unexpected costs, it is important to know how to combat these challenges.
- Rent: As a property owner, time is on your side. Most tenants sign yearly leases, making rent increases, especially if the increases are tied to the Consumer Price Index, an effective way to increase revenue for your multifamily property.
- Lock In Rates: Instead of signing a one-year contract with your utility vendors, negotiate a slightly higher rate that can be locked in for several years. Suppliers are already experiencing several clientele changes and may be willing to work with your multifamily property if it means that they can count on you for your business.
- Invest in You: Perform regular building maintenance and upgrades. Newer, more efficient systems may cost more upfront but end up paying for themselves through lower overall costs. This system is especially true with appliance and HVAC upgrades. Consider investing in some equipment and supplies that will enable your building manager to perform simple maintenance tasks that will lower your overall costs. It is much less expensive to perform simple tasks such as unclogging drains in-house than it is to engage a plumber at 2:00 AM.
- SAVE: Lowering your purchasing costs so you pay less for maintenance, repairs, supplies, and more will always benefit your bottom line. Raiven is an example of how you can save.
Raiven Can Help
Raiven serves multifamily property owners and managers by providing the lowest prices on equipment, parts, and maintenance supplies as well as a purchasing platform that makes buying fast and efficient. Key benefits include:
- Pre-negotiated discounts of 7-25%+ from big name suppliers like Ferguson, HD Supply, Grainger, Graybar, Office Depot, and more.
- Supply chain alerts for price and product availability changes on the items that matter to you most.
- Private marketplace houses all your preferred suppliers in one location for easy access to your discounts. No more bouncing around websites comparing prices.
- AI-powered purchasing tools that find the lowest prices even when employees shop outside your network.
Raiven is your one stop shop to save time and money. Ask our clients Core Realty, Lyon Living, or Oaks Property Management what we’ve done for them. Visit Raiven to learn what we can do for you.
Article Sources:
- https://fnrpusa.com/blog/fixed-vs-variable-costs/#:~:text=Fixed%20expenses%E2%80%94sometimes%20called%20fixed%20costs%E2%80%94are%20those%20that%20must,the%20property%20is%20completely%20empty%20or%20completely%20full.
- https://smartland.com/resources/what-to-expect-from-multifamily-real-estate-as-inflation-rises/<
- https://www.multifamilyexecutive.com/design-development/supply-chain-headaches-continue-for-multifamily_o
- https://www.axios.com/2022/10/05/hurricane-ian-rebuilding-affordable-housing
- https://apartmentdata.com/blog/multifamily-data-research-reducing-maintenance-costs/
- https://www.raiven.com/success-stories/oaks-saves-big-on-maintenance-costs
- https://supply-chain.cioapplications.com/vendor/raiven-facilitating-smart-purchasing-and-sourcing-decisionmaking-with-ai-cid-5677-mid-365.html
