In this post I am going to introduce the four types of metrics in real estate management that I recommend our clients keep an eye on.
Most of our clients ask to look at Actual vs Budget. Looking at the variance to budget helps them know how they are managing. I think this is a good practice for property management companies, but is not enough.
Four Types of Metrics in Real Estate Management
These are the four types of metrics in real estate management that I recommend tracking:
|Proforma||A proforma is what you told your investors would happen|
|Budget||A budget is what you intend to make happen|
|Forecast||A forecast is what you think will happen|
|Actual||Actuals tell you what happened. Unlike the other three numbers above, Actuals look at history|
- Proformas are the assumptions you made when acquiring the properties.
- The variance between actuals and proformas reveals how realistic your assumptions were, and whether your investors are likely to see the returns they expected.
- A budget is what you want to happen. It’s your plan.
- Budgeting is setting the intention to achieve your plan by allocating money and resources.
- When setting a budget, you make some assumptions about what you are going to do, and what conditions are going to be like, in order to achieve the budgeted income and expenses.
- Budgets should not change frequently, such as every month. I recommend that my clients establish the budget for the year, and adjust it quarterly, only if operating conditions have significantly changed.
- The forecast is the most useful of these four numbers.
- Forecasts should be updated monthly.
- Forecasting forces you and your team to look at the business, property by property, and take into account what’s changed (for example heavy rains expected, therefore additional storm damage expenses. Or, a flailing marketing campaign, therefore fewer leads.
- At the start of the year, the budget and forecast are the same.
- However, as the months come and go, some of the budgeting assumptions you made no longer hold, so there is a divergence between the forecast and budget.
- Actuals are what has already happened.
- It’s easy to look up the actuals.
- But actuals only tell history, so you are looking backwards in time when you are reviewing the actuals.
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