Budget Breakdowns: Understanding and Reporting on Multifamily Budget Variances

Accountants know that no matter how much sweat they put into financial planning, budget variances are certain. Depending on the size, the variance may or may not get a second look. But inside the numbers is critical information that may affect the long-term health of the property. The most proactive multifamily property management companies understand the importance of variance analysis. That’s why they regularly report budget variances related to income, expenses, cash flow and other key accounting metrics for monthly or quarterly review. What is variance analysis in accounting? It’s first looking at accounts and determining the difference between an actual amount and the revenue or expense budgeted. From there, it’s resolving the reason for the difference. Through analyzing and reporting variances, budgeters get a clearer picture of how their assets are performing. A common perception is that a property that enjoys high occupancy or improved rents is succeeding. Yet revenue variances in income and expenses may argue otherwise. Take a community that is at 98% occupancy on two-bedroom apartments and is fulfilling its plan to capture young households rather than downsizing couples. While occupancy is up 2% year-over-year, an analysis of two-bedroom floorplans shows that revenue is actually down 5%. Upon further investigation, the property discovers that it is getting a slightly lower price per square foot for these units because of rent concessions used to fill them. Compounding the problem is that a review of utility data for the units shows total operating expenses have risen from the previous year. Factoring in revenue and expenses over a 12-month lease, the property will make significantly less profit on two-bedrooms for the year. In this case, the revenue variance analysis provides some potentially eye-opening financial data for the property. The management company can use the variance information to determine next steps to increase occu...