Why Annual Outgoings budgets are essential for Commercial properties?
The Annual outgoings budget is often an essential component of the lease on a commercial property, and unfortunately it is also sometimes overlooked by owners. In many cases this can be costly and be a breach of the lease agreement with the Tenant and in some instances a breach of the Retail Shop Leases Act Legislation.
An outgoings budget outlines monthly expenses payable for the property. It may be that the tenant pays outgoings on top of their rental in accordance with their lease. This is called a net lease.
The number of outgoings may be small on some leases as it may only include, Rates, Water and Body Corporate, however outgoings budgets become more complex when the property is part of a Body Corporate or a retail centre or falls under the Retail Shop Leases Act.
Even if the Tenant's rental includes outgoings, which is known as a Gross lease, an Outgoings Budget is essential so that you know the actual net income the investment is producing (rent less expenses).
By having the outgoings budget you are planning for the next 12 months and have a guide on what expenses will be required and you can strategically plan for the expenses.
Here are 5 reasons why creating an outgoing budget is vital.
1. A Legal Requirement of The Lease
The Lease will stipulate what outgoings are payable by the Tenant and if it is a Retail Lease the Retail Shop Leases Act also stipulates what can and cannot be charged for.
2. To know the Net Return on Your Investment.
Many owners charge a Gross rental which is rent including outgoings. An outgoings budget provides the cost of expenses to deduct from the rental income collected so you know the net income the property is producing. It is the net income that determines the value of a tenanted investment.
2. Helps You Stay On Top of Your Finances.
Creating an outgoing budget allows you to keep track of where your money goes and helps you stay on top of your finances. When you know exactly how much money you need to spend each month on the property, you can avoid overspending and make sure you have enough money to cover your expenses.
3. Enables You to Plan for Future Capital Expenses
An outgoing budget also allows you to plan for the future. You will know what your regular expenses will be and so can also budget for Capital expenses that may be required in the future, such as a new roof, air-conditioners etc. By identifying these expenses in advance, you can start saving for them early on and avoid any financial surprises when the time comes.
4. Helps You Make Informed Financial Decisions
When you have a clear picture of your monthly expenses together with the income the property provides, you can make informed financial decisions. If you need to cut back on expenses, you can identify areas where you can make changes.
5. Helps You Achieve Your Financial Goals
The outgoings budget can be used to prepare your income and expense reports and help you achieve your financial goals. By knowing how much money is coming in and how much you need to spend each month, you can set realistic savings goals and work toward achieving them.
In conclusion, an outgoing budget is an essential part of financial planning when owning a Commercial property. By creating a plan that outlines your monthly expenses as well as income, you can stay on top of your finances, plan for future expenses, make informed financial decisions, identify areas of overspending, and achieve your financial goals.
If you haven't created an outgoing budget yet, now is the time to start ready for 1st July!