Budget Variance

What is Budget Variance?

Budget variance is the difference between the budgeted or planned amount of revenue or expense and the actual amount incurred or received. In real estate investing, it's a critical financial metric used to assess how well a property or portfolio is performing against its financial projections. Understanding budget variance helps investors identify areas of overspending or underperformance, enabling timely adjustments to maintain profitability and achieve financial goals.

How Budget Variance Works in Real Estate

Budget variance can be either favorable or unfavorable. A favorable variance occurs when actual revenue is higher than budgeted, or actual expenses are lower than budgeted. Conversely, an unfavorable variance means actual revenue is lower than expected, or actual expenses are higher. Analyzing these deviations provides insights into operational efficiency, market changes, and the accuracy of initial financial forecasts.

Key Components of Variance Analysis

• Revenue Variance: This compares actual rental income, laundry income, or other property-generated income against the budgeted figures. For example, higher-than-expected occupancy rates would lead to a favorable revenue variance.
• Expense Variance: This measures the difference between actual operating expenses (e.g., property taxes, insurance, utilities, maintenance) and their budgeted amounts. An unexpected repair cost would result in an unfavorable expense variance.

Calculating and Analyzing Budget Variance: A Step-by-Step Guide

To effectively manage your real estate investments, a systematic approach to calculating and analyzing budget variance is essential. Follow these steps to gain clear insights into your property's financial performance:

1. Gather Financial Data: Collect all actual income and expense statements for the period being analyzed (e.g., monthly, quarterly).
2. Retrieve Budgeted Figures: Access the original budget or financial projections for the same period.
3. Calculate Variance: For each line item (e.g., rent, utilities, repairs), subtract the budgeted amount from the actual amount (Actual - Budgeted). A positive result indicates a favorable variance for revenue or an unfavorable variance for expenses, and vice-versa.
4. Analyze Significant Variances: Investigate any variances that exceed a predefined threshold (e.g., 5% or $500). Determine the root cause of these deviations.
5. Take Corrective Action: Based on your analysis, implement strategies to address unfavorable variances or capitalize on favorable ones. This might involve adjusting rents, optimizing operating expenses, or revising future budgets.

Real-World Example: Rental Property Budget Variance

An investor budgeted $2,000 in monthly rental income and $800 in operating expenses for a single-family rental. In July, the actual figures were $2,100 in rental income and $950 in operating expenses. Let's calculate the variances:

• Rental Income Variance: Actual $2,100 - Budgeted $2,000 = +$100 (Favorable). This could be due to a tenant renewal with a slight rent increase.
• Operating Expenses Variance: Actual $950 - Budgeted $800 = +$150 (Unfavorable). This might be due to an unexpected plumbing repair or higher utility costs.
• Net Operating Income (NOI) Variance: Budgeted NOI was $2,000 - $800 = $1,200. Actual NOI was $2,100 - $950 = $1,150. The NOI variance is $1,150 - $1,200 = -$50 (Unfavorable).

In this scenario, while rental income was favorable, the higher operating expenses led to an overall unfavorable NOI variance. The investor would then investigate the $150 expense overrun to understand its cause and prevent recurrence.