How to Build a First-Year Operating Budget for an Apartment Building You Just Bought
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A first-year operating budget is the monthly plan for the building's income and operating expenses that the property manager runs against and you report against. It starts from your underwriting but is more detailed: income is built from the actual rent roll, lease expirations and your renewal and turnover plan, and each expense line is rebuilt from contracts, bids and the new property tax and insurance numbers rather than the seller's history. Renovation and other capital spending go in a separate capital budget, funded from reserves raised for it, so the operating budget shows the building's real cash flow. Set it before closing, adopt it in the first month, and compare actual results to it every month.
This guide walks through building the budget line by line. It follows from your underwriting and feeds your quarterly investor reports.
Step 1: Income, unit by unit
- Start with the rent roll at closing. Each unit's rent and lease end date.
- Lease expirations. Note which leases end in each month. For each, assume a renewal rate and a renewal increase, or a move-out.
- Turnover vacancy. For each move-out, budget days vacant for make-ready and leasing. Renovated units take longer.
- New leases. Use rents you can support with rent comps, not the top of the market.
- Loss to lease and concessions. Show them as separate lines so you can track progress. See loss to lease.
- Bad debt. Budget a percentage of rent based on the building's history and the market, not zero.
- Other income. Utility reimbursements, fees, parking, laundry and storage, each on its own line. See other income.
Step 2: Operating expenses, line by line
| Line | Where the number comes from |
|---|---|
| Property management fee | The management agreement (usually a percentage of collected income) |
| Payroll | Staffing plan from the property manager: on-site manager, leasing, maintenance |
| Repairs and maintenance | Building history, adjusted for age and condition |
| Turnover (make-ready) | Expected move-outs times cost per turn |
| Utilities | 12 to 24 months of bills, by meter, adjusted for rate changes and any reimbursement plan |
| Contract services | Landscaping, pest control, trash, elevator, fire monitoring, from the contracts |
| Marketing and leasing | Listing sites, signage, leasing incentives |
| Administrative | Software, office, legal, accounting, bank fees |
| Property taxes | The post-sale estimate, not the seller's bill. See property tax reassessment |
| Insurance | The new policy premium and deductibles. See insurance costs |
| Replacement reserve deposits | The lender's required monthly deposit, if any |
Check the total against an operating expense ratio for similar buildings. A budget far below the market ratio needs a reason.
Step 3: A separate capital budget
List each capital project (unit interiors, roof, HVAC, parking lot, amenities) with its cost, timing and funding source: the renovation reserve raised at closing, a lender's capex holdback or operating cash. Keeping it separate shows investors whether the building itself is performing, and it helps your CPA decide what is deducted as a repair and what is capitalized and depreciated.
Step 4: Monthly timing
Spread each line across the months it actually hits: property tax installments, the insurance premium (or monthly escrow), seasonal utilities, landscaping and snow removal, and turnover in peak leasing season. This produces a monthly cash flow that shows whether distributions can be paid on schedule.
Step 5: Run against it every month
- Ask the property manager for a budget-vs-actual report with the monthly financials.
- Flag variances over a threshold you set (for example, 10% and a dollar amount) and get an explanation.
- Reforecast the rest of the year after each quarter.
- Report the key lines and variances to investors in your quarterly report.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c), and sends quarterly investor updates once the deal closes. It prepares the standard offering documents, forms the LLC, files Form D and state notices, and verifies accredited investors for 506(c) deals. Escrow is at Enterprise Bank & Trust, an FDIC-insured bank, and investors fund by wire only. See pricing. Bookkeeping is done by the deal's accountant or the optional Property Books & Taxes service. DoorRaise is not a law firm, broker-dealer, investment adviser, funding portal or bank.
Raise your apartment deal from the people who already follow you.
DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.
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FAQ
Who prepares the budget, the sponsor or the property manager?
Usually the property manager drafts it and the sponsor reviews, challenges and approves it. The sponsor owns the result because investors judge the deal against it.
Should the budget match the underwriting exactly?
It should tie back to it, but it is more detailed and can differ once you have contracts, tax and insurance numbers and the actual lease schedule. Explain any big differences to investors.
Are mortgage payments in the operating budget?
Debt service sits below net operating income. Most sponsors show NOI, then debt service and reserves, then cash flow available for distributions.
How often should the budget be revised?
Adopt one for the year, keep it as the baseline, and reforecast quarterly so you can compare both the original budget and the latest forecast.
Next step: see how the numbers become investor reports in quarterly investor report template.
Sources
This article is general information, not accounting, legal or investment advice. Talk to your property manager and accountant about your building. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.