Variable Expenses

What are Variable Expenses?

Variable expenses are operating costs associated with a rental property that vary depending on the level of occupancy or usage. Unlike fixed expenses, which remain constant regardless of occupancy levels, variable expenses fluctuate. They can include costs such as management fees based on rent collections, utility costs influenced by the number of units occupied, and property maintenance that rises with increased tenant turnover.

Key Components of Variable Expenses

Management Fees
Utility Costs
Maintenance and Repairs
Housekeeping and Trash Removal
Marketing Expenses

Examples

Management Fee

If a property management company charges a management fee that is a percentage of the collected rent (e.g., 5%), this is a variable cost. The more units occupied, the greater the total rent collected, and therefore, the higher the management fee.

Trash Removal

A contract for trash removal might stipulate a fee based on the number of occupied units, such as $10 per month per unit. Therefore, as occupancy increases or decreases, so will the trash removal expense.

Utility Costs

Utilities like water, electricity, and gas expenses often rise with the number of occupants, as more tenants using amenities lead to higher usage.

Maintenance

Regular maintenance and repairs may increase with higher occupancy due to the higher wear and tear associated with more active usage of the property’s facilities.

Frequently Asked Questions (FAQs)

What is the difference between variable and fixed expenses?

Variable expenses change with occupancy levels or usage, while fixed expenses remain constant irrespective of these factors.

How can property managers control variable expenses?

Effective property management includes regular monitoring of utility usage, maintaining proper records, utilizing energy-efficient appliances, and negotiating variable-related contracts skillfully.

Why are variable expenses significant in budget planning?

Variable expenses impact the net operating income (NOI) more directly as they fluctuate with occupancy. Properly estimating these changes is crucial for accurate financial forecasting and management.

Fixed Expenses

These are property expenses that remain constant regardless of the property’s occupancy. Examples include mortgage payments and property taxes.

Net Operating Income (NOI)

A measure of a property’s profitability, calculated as gross income minus operating expenses, including both fixed and variable expenses.

Operating Expenses

All costs associated with running and maintaining a property. This includes both fixed and variable expenses.

Gross Income

The total income generated from a property, including rent and other revenues prior to deducting expenses.

Online Resources

References

Brueggeman, William B., and Fisher, Jeffrey D. Real Estate Finance and Investments. McGraw-Hill Education, 2020.
Geltner, David, and Miller, Norman. Commercial Real Estate Analysis and Investments. South-Western Educational Pub, 2013.

Suggested Books for Further Studies

Real Estate Investment: Strategies, Structures, Decisions by David M. Geltner
The Real Book of Real Estate: Real Experts. Real Stories. Real Life. by Robert T. Kiyosaki
Property Management Kit for Dummies by Robert S. Griswold

Real Estate Basics: Variable Expenses Fundamentals Quiz

### Are management fees considered variable or fixed expenses? - [ ] Fixed expenses - [x] Variable expenses - [ ] Mixed expenses - [ ] None of the above > **Explanation:** Management fees are considered variable expenses, as they typically change based on the rent collected. ### Do utility costs generally increase or decrease with occupancy levels? - [x] Increase - [ ] Decrease - [ ] Remain constant - [ ] Fluctuate unpredictably > **Explanation:** Utility costs generally increase with occupancy levels because more tenants result in higher usage of utilities. ### What are examples of variable expenses in real estate? - [x] Management fees, utility costs, and trash removal - [ ] Mortgage payments, insurance premiums, and property taxes - [ ] Landscaping, foundation repair, and roof replacement - [ ] Marketing costs, legal fees, and brokerage fees > **Explanation:** Examples of variable expenses include management fees, utility costs, and trash removal. They fluctuate depending on occupancy and usage levels. ### How can property managers reduce variable expenses? - [ ] Increasing rent prices - [x] Using energy-efficient appliances - [ ] Adding more fixed expenses - [ ] Ignoring occupancy levels > **Explanation:** Using energy-efficient appliances can help reduce variable utility costs despite higher occupancy levels. ### Are cleaning and housekeeping expenses considered variable or fixed? - [x] Variable expenses - [ ] Fixed expenses - [ ] Mixed expenses - [ ] None of the above > **Explanation:** Cleaning and housekeeping expenses are considered variable expenses as they change based on occupancy or tenant turnover. ### How is rental property impacted by variable expenses? - [x] Impacts net operating income - [ ] Has no significant impact - [ ] Only affects fixed costs - [ ] Only reduces gross income > **Explanation:** Variable expenses impact the net operating income (NOI) by affecting the overall operating costs related to property management. ### Can maintenance and repairs be classified as variable expenses? - [x] Yes, especially when driven by occupancy level - [ ] No, they are always fixed - [ ] Yes, but rarely applicable - [ ] No, they are actual periodic costs > **Explanation:** Maintenance and repairs can often be classified as variable expenses, particularly when increased by higher occupancy levels resulting in more wear and tear. ### Why is accurate estimation of variable expenses critical? - [x] For accurate financial forecasting and management - [ ] To ignore budgeting needs - [ ] To adjust gross income - [ ] To comply with property tax laws > **Explanation:** Accurate estimation of variable expenses is critical for precise financial forecasting and effective property management. ### What would be an example of a non-variable property expense? - [ ] Utility costs - [x] Property tax - [ ] Trash removal - [ ] Management fee > **Explanation:** Property tax is typically considered a fixed expense as it does not vary with occupancy or usage levels. ### How does occupancy level influence variable expenses? - [x] Occupancy level directly influences the amount of variable expenses - [ ] Occupancy level has no impact on variable expenses - [ ] Occupancy affects only fixed expenses - [ ] Occupancy level decreases variable expenses > **Explanation:** Occupancy level directly influences the amount of variable expenses; more occupants typically result in higher variable costs like utilities and maintenance.