When investing in commercial real estate, it’s essential to take all costs and future expenses into account, even expenses that are not directly related to the product or service your business is providing. These costs are called overhead (OH).
What Is Overhead?
Overhead is defined as ongoing business expenses not directly related to creating a product or providing a service. Anything that keeps a business operating without being tied to the product or service is considered OH.
Calculating OH is important to keep any business running, as it is considered a business expense and helps to determine how much someone should charge for a product or service.
For example, if you own a commercial property like a storefront, the overhead could include expenses like insurance, mortgage payments, and utilities, which are not related to the product being sold in the store. It’s always essential to include OH in any budgeting plans and calculations. Check out our acquisition calculator for more thorough insights.
3 Types of Overhead
There are a few different types of OH that you should account for in all of your investments and businesses.
Fixed overhead is the same every month. For instance, rent, mortgage payments, electricity, and insurance are considered fixed. The bill is the same every month and there are no surprises.
Variable overhead changes, depending on the business, market changes, neighborhood changes, or any other external factors. An example of variable overhead could be shipping costs if the business sends out regular shipments that change in frequency depending on how well the business is doing.
Semi-variable overhead may or may not change each month. One example is utility costs, which could change based on the season. For instance, in the summer, when the air conditioning is always in use, your utility bill may be higher.
Categories of Overhead
When making your own OH calculations and estimates, sometimes it’s a good idea for organizational purposes to group it into categories. Some examples of these categories include administrative, selling, research, maintenance, manufacturing, or transportation overhead.
Administrative, for instance, applies to costs related to the administration of a business (hiring, salaries, etc.), and selling OH could relate to things like marketing and advertising costs.
OH is considered a general expense necessary for company operations, and these expenses are usually found on a business’s income statement. On the income statement, overhead is subtracted from the income to get to the “net income figure.”
Always make sure to account for overhead in any budgeting and investment plans, as it’s essential to the operation of your business.