Variable costs are expenses that change based on how much a business produces or sells. In many cases, these are related to production. If a company is producing more, its variable costs increase, and if it’s producing less, its variable costs decrease.
For example, if you own a business that creates wedding invitations and you have 200 more clients than you did last year, your variable costs will increase year over year. This is because your production costs in paper, design, labor and postage will also increase. Other types of variable costs include packaging, credit card transaction fees, and shipping expenses.
Fixed costs are expenses that do not change regardless of production output. For a wedding invitation business, your fixed costs might include salaries for your full-time employees, insurance, and office supplies. Because fixed costs are difficult to decrease, when reviewing budgets, many companies seek to decrease their variable costs instead. Buying in bulk, streamlining processes to reduce overtime, and purchasing less expensive raw materials all might contribute to lowering the company’s variable costs without affecting its overall production numbers.
In commercial real estate, a common variable cost is property management. Many property managers are paid based on the money a property produces. So, the more tenants you have in your property, the more your property manager would get for their fee. Sales commissions, maintenance, repairs, landscaping, and parking are other variable costs in commercial real estate. Fixed costs in commercial real estate are expenses that don’t change based on the occupancy level. The main expenses here are property taxes and insurance. These expenses will remain the same no matter how full a property is.
Net Operating Income in commercial real estate is the gross operating income minus the operating expenses, including both the variable and fixed expenses. Gross operating income is equal to the total possible profit from a rental property minus any vacancies.
