As of 2023, the U.S. housing market boasts 44.17 million renter-occupied units, the renter market provides a rich landscape for enhancing property management profitability. This is bolstered by a positive outlook on single-family rentals, which, despite challenges in certain markets, is essential to capitalize on since the demand for more space is there, particularly among millennials starting families.
In 2023 and 2024, third-party property management companies have been making use of the single-family rental (SFR) market's potential by focusing on portfolio and revenue growth, seeking new clients, and employing various strategies to increase their profitability. According to a survey by Buildium, enhancing property management profitability ranks as the 4th most important goal for 2024, gaining more focus from industry professionals than it did in 2022. This shift indicates a growing emphasis on financial performance within the sector.
To increase their revenue, property managers plan to employ tactics such as increasing rents/resident-paid fees (62%), leveraging technology and automations to drive efficiency (48%), expanding their service offerings (40%), and making value-add updates to properties (39%).
14 Key Metrics for Maximizing Property Management Profitability
1) Revenue Per Unit (RPU)
Definition: The average revenue generated per rental unit, indicating the financial performance of properties.
Revenue Per Unit = Total Revenue / Total Number of Unites Managed
Average Value: Varies widely based on location, property type, and market rates. According to a report by Yardi Matrix, the average revenue per unit for multifamily properties in the USA was $1,423 in 2021. Meanwhile, for single family rentals it is $170-$355.
Calculation Frequency: Monthly and annually for tracking performance and guiding pricing strategies.
2) Operating Expenses Ratio (OER)
Definition: The ratio of operating expenses to total income, indicating the efficiency of cost management.
Operating Expenses Ratio = Total Operating Expense / Gross Revenue
Average Value: Generally, a healthy ratio is between 35% to 80%, depending on property type and operational efficiency. Meanwhile according to Metric-X, a good operating expenses ratio is typically between 30-40% of revenue.
Calculation Frequency: Quarterly and annually to track efficiency improvements or identify increasing costs.
3) Technology and Automation ROI
Definition: The financial return on investments in technology and automation solutions, aimed at improving efficiency and profitability.
Average Value: Can vary widely based on the solutions implemented and their impact on operations. According to AppFolio, the average ROI for property management technology is around 150%.
Calculation Frequency: After implementation to measure initial impact and annually for ongoing benefits.
According to LetHub users’ data you can get your tech payback within the first 15 days, enjoy automation for free for the rest of the year.
4) Maintenance and Repair Costs
Definition: Costs associated with maintaining and repairing property to ensure it remains in good condition and retains value.
Average Value: According to Stessa, a good rule of thumb is to budget 1-2% of the property's value per year for maintenance and repairs.
Calculation Frequency: Annually for budgeting purposes, with ongoing tracking of actual vs. budgeted expenses.
5) Tenant Acquisition Costs
Definition: Expenses related to marketing, screening, and leasing to new tenants.
Average Value: Can range from a few hundred to several thousand dollars, depending on the market and property type. According to AppFolio, the average tenant acquisition cost is around $500.
Calculation Frequency: After each tenant acquisition cycle to evaluate marketing efficiency and cost-effectiveness.
6) Rent Collection Efficiency
Definition: Measures the effectiveness of collecting rent owed on time.
Rent Collection Efficiency = (Total Rent Collected / Total Rent Due) x 100
Average Value: Ideally close to 100% but may vary based on tenant demographics and economic conditions. According to Property Management Consulting, a good rent collection efficiency rate is around 95%.
Calculation Frequency: Monthly to promptly address any issues in payment processes or tenant communications.
7) Average Time to Lease
Definition: The average duration it takes to lease a property from listing to signing the lease.
Average Time to Lease = Total Days on Market for All Properties / Total Number of Leased Properties during the same period
Average Value: Typically ranges from a few weeks to a couple of months, depending on market conditions and property appeal. According to Buildium’s report, the average time to lease a rental property in the USA is 19 days
Calculation Frequency: After each leasing cycle to evaluate the effectiveness of marketing strategies and property appeal.
8) Maintenance Request Response Time
Definition: The average time it takes to respond to and address maintenance requests from tenants.
Average Value: Immediate response is ideal, with resolution times depending on the issue complexity. A benchmark could be within 24 hours for response and 4 days to 2 weeks for resolution, based on urgency.
Calculation Frequency: Continuously monitor for immediate operational adjustments and analyze trends quarterly for process improvements.
9) Direct Labor Efficiency Ratio (DLER) or Management Labor Efficiency Ratio (MLER)
Definition: Measures the efficiency of labor or management in generating revenue, alongside other operating metrics that provide insight into the operational performance of property management.
Direct Labor Efficiency Ratio or Management Labor Efficiency Ratio = Gross Margin (Revenue – Cost of Sales) / Direct Labor or Management Costs
Average Value: Specific targets can vary; higher ratios indicate more efficient labor use. According to the National Association of Residential Property Managers (NARPM), the benchmark for DLER is 3.96, while the average in the industry is 2.90.
Calculation Frequency: Quarterly and annually to identify areas for operational improvement and efficiency gains.
10) Occupancy and Vacancy Rates
Definition: Occupancy rates measure the proportion of rented or used units against total available, while vacancy rates represent the inverse.
Occupancy Rate = (Number of Occupied Units / Total Number of Units) × 100
Vacancy Rate =(Number of Vacant Units / Total Number of Units) × 100
Average Value: High occupancy rates above 95% are typically seen as successful; vacancy rates should ideally be as low as possible. According to a report by RealPage, the average occupancy rate for multifamily properties in the USA was 95.4% in Q2 2021.
Meanwhile a report by Yardi Matrix says the average vacancy rate for multifamily properties in the USA was 6.2% in 2021. With LetHub users’ data, we have seen an average of reduction in vacancies by 25+%.
Calculation Frequency: Monthly for operational adjustments and annually for strategic planning.
11) Ratio of Tenant Acquisition Cost to Lifetime Value of a Tenant
Definition: A comparison of the cost of acquiring a new tenant to the total revenue expected from them over the duration of their tenancy.
Tenant Acquisition Cost to Lifetime Value of a Tenant Ratio = Customer Acquisition Cost (CAC) / Lifetime Value (LTV)
Average Value: Ideal ratios depend on the industry but aiming for a lifetime value to be significantly higher than the acquisition cost is common. The average ratio of customer acquisition or tenant cost (CAC) to lifetime value (LTV) of a tenant or customer in the USA is 1:3
Calculation Frequency: Periodically, as it requires accumulation of data over time to accurately calculate lifetime value.
12) Debt Service Coverage Ratio (DSCR)
Definition: A measure of a property’s ability to cover loan payments, calculated as net operating income divided by debt service.
Step 1: Net Operating Income = Gross Potential Income - Operating Expenses.
Step 2: Annual Loan Payments (debt service) = principal repayment + interest payment + any additional fees like mortgage insurance premiums.
Step 3: Debt Service Coverage Ratio = Net Operating Income (from step 1) / the Annual Loan Payments (from step 2)
Average Value: Lenders typically look for a DSCR of 1.25 or higher, meaning that the property has enough cash flow to cover its debt obligations plus an extra 25%. Keep in mind that the actual requirements might differ depending on the lender and the specific circumstances of each case.
Calculation Frequency: Annually, or as needed for refinancing or assessing financial health.
13) Unit Churn
Definition: The rate at which tenants leave or turnover in rental units, affecting occupancy rates and operating costs.
Unit Churn = (Number of Units Vacated / Total Number of Units) × 100
Average Value: Industry averages can vary, but lower churn rates are generally preferred as they indicate higher tenant retention. According to a report by RealPage, the average annual unit churn rate for multifamily properties in the USA was 47.5% in Q2 2021
Calculation Frequency: Annually for assessing tenant satisfaction and retention strategies effectiveness.
14) Owner Churn
Definition: Owner churn refers to the rate at which property owners cease their property management services and move to another service or decide to self-manage.
Owner Churn Rate = (Number of Owners Lost/Total Number of Owners at Start of Period) x 100
Average Value: Finding specific average values for owner churn in the real estate industry is challenging due to the variability across different markets and lack of standardized reporting. However, the property management industry experiences significant turnover rates, with one source mentioning a pre-pandemic worker turnover rate of 32.7%, which might indirectly reflect on owner churn as well.
Meanwhile, National Association of Residential Property Managers (NARPM) is collecting data on owner churn and will share it with the industry as soon as it's documented but according to Four and Half, once an owner’s maintenance costs go over 12% of what they collect in rent, they’re far more likely to churn.
Calculation Frequency: Annually for assessing owner churn to allow property management companies to evaluate their retention strategies' effectiveness over a meaningful period.
Boosting Property Management Profitability: 4 Models to Focus on
Planning for property management profitability involves strategic adjustments across your business model, applicable to both large and small operations. This journey may span months to years for full integration into your processes.
1) Pricing Model: Revise Your Strategy
- Align your rates with local market standards.
- Consider fees for additional services beyond rent collection.
- Introduce flat fees for unique offerings.
- Explore new service charges.
- Monitor and adjust for positive cash flow.
2) Labor Model: Optimize Your Team
- Ensure team members are well-placed.
- Balance local and international talent.
- Implement retention strategies.
- Enhance team productivity with effective systems.
3) Expense Model: Reduce Your Costs
- Identify areas for cost reduction.
- Utilize software for operational efficiency.
- Renegotiate fixed expenses where possible.
4) Growth Model: Make Strategic Initiatives
- Recruit a skilled business development manager.
- Refine your sales process.
- Boost lead generation for sustainable business development.
Implementing these strategies requires patience, with a focus on gradually rolling out new pricing models and making significant shifts in labor and expense management for lasting property management profitability.
The Role of Automation in Enhancing Property Management Profitability
According to a report by Building Engines Inc., 38% of property management companies have reported a decrease in operational costs due to the adoption of automated solutions. It helps in enhancing property management profitability by:
- Improving guest communication: Automated pre-stay emails provide guests with crucial information, while review requests boost your property’s online reputation.
- Scheduling maintenance tasks: Automation schedules routine maintenance tasks, coordinates cleaning services, and manages inventory restocking.
- Dynamic pricing algorithms: Automated tools monitor competitors’ pricing strategies, and property managers can create and manage special offers and discounts effortlessly.
- Simplifying financial tasks: Automation streamlines financial tasks, from expense tracking to reporting and lodging tax calculation and filing.
Frequently Asked Questions:
How Long Does It Take for a Property Management Company to Increase Profitability?
Daniel Craig, CEO of ProfitCoach, suggests that businesses typically need a period of one to three years to undergo significant transformation. He observes that while some companies have achieved dramatic changes within just a year, others have spread their evolution over a few years.
Daniel emphasizes the importance of allowing a timeframe of one to three years for a company to transition from its current state to becoming a benchmark in its industry. This period is crucial for implementing and solidifying major shifts in strategy, operations, or market positioning.
How To Boost Property Management Profitability Through Ancillary Income?
Exploring ancillary income streams is a strategic move for property management profitability. By introducing additional services and amenities that add value for residents and property investors, property managers can significantly improve their Revenue Per Unit (RPU). Small adjustments and enhancements in the offerings can lead to substantial increases in profit margins. For instance, even a modest 10% increase in revenue per unit has the potential to 2X the profit per unit. This concept underscores the importance of focusing on creating, communicating, and realizing value through various ancillary services in property management.
These can range from offering premium parking spaces, pet services, or advanced property management technology services to implementing fees for amenities like gyms, pools, or communal spaces. The key is to identify opportunities that not only meet the needs and desires of tenants but also align with the investment goals of property owners, thereby creating a win-win situation that boosts property management profitability.
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