Investing in Your Investment Pays Handsome Returns
Keeping your property in top condition takes a lot of work and is an upfront investment but one that pays great dividends. As you consider upcoming projects at your property, take a minute to consider how it not only maintains the physical integrity of your investment property but also maintains and improves its overall value.
Your property is meant to deliver positive financial results for you over the life of that investment. One way you can be sure this will happen is by understanding this philosophy.
The Economics of Tenant Retention: Happy Tenants Drive Profit
You may be asking yourself, "Happy tenants drive profit? How is that possible?" When it comes to profitability on a real estate investment, one of the key metrics to understand is your NOI (Net Operating Income).
According to Investopedia, Net Operating Income is defined as:
"Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses."
Not All Rental Property Expenses Are Created Equal
When looking at the upcoming expense of a project that is meant to keep your property in premium condition, remember that the costs of your maintenance can save and even make you money! Why is that? That is because tenant retention is one of the best cost-effective strategies to boost your bottom line.
Happy tenants rent longer, pay more and take better care of the property than unhappy tenants. This is why the Lifetime Value of the tenant is more important than the Month-to-Month value.
A tenant's month-to-month value is measured in the profit generated from their rent each month. Their lifetime value is measured in the monthly profit they can generate and all the cost savings that come with a long-term and happy tenant. The cost of retaining tenants is far less than gaining new tenants.
On average, a vacancy costs 1-2 months' rent. Keeping vacancies low is key to adding to your bottom line.
A Tale of Two Rentals
Imagine owning two different rental properties in different cities, run by two different management companies. These properties are in similar neighborhoods, with similar rent, and are in similar condition.
Company "A" believes in the economics of tenant retention and works at fostering that positive relationship with the tenant. Company "B" is concerned with simply doing the minimums, fixing things only when necessary, and engaging in poor customer service.
Over 5 years, Company "A" has had 1 vacancy. This vacancy is filled quickly due to their reputation in the community as a great place to rent. The property needs no major maintenance work because of the vigilant eye of the maintenance crew. It also helps that tenants with Company "A" always feel valued by the property management company, so they maintain the homes as if they are their own. This vacancy costs approximately 1-2 months' rent.
Company "B," over the same 5 years, has 3 vacancies. These 3 vacancies each cost 1-2 months' rent, and there are the additional costs of major maintenance work for two of the vacancies. When tenants feel like they aren't valued, they don't love the property they are renting, which leads to more damage that needs to be fixed.
The Cost of Treating Your Tenants Poorly
Over those 5 years, both units had some turnover. There was maintenance needed on both units. However, the fact that Company "A" had only one vacancy compared to Company "B," which had 3, means that the cost to operate Company "B" s unit was at least 3.5 times more! This could mean the difference between turning a profit or running a deficit.
Not only does it cost more financially, but the damage that bad word of mouth does to your reputation is hard to quantify. If people are known to leave your units because they are treated poorly, and the units are poorly kept, you will only attract unsavory tenants. This will lead to even worse outcomes for your properties!
Why It Pays to Invest in Your Investments
If you are considering a big project that will boost the value of your property and add value to your tenants, remember this. While it may seem like a cost now, you may save time and money in the future. The Net Operating Income of rental properties that maintain good tenant relationships is always better.
That is where a good property management company comes in. At Centurion Property Management, we take care of your properties. We take care of your interests. We take care of your future. Reach out today and see how we can help you care for your interests.
