Maximize Property Management Revenue Part 2: Churn, Lifetime Value, and Legislation

Most property-management owners focus on adding new doors, or, they’re just concerned with reputation management and they don’t feel like they need to grow their business. But, they ignore the cause of lost revenue and lower customer lifetime values: annual churn that quietly erodes 20–25 % of portfolios.

You probably don’t realize just how big your churn rate is.

Welcome to Part 2 of our conversation with Todd Ortscheid, CEO of Revolution Rental Management. In this part of our series, we are talking about real world churn rates for property managers, how boosting your Customer Lifetime Value (CLV) can elevate your property management company and give you the budget necessary to effectively market your services, and some of the most threatening legislation and regulation around fee-maxing.

How Much Are You Really Losing? Getting Honest About Churn

Any industry report you read will show you that property managers can expect to lose doors every month and every year. Even if you’re doing a perfect job, your owners are going to sell their properties. They’re going to die. They might change their minds.

Todd says that when asked to estimate churn, many managers guess that their churn rate is around five percent. But really, most property managers are losing 20–25 % of their doors every year.

The latest NARPM® benchmarking guide says the average churn is at 20%, and Todd says that property management companies that can bring that loss down to around 10% can feel really good about what they’re achieving.

Some property managers might think that they’re not losing money on churn because they’ve helped one of their owners sell a property. That’s great. There are commission earnings to be made. But, they’ve lost the recurring revenue.

Never underestimate what you’re losing to churn, and even though it’s surprisingly difficult, try to bring that churn rate a bit lower. When sales are intense, churn rates will jump. Be prepared.

Increasing Customer Lifetime Value

When you have responsible ancillary fees in place, you’re earning extra cash to invest into better services.

Better services reduce your churn and increase your customer lifetime value.

Where should those extra earnings be spent? We discussed this a bit in part one of our conversation:

• Marketing. Each new door now yields twice the ROI, making pay-per-click (PPC) or content marketing an easy investment.
• Better services. Upgrade what you can provide. This might be a 24/7 maintenance line, leasing automation, and a resident-benefit package (RBP). These things are increasingly expected by tenants.

Fee-Maxing Myths and The Triple-Win Model

Fee-maxing means charging more money from tenants. Won’t that lead to tenant churn? If you’re taking more money from residents, the property manager and the owner have better returns, but won’t residents leave, thus increasing an owner’s vacancy rate?

That’s a fear not a fact.

• Properly structured fees don’t drive tenants away. Most ancillary charges are behavior-based or have opt-in requirements. Late fees and bounced check fees and credit-contingency fees are behavior-based. Only the tenant can prevent those fees.
• Pet fees are completely optional. No one will charge a tenant a pet fee if they’re not moving in with a pet.

Todd has a client in Washington State who is the only property manager in his market to allow pets everywhere. He rents every listing faster while collecting a pet fee for the owner. The result is a much lower vacancy rate, happier owners, and grateful residents who couldn’t find pet-friendly homes elsewhere.

Tenants who have lower credit might not like that they have to pay a bit more in rent every month, but they’ll be grateful that they can rent a place, even with that low credit score. Those residents are grateful that someone is willing to work with them.

Second Nature is the company that manages Resident Benefits Packages. They have a model that they call Triple Win. The owner wins. The tenant wins. The property manager wins. That’s what happens with these ancillary fees, whether we’re talking about renters insurance that’s offered to tenants at a cheaper rate than they’d find on their own or a rising credit score that’s occurring because their on-time rental payments are being reported to the credit bureau. It’s a better deal for residents. Those tenants aren’t going to leave. They’re getting benefits.

Fee-Maxing and Regulatory Reactions

Fee-maxing quickly got the attention of regulators and legislators, and they began to see it the same way they might see Ticketmaster charging “junk fees.” But it’s not the same. The airline industry has done a good job of convincing the government that their ancillary fees are necessary in keeping ticket costs down.

The property management industry needs to make the same case. Our industry has advanced. We want to fund technology and new benefits for tenants, and if we cannot provide that through ancillary fees, we’ll have to increase rent and property management fees. When those fees go up, rent has to go up. Everyone suffers. It no longer becomes a situational cost. It’s not affecting only tenants with pets or only tenants who need credit help. It’s affecting everyone.

Many areas of the country are facing legislative hurdles when it comes to ancillary fees and property management. Part of this is due to the perception that landlords are rich corporations. In Atlanta, for example, a lot of institutional investors and corporations have moved into the market. So, many people have the misguided idea that landlords are big rich billionaire fat cats. But those institutional investors are about one percent of the rental owner market. Everything else is owned by small investors. The average landlord is a blue collar person and all their wealth is in the rental property. People don’t know that.

States like New York are especially hostile to ancillary fees, which surprises no one. West coast states like California, Oregon, and Washington, are also tightening rules on fee-maxing and capping pet fees or Resident Benefit Package fees. In Colorado, pet fees are now limited to $35 per pet. Another state that has shifted to be less landlord-friendly is Nevada.

What are some smart work-arounds that can keep a property owner and manager profitable in some of these states? Here are some of Todd’s suggestions:

• Rent-inclusive RBP pricing. Bundle the benefit cost inside your advertised rent. For example, if your normal rent in Oregon is $2,000, you can advertise your property at $2,050, and provide the Resident Benefits Package. Then, earmark the first $50 as the management fee.
• Provide tiered service packages. Offer “Platinum” plans that bake in formerly capped fees.
• Support data-driven advocacy. Show lawmakers how fee caps backfire on residents. This is a lesson that rent control already should have proved.

It’s important to be creative and work within what you can charge. Over time, too much regulation will negatively impact residents and there will be backlash.

Be ready to explain why the fee is in place. If it’s just a money grab, you’ll have a tough time defending it. But, if you’re putting a fee in place to change behavior or provide something of value, there’s an argument that can be reasonably made in support of that fee.

The best business model will depend on your property management company. Maybe an all-inclusive plan works best for your customers. There are zero additional fees, but they’re paying you more every month for everything, whether they use all the services that the fee covers or not.

Tiered pricing is another option. It’s like buying a basic economy airline ticket and then adding the things that you want, like meals or seat selections.

There’s nothing wrong with any of the models. As the owner of a property management company, you need to figure out what will get you to the revenue that allows you to provide the kind of service you want to provide while still making money for yourself.

In Part Three, we’ll pivot from policy to practice. We’ll talk about education versus marketing, how to create video that converts, and how to use AI to be an efficiency assistant rather than a brand killer.

Stay tuned for the finale with Todd. And if you’re hungry to turn your fresh margins into high-quality owner leads, contact us at Fourandhalf.

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