Why is knowing the LTV and CAC important? These two numbers work together to tell you how well you’re budgeting your income. Here’s how LTV and CAC fit together in the below easy-to understand ratio.
To make a profit from your rental property, your CAC should always be less than the tenant’s LTV. Otherwise, you’re losing money. Take a look at the ratio above. What this means is that for every $1 you spend, you are getting $20 in return. In this case, your customer lifetime value (LTV) ratio is 20 to 1. For example, if you’re spending $1 to acquire a customer and their LTV is $20, you are earning back 20 times the amount paid. Form a budget. By working out how much each tenant is worth (LTV), you now know how much you should spend to acquire a new tenant. If filling a vacant unit costs $200, you’ll know that spending $500 on a bench advertisement is a waste of money. Use the CAC and tenant LTV to get a clearer idea of how to portion your marketing budget, run your property efficiently, and generate more profit.
Take the next step. You’ve figured out how much you’re spending to fill each vacancy. Now imagine having to pay that amount on each unit, each year, releasing. Your bank account is much better off if you get your residents to renew their lease - you’ll cut down on marketing spending. Understanding LTV and CAC make it clear how resident retention shapes your profit. There’s more: to see how much money you save with each lease renewal, you also need to know how much income you lose in the average turnover, which we’ll cover in the next Newsletter.
Stay tuned for More On the Economics of Rental Retention and How Keeping Residents Happy Drives Profit. In Future Newsletters, we’ll break down more on the economics behind tenant retention and look at how applying strategies to reduce turnover will have a positive impact on your profits, operating budget, and long-term success as a rental property manager.
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