Each additional month a Resident stays adds to their LTV.
The lifetime value of a Resident is the profit that you’ll make for the period of time they’re renting from you. Keeping Residents longer boosts your profits. If your rental price is $500 a month and the average tenant ‘lifetime’ is 20 months, that’s a lifetime value of $10,000. What if they stayed an additional 6 months? That’s an additional $3,000 generated from each tenant. Keeping residents in your unit means you won’t have to market vacancies, and on top of that you don’t open yourself to the risk of renting to a non-paying or problem tenant.
"To reach your tenant retention goal, your residents need to be satisfied with their current living situation."
Knowing the LTV helps you decide where you can best spend your money to influence tenant retention. We mentioned previously that the average retained resident is worth almost $900 each year to the property, in addition to rent payments. Assume 1 year’s rent is $6,000. If you know that a tenant’s LTV is $6,900 (1 year in rent plus the $900), you’ll be much less hesitant to make a repair in the unit costing $500 because you’re still making $6,400. Measuring tenant lifetime value and using it as a metric will highlight the importance of customer service.
Long-term tenant satisfaction is more valuable than maximizing short-term value, especially in the case of keeping great residents. Before imposing a steep rent increase, knowing the risk you open yourself up to will help you determine if the increase is worth it. Your renter has the option of going somewhere else for a better deal, drastically reducing their LTV. Will a $200 rent hike increase the likelihood of retention, or are you better off using that money to make unit improvements, resulting in increased lease renewal? It costs tenants time, money, and hassle to move in and out of your unit, so encouraging them to stay by being a responsive property manager can go a long way. Retained tenants generate more profit because you save money from not having to market vacancies.
In order to accurately calculate a tenant’s LTV, you also need to know how much it cost for you to fill the unit. This measurement is your Cost to Acquire a Customer. Stay tuned for More On the Economics of Rental Retention and How Keeping Residents Happy Drives Profit. In Future Newsletters, we’ll break down 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.