Track These KPIs To Maximize Your Return On Rental PropertiesDoug Brien
January 19, 2017
Anyone who knows me knows that I’m obsessed with real estate. I’ve dedicated the last 15 years of my life to studying the way it ebbs and flows and learning what metrics to measure to get the highest possible return on my investments. I’m all about knowledge sharing, and that’s what I intend to do here. When I first got started in real estate, I was bright-eyed and bushy-tailed, and was hungry to master the industry. Back then, if someone gave me a “toolbox” of sorts to become a smarter property investor, I would’ve been absolutely drunk with elation. Well, folks, here’s your toolbox.
How do you measure property management?
As an investor, property management should be seen as a business. And like any business, knowing exactly what key performance indicators, or KPIs, to measure is the foundation of success. Once you measure something, you understand how it works. Then, you have to constantly ask yourself, “How can I be doing better?” It’s necessary to understand baseline metrics as well as market conditions, so you can formulate a plan on how to improve. On the flip side, if you have too many metrics, you can lose sight of what’s important. Real estate, like most industries, is heading towards technology platform strategies. With this shift, you’ll be able to make more informed decisions by having access to better data. Your data is going to be incredibly valuable – not just for decision-making, but in keeping audit trails and important records as well. Use your data to establish KPIs for growth, and continue fine-tuning as you develop your investment portfolio.
Here are the essential KPIs you should be tracking:
- Economic Vacancy – all forms of revenue loss including vacancy and bad debtFor example, if you have a vacant unit for two months – that’s two month’s worth of rent you can potentially collect that you have to write off. Having a clear view of the total amount of revenue loss in all forms provides a better perspective on overall financials.
- Turnover rate – average duration of stayThis is extremely important to know since your financial forecast is predicated on turnover. The more resident turnover you have, the higher the cost to turn, and that’s a cost you don’t want to incur too frequently. – unless you are in a rent controlled market.
- 100% turnover rate = 100% of residents leave after 1 year
- 50% turnover rate = 100% of residents stayed for 2 years
- 33% turnover rate = 100% of residents stay for 3 years
- Average time to lease – how many days it takes to fill vacancyCash is basically flying out of your pockets with every day your units are vacant. There are several syndication feeds you can put your rental listings on for optimal visibility. These days, people who are looking for rentals want as much information as possible, as quickly as possible. Professional-quality photos or videos produce 60% more leads than listings that don’t have visual references. You want to create as compelling of a case as possible online, and make the leasing process as simple and seamless as possible. I recommend considering self-showings to optimize your conversion funnel. Another consideration is your asking rent. You want a true market rent that maximizes your revenue, but you don’t want to ask so much that your unit sits vacant for too long.
- Average day to turn – how many days it takes to get a unit rent-ready after the previous resident has vacatedThis impacts the average time to lease, so you want to be as efficient as possible with this process. In the East Bay – especially in Oakland or Berkeley – if it’s taking you more than 14 days to lease, then something is off. Perhaps you might be asking for too much in rent, or the quality of the unit doesn’t match market standards. Macro-cycles and seasonality should also be considered.
- Cost of turn – This impacts the average time to lease, so you want to be as efficient as possible with this process. In the East Bay – especially in Oakland or Berkeley – if it’s taking you more than 14 days to lease, then something is off. Perhaps you might be asking for too much in rent, or the quality of the unit doesn’t match market standards. Macro-cycles and seasonality should also be considered.Is the amount you’re investing to match or exceed market standards for your rental units worth the return? Certain investments like smart locks may provide long-term value, but be sure to assess what kinds of building upgrades and fixes are worth the investment.Is the amount you’re investing to match or exceed market standards for your rental units worth the return? Certain investments like smart locks may provide long-term value, but be sure to assess what kinds of building upgrades and fixes are worth the investment.
- Repair and maintenance – overall costs for routine maintenance and necessary repairsWorking with property management companies that already have vendor relationships and pre-negotiated deals can be a huge benefit, especially
- Net collection – top line revenueWhat is the amount you’re collecting for all of your rental properties before any other expenses are considered? Are you driving as much “other income” as possible? This includes parking fees, storage fees, etc. Do you have too much loss to lease because your asking rents are too low?
If you try and solve for one metric or just a few of them, you won’t be seeing the bigger picture and may not be setting yourself up for success. So how do you go about collecting all this data? There are several kinds of property management software available – most of which lack the robust capabilities to measure these KPIs. Then, of course, there’s the option to work with property management companies. If you are working with an East Bay property management company, be sure to ask about what kinds of software they use or how they track metrics. As an owner, ask about how much access you get to your own metrics. If you don’t have operating data then you can’t make sense of your financials.
Why Having the Right Team Matters
It’s one thing to know what’s going on, but turning that insight into something actionable is a separate skill altogether. Building the right team is what sets business-minded investors apart from real estate hobbyists. Identify your core skills when it comes to real estate, and delegate the rest of the tasks to others. Are you gifted at sourcing locations, or renovating interiors? Stick to what you’re good at, and build a talented team to manage the functions you don’t enjoy doing or don’t particularly excel in. Asking for help is not a sign of weakness. In fact, it shows an ability to recognize cracks in what can otherwise be a smooth sailing business, and having the guts to right the ship.
Real estate is the greatest wealth creation vehicle, but it’s not about getting rich fast. I like to liken it to baseball – hitting a bunch of singles and doubles and getting your wins slow and steady. Don’t forget to build a solid team to and let each person take the reigns on their area of expertise. And last but not least, be sure to enjoy the ride.