4 Steps to Boost Your Bottom Line by Improving Tenant Retention
Most people have heard that it costs five times as much to get a new customer as it does to keep an old one. Along this line of thought, Invesp has an interesting infographic that’s worth checking out. It highlights research done on the effectiveness and cost of customer retention versus customer acquisition. Among the key points it highlights:
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- Forty-four percent of companies focus more on customer acquisition, while only 18 percent focus more on customer retention.
- The probability of selling to an existing customer is 60 to 70 percent, while the probability of selling to a new prospect is 5 to 20 percent.
- Existing customers are 50 percent more likely to try new products and spend 31 percent more than new customers.
- Increasing customer retention rates by 5 percent increases profits by 25 to 95 percent.
Of course, all of these statistics are related to business in general and not to real estate in particular. That being said, customer retention with regard to property management is a sorely under-discussed topic amongst buy and hold real estate investors. We spend plenty of time talking about how to find new tenants, but after that, we usually neglect to talk about how to keep them. Each turnover is expensive. There is lost rent while the property is vacant, potentially some repair costs that aren't covered by the deposit and possibly a lease up fee if you use a property management company or third party leasing agent. The more turnovers you can eliminate, the better it is for the bottom line.
The key thing to remember is that tenants generally don’t like their landlord that much. Once they move in, the only time they think of you is either when something breaks or when they have to give you money each month. And then if there is a disagreement about who is to pay for some damage or something else like that, this creates a combative situation that can strain the tenant-landlord relationship all the more.
In other words, this dynamic is not well designed to build customer loyalty or increase tenant (i.e., customer) retention.
But there’s a major advantage in that fact, and that is that you don’t have much in the way of competition. Indeed, most tenants will have had at least one bad experience with a landlord in the past. So even if you can do OK, they will generally at least tolerate you. But if you can move beyond “OK,” you can build a major competitive advantage through increased tenant retention.
Here are four key steps to master tenant retention.
4 Steps to Boost Your Bottom Line by Improving Tenant Retention
1. Screen, screen, screen.
It gets said all the time, but it’s worth repeating: You need to screen and screen diligently. We don’t accept evictions unless they are really old (like 20 years). Same with felonies. They also need to have good landlord and employer references and make at least three times the rent in income. If you slack on screening, it’s more likely that you will have to evict the tenant, which, of course, costs money and will create a vacancy.
But even if you don’t have to evict them, you are more likely to have a tenant who will pay late, cause damage, be a hassle, or be willing to break a lease. The more qualified a tenant is, the more likely you are to keep them for the long haul (and not be bothered by them during their stay either).
2. Prioritize maintenance.
As I noted in a previous article, maintenance is the cornerstone of property management:
“Once a prospect becomes a tenant, their relationship with management and therefore the landlord (in this case, you) is not the most pleasant one. Basically, they pay you money each month to stay in the unit you rented them. But it’s like when someone buys a new toy or piece of furniture or whatever. It’s exciting and new for a while, but then it becomes just another part of that person’s new normal. It’s almost no more than background scenery. Very soon, this tenant just feels like you are some giant succubus that inhales their money each month […]
“During the tenant’s stay, their only contact with management is usually in some negative situation, which is likely why so many tenants have such a bad view of property managers. Either they’re paying the landlord rent, causing some problem that needs to be resolved, or something broke and needs to be fixed […]
“This is why maintenance is such an important thing to get right. It is the only chance you really have to impress a tenant after they’ve been impressed enough by your property to move in in the first place. And since many tenants pay by check or mail, it’s really the only face-to-face contact many ever have with management after the lease signing.”
Maintenance should never be an afterthought; it needs to be a priority. That doesn’t mean that you should pay for damages a tenant causes just to pacify them, but it does mean that you should try to get every maintenance issue resolved as soon as possible, preferably in a couple of days. If you are hiring maintenance technicians yourself, make sure they are qualified and will get the job done the first time, even if it costs more. Don’t allow them to dress or look sloppy on the job. And screen maintenance technicians you hire, as well. You don’t want to let someone with multiple felonies for burglary into your tenants’ homes to fix a leaky toilet. That is a liability nightmare waiting to happen!
And if a property management company is failing you in this regard, you should seriously consider switching.
3. Master tenant relations.
Even when you are in an antagonistic situation with a tenant, you need to learn to speak and negotiate with them in a way that will reduce hostility as much as possible. Approaching tenant relations with a “team spirit” versus a competitive one can work miracles. Indeed, my brother once succeeded in convincing a tenant who wanted to sue us to change her mind and want to rent from us again over the course of a one-hour conversation!
Say you have a tenant who is angry with you over whatever issue, perhaps a late rent charge or maintenance fee. Be fair but firm and do not become accusatory. Don’t say, “You did this,” or “You did that.” Instead, make yourself the tenant’s ally. Be on the same team, as I described here:
“Make something other than yourself the ‘enemy.’ It could be the lease, the law, company policy, or even the owner. But the enemy is certainly not the property manager. No, you as the property manager are the tenant’s ally. So for example: ‘I appreciate how hard this is; however, we have to follow the lease, and the lease mandates that we charge these expenses. We legally can’t make an exception for one unless we make it for all.’ Or perhaps, ‘I think we can find the best possible outcome given your situation that will fit with what the lease requires and the owner will accept.’ You are on their team trying to come up with the ‘best solution’ (not necessarily what they want). The rules dictated by the lease, law, policy, or owner are the ‘enemy’ in this situation.”
This approach can work wonders for tenant retention.
4. Get creative.
After reading Brandon Turner’s book on property management, I highly recommend you check out Jeffrey Taylor’s (i.e., Mr. Landlord’s) book The Landlord’s Survival Guide. Taylor notes that, “According to a federal government survey, the top reason people switch services (i.e., rental housing) is because they sense indifference on the owner’s part” (Taylor 167). So Taylor put together a program to put an end to that “sense of indifference.”
Related: 10 Not-So-Obvious Ways to Thoroughly Screen Potential Tenants
He calls it his 3-Star Resident Program, which he describes as follows:
“When residents move in to one of my properties, I welcome them into my 3-Star Resident program. It doesn’t cost them anything and they get perks by being a part of it. Their ‘anniversary’ becomes a time of celebration. Every year, I give them a choice of property upgrades (costing between $25 and $75 each) [With inflation, this is more like $50 to $100] for paying rent on time. Some landlords wonder why I reward people for doing what they’re supposed to do anyway. I regard my residents as business partners and vital member of my success team; giving rewards helps our relationship work. It also encourages them to stay longer than one year. To avoid vacancies, I’m glad to give a property upgrade that costs $75 or less. Too many times, landlords try to be cheap and step over dollars to save nickels. This isn’t rocket science; I’ve proven that people stay longer when I offer upgrades!” (164).
Such a price is a token to pay to avoid vacancies. Taylor states that his tenants stay an average of six years, which is twice the national average. That means that the average owner pays twice as much as Taylor in turnover costs. And furthermore, he has brilliantly offered a gift to the resident that is both pleasing to them and improves the property (such as a ceiling fan or accent wall).
One thing we do is to ask each resident their favorite restaurant before they move in. We keep this on file, and if there’s ever a bad maintenance issue (or we handle it poorly for whatever reason), we give them a gift card to the restaurant they wrote down. This is a much more personal (i.e., not indifferent) way to build customer loyalty than just a cash refund.
Regardless of the exact approach you take, you should see tenant retention as a critical component of the property management side of your business. Remember, it takes five times as much to find a new customer as to keep an old one, so don’t take your old customers for granted!
How do you keep your tenants staying and paying?
Let me know with a comment!