Loss rate, churn rate, attrition rate.
None of these are sexy terms for property management business owners, but they are an everyday reality and you really need to know yours.
The varying sizes of property management businesses is something I have always been fascinated by, and have often said that businesses seem to have a rate of natural attraction, and a rate of natural attrition, and when those two match, that’s effectively the size they tend to stay forever.
This becomes a really important consideration when you are thinking about growing your business by acquiring new rent rolls.
Why? Because attrition rates tend to remain proportional to the size of the business, whereas growth rates are usually static until you change your approach, or do something differently.
Consider the following example, which is obviously very general in nature but at the same time, also very typical:
You have a 500-property business, and you are going steadily adding about eight new managements per month.
Your rate of attrition across the business is a fairly typical 15 per cent per annum.
This means every year, you are putting on about 96 properties, and you are seeing about 75 head back out the door.
Currently, you are growing in size by around 20 managements per year.
An opportunity comes up to acquire a further 500 properties, and so you jump on it, because it’ll instantly scale you up, something that has been part of your strategic business plan for quite a while.
You’ve just become a 1000-property business, and that’s a great feeling and an awesome milestone.
Because we’re optimistic, let’s say that your rate of attrition has remained the same, and not increased, even though you now have a lot more things on your plate to manage.
And because we’re optimistic, let’s also say you got a little bit of an upswing in growth, just because you have a larger presence now, and so you are consistently getting 10 new managements per month.
It’s great news that your organic growth has bumped up to about 120 properties per year, but the reality is now you are also losing 150 properties per year.
The slide has begun, and you’ll soon be at 970 properties.
All things being equal, this story ends with a slow decline that will continue until you reach about 825 properties.
When you reach 825 properties, that is the point where you will be adding 120 properties per year, and also losing about 120 properties per year, and that just becomes your “new normal”.
Thinking about those 175 properties that have slowly leaked out the door over time, this means a loss in value of well over $1 million based on today’s rent roll values, plus the interest you’ve invariably paid in the meantime.
That’s a really confronting thought to digest as a business owner.
This is definitely not intended to be a dreary tale of woe, it’s simply about being prepared.
The time to think about these critical issues is actually before you expand your business, and not once the slide has started.
Consider your current rate of growth, and how consistent that has been over time.
What is your current rate of attrition?
Based on these two numbers, what does that mean your theoretical maximum size is right now, if you did nothing differently?
Now, if you are about to buy a rent roll, how big will you become relative to your current theoretical maximum?
The challenge begins when you will exceed your current theoretical maximum, because that means now is the time to plan the growth strategies that you need to ramp that up, before you make that acquisition.
You could even consider the art of rent roll acquisition is actually buying to match your organic growth rate.
However you prefer to go about it, please make sure you have that plan in place to protect your investment and not see your hard earned work diminish in value over time.