Enter your email address for weekly access to top multifamily blogs!

Multifamily Blogs

This is some blog description about this site

THE COST OF A REPLACING A RESIDENT? WHAT’S THAT NUMBER?

 

 

As I was reading some old blogs I ran across one where the conversation revolved around the value of retaining existing residents. One of the points that was in the center of that conversation was the cost of loosing and replacing a resident.

 

Here are my questions:

Is it accurate that it costs about $4,500 more to replace a lease than to renew?

Is it accurate that the average turnover is 60% in an apartment community?

 

Both these numbers seem high to me (as an outsider) and they certainly show a tremendous opportunity for apartment communities to improve NOI by either lowering acquisition cost of a new resident or increasing the renewal rate. Even a 1% or 2% improvement can be a huge impact to the net profitability of a community.

Rate this blog entry:
0
 
This comment was minimized by the moderator on the site

Because of the length of my response, I will post in multiple comments.

Good questions and answers are not standard with either one of them. Let's address cost to lose a resident and the areas that must be worked into the calculation.
1. What is your average length of vacancy on an apartment and what is your lease value. This may vary depending on floor plan. Let's say you have 1,2,and 3 bedroom plans and overall (just to simplify) your average vacancy on any apartment size is 60 days (two months for ease of calculation) and your average rents are $900. You can see we can assertain your vacancy loss number is $1,800. I would use current average vacancy over the last 90 days, as we all know seasonality and other factors have impact your number. Your vacancy loss may also fluctuate considerably depending on the time of the year and changing market conditions.
2. What are the base costs of turning an apartment? This is the next part of the equation and should include painting, cleaning, carpet cleaning, general supplies (i.e. drip pans and other items not considered damage). If you have $250 to paint (including supplies), $50 for cleaning, $50 for carpet cleaning, and $25 for supply costs, your total base costs will be $375.

End of post 1

  Lawrence Berry, CPM
This comment was minimized by the moderator on the site

Post Two

3. Improvement costs are a little trickier to come up with. These are the expenses related to major or capital items to return create a true marketable apartment. This could include blinds, appliances, and of course floor covering (carpet and tile/vinyl). Most of us are not changing these things out with every turn. I would take your last six months of these expenses and divide by the number of turns to get a "cost-per-turn" number here. Let's say you are changing out due to age 20% of your carpets and 15% of your vinyl, base your calculations on this. Let's just say for ease of calculations the total vinyl and carpet number is $30,000 and you turn 60 apartments, the average cost per turn adds $500 to your total.

Now we are up to $2,675 (if using above numbers), and have not included marketing and leasing. There are two schools of thought related to these costs. First school asks, "I would have to market and advertise no matter what my turnover level is, just to maintain market presence?" If you look at it this way the only addition to your cost per turn is going to be additional marketing you do to maintain or increase occupancy. This might include outreach, flyers and additional marketing materials, increasing the number of mediums from what has been required in the past, raising the level of medium services such as going from a standard ad to a premium, etc. The second way of looking at it is adding all your marketing costs and dividing by the turnover and this gives you a number per apartment for marketing.

Last and certainly not least, some like to include staff costs. Here again, many look at this the same as marketing and determine if there are true costs that you would have no matter what the circumstances. If occupancy was high and turnover low, the same resources and costs for staffing you would use to focus on continued retention and services. However, if you hire additional staff with the purpose and intent of raising...

Post Two

3. Improvement costs are a little trickier to come up with. These are the expenses related to major or capital items to return create a true marketable apartment. This could include blinds, appliances, and of course floor covering (carpet and tile/vinyl). Most of us are not changing these things out with every turn. I would take your last six months of these expenses and divide by the number of turns to get a "cost-per-turn" number here. Let's say you are changing out due to age 20% of your carpets and 15% of your vinyl, base your calculations on this. Let's just say for ease of calculations the total vinyl and carpet number is $30,000 and you turn 60 apartments, the average cost per turn adds $500 to your total.

Now we are up to $2,675 (if using above numbers), and have not included marketing and leasing. There are two schools of thought related to these costs. First school asks, "I would have to market and advertise no matter what my turnover level is, just to maintain market presence?" If you look at it this way the only addition to your cost per turn is going to be additional marketing you do to maintain or increase occupancy. This might include outreach, flyers and additional marketing materials, increasing the number of mediums from what has been required in the past, raising the level of medium services such as going from a standard ad to a premium, etc. The second way of looking at it is adding all your marketing costs and dividing by the turnover and this gives you a number per apartment for marketing.

Last and certainly not least, some like to include staff costs. Here again, many look at this the same as marketing and determine if there are true costs that you would have no matter what the circumstances. If occupancy was high and turnover low, the same resources and costs for staffing you would use to focus on continued retention and services. However, if you hire additional staff with the purpose and intent of raising occupancy, it would be justifiable to add that expense.

The final part of the equation is factoring in the cost of concessions or specials. This is sometimes forgotten and has a direct impact on your true number. If you are giving away one month free on top of everything else, you add another $900 to the number. Now we have just gone from $2,675 to $3,575 just in hard costs.

As you can see there is not straight or direct answer, and will depend on many variables. What you want to include, what market turns costs are, what your rents are, how much are your specials and concessions, what major and capital needs to be included, etc. Each market is non-homogenous and each primary market for your site may be different as well as variences related to your property age and condition do not allow for a "one size fits all" number.

Now that I have just written a thesus on turn costs and bored about half who may read this, let's address average turnover.

Here again, there are no cut-and-dry numbers and so many variables that have an impact. Primary market conditions, the competitive nature of the market, mortgage rates and availability of loans (which changes as we are seeing), employment changes, age and upkeep of your community compared to the market, are there student populations in the competitive market impacting turnover, etc. Some markets 45% turnover may be high, while in others 60% is the norm. Let me give you an example. A community that targets and has a profile of residents between 45 and 60 years of age may have a considerably higher retention (that is of course if the staff and owners are doing their part) than a site that has a lower age profile. Generational studies show those as in example in the 20 to 35 age category are more transient and more willing to move based on price rather than service. Therefore if your resident profile is in this range and your market special oriented, your turnover would be higher. Here again, doing your research and within your competitive market will assist with the answers.

It would be nice if we could have questions answered easily. We work in a very complex industry, with a lot more gray than black and white. I believe it is also one of the reasons so many of us love this business, because it provides challenges and new opportunities every day and makes us ask the questions you have presented.

Good luck and hope this had been helpful, although not sure you received a direct answer because as you can see...there is not one that works for everyone.

Larry Berry

Read More
  Lawrence Berry, CPM
This comment was minimized by the moderator on the site

Thank you Larry this was a great answer. Your points certainly give a great overview of the dynamics in play. I guess a follow up question would be what the cost of a renewal is... Is there concessions given there (I would assume there is) and are there sales commissions on these?
I am trying to get a feel for the cost differential (range) between a renewal and a new lease.
By the way what is the typical comp in multifamily? Is there a large part of one's income tied to new lease and renewals?

  Frederic Guitton
This comment was minimized by the moderator on the site

I agree that it is a number that has too many variables; but I think it is important information to have when for formulating annual budgets. It is also useful to have when faced with a situation where a current resident has an actual complaint about an aspect of their apartment; i.e. do I spend $500 to replace the carpet for a new resident who has a stain that was not completely removed from the previous resident; or do I risk having to spend over $3000 to turn that same unit? Or do I choose to replace the carpet for someone who has been with the property a long time when they renew, instead of simply cleaning the carpet?

I have always felt that it is easier and costs less to keep current customers/residents happy than it is to try to capture new ones.

When considering reasons that residents can have that force them to move; they fall into 2 categories:

1)Lifestyle changes; these include (but are not limited to): changes in employment status/location, change in household size (loss of a household member, or the addition of one so that they exceed occupancy standards you cannot support), or the purchase of a home. These changes need to be accepted by managemnet as not within their control.
2) CUSTOMER SERVICE; these are issues that are completely within the realm of management's control, whether it be something that should have happened and didn't, or something that did happen and shouldn't have.

Once I understood that, it was like an 'A-Ha!' moment and everything else fell into place.

  Johnny Karnofsky
This comment was minimized by the moderator on the site

Hi Frederic - I think it is great you are asking these questions and challenging these numbers. It's important to get a gut check every now and again. I think Lawrence did a fantastic job in addressing the cost of turnover question. Regarding the question of the average turnover being 60% at the average apartment community - this figure comes from the annual NAA Income and Expense survey. If you look back of the last several years, the average turnover fluctuates between 57% and 62%. This is why it's so critical to focus on retention because we are one of the few industries that finds it acceptable to replace nearly two-thirds of our customers every year!

  Jen Piccotti
This comment was minimized by the moderator on the site

Great responses and follow up by Frederic, Jen, and Johnny. I agree totally in the thought it is less expensive and better to try and keep a resident than lose them. They have a marginal carpet, have been a great resident, and that costs me $1,000 to keep them and I would have to replace at turn. YOU BET! Here is a thought. Why do we focus so much on the leasing aspect when we should be putting more emphasis on resident retention? Result is higher income, lower expenses, improved NOI. DAH!

To your question of the cost of resident retention. If your cost for renewal is lower then the cost of a turn and they were going to move, you are ahead of the game. Please communicate with your team the cost of turnover, and with them make sure they understand the time aspects for them to turn and lease the apartment. It all follows working smarter and not necessarily harder theory. You ask about the cost of a renewal and the cost of a new lease. The cost of a new lease is basically what we discuss before, easily over $3,500 if not more. The cost of a renewal...priceless!

  Lawrence Berry, CPM
This comment was minimized by the moderator on the site

Oh, I forgot. Read Jen's blog on The Truth about Retention in THIS Economy. Really good job Jen. Touches on some of what we have been talking about and more.

  Lawrence Berry, CPM
This comment was minimized by the moderator on the site

Thank you for the comments
@ Johnny, I guess we need to worry about what we control. As far as the 2 categories 1 is what it is and 2 is our/your resposibility.
@Jen Kind of like baseball. If you hit better than 30% you are a rock star. Tying back to Johnny's comment it would be great to be able to get the breakdown of these move out within these 2 buckets
@Larry MasterCard love you! LOL

  Frederic Guitton
This comment was minimized by the moderator on the site

@Frederic;

Yes, the first category of reasons 'is what it is'; I only broke down the 2 groups because it is important to understand the difference between the two. If a resident chooses to leave and you are able to determine that it IS because of a reason falling into the second group, realize it is a test and an opportunity for you to delve deeper and resolve the issue; perhaps convincing the resident to rethink his plans and rescind his notice.

  Johnny Karnofsky

Comment Below

  1. Posting comment as a guest. Sign up or login to your account.
Attachments (0 / 3)
Share Your Location
There was an apartment-related story in the Houston Chronicle today, but the interesting aspect wasn't in the news, but in the comments below. They were incredibly anti-apartments with comments like, "There goes the neighborhood" and "NO MORE APARTMENTS!" The interesting aspect is that a significant chunk of this new construction is Class A properties that cost more than the houses those readers live in. When your average rents are over $1,800, it is definitely not a situation of "there goes the...
Would it surprise you to learn that in a recent study across the country where apartment communities were contacted with requests for information via the internet that less than 10% of the communities contacted responded?  In our current economic climate where maintaining occupancy is a challenge in many of our metropolitan areas, would your communities be part of the 10% or would they be part of the 90%?  As we begin 2009, I would challenge all multi-family professionals, whether onsi...
First of all, I want you to know that I am all for technology.  I have a cell phone, a laptop computer, voicemail, an email account, and a Facebook account.  I love that I have access to information and can communicate with the touch of a finger.  I love the fact that I can communicate with someone across the country in the middle of the night if I want to.  It is amazing.Now for the reason for my post today - I am so sick of not being able to talk to a live person. &nbs...