Whether you operate a shoe shine stand or a multifamily property your business is built on renewals, or re-occurring income from existing customers. In multifamily, a high percentage renewal rate makes for a much more predictable income stream.
The value of a lease renewal can be quantified. Granted, while different for each property, the amount is one that has a direct impact on asset value, particularly when multiplied by their effect on year-over-year Net Operating Income.
Lower turnover, higher profitability
Focusing on renewals has significant downstream impact on operations. Each renewal equals one less turnover (make-ready) making the math pretty easy. Use the following math to calculate savings from increases in renewals.
Cost of A minus the cost of B equals direct savings from eliminating a single turnover.
Now let's apply this to a 100 units development that is experiencing 50% turnover versus the same development with 25% turnover.
If the average costs of each turnover is $650, then fifty turnovers per years cost $32,500. Reducing turnover from to 25% from 50% saves $16,250. Thus, expenditures to secure renewals in any amount less than $16,250 generates real savings.
But wait! There's More!
This is just the initial, easy-to-calculate savings. The "real" savings comes from the reduction in days vacant. Each renewal removes turnover expenditures and days vacant for that particular unit.
In our example from above, with turnover reduced to 25% from 50%, assuming that days vacant were 15 days with rents at $900, then the revenue generated from avoiding these days vacate equates to $11,250 (25 units each vacant for two weeks).
Additional costs savings from increases in the renewal rate show up in the form of make-ready overrun cost avoided, the potential necessity of flooring and fixture replacements and appliances.
The next layer of savings comes in the form of management administrative time. Maybe a little more difficult to quantify, but a costs all the same. This includes leasing and make-ready oversight, for example.
Consider the impact on value for properties under your control. What is increase in property value derived from one additional dollar to net income? Now multiply that times $50,000 or $100,000.
This article is intended to be informational only and does not provide legal, financial or accounting advice. See Multifamily Insight Video at John Wilhoit.com.
Banyan Residential Begins Construction on 223-Unit Luxury Multifamily Development in Phoenix, Arizona Opportunity Zone
McShane Begins Construction on 276-Unit Springs at Cooley Station Luxury Apartment Community in Phoenix Submarket
Kirco and Phoenix Senior Living Announce Completion of 137-Unit The Bluffs at Greystone Senior Living Community in Birmingham
Madison Place Luxury Apartments Usher in Exclusive VIP Access to Area's Newest Concert Venue at Ovation Pavilion in Kentucky
The latest multifamily industry news
delivered to your inbox
PHOENIX, AZ - Banyan Residential has announced the start of new construction at 5321 E. Washington...
GILBERT, AZ - McShane Construction Company has begun construction on Springs at Cooley Station in...
BIRMINGHAM, AL - KIRCO and Phoenix Senior Living announced the completion of The Bluffs at...
COVINGTON, KY - Madison Place, the area's first high-rise luxury apartment community in Covington,...
MONTGOMERY, AL - Elevation Financial Group, a provider of senior and multifamily affordable...
FORT WORTH, TX - Greystar Real Estate Partners, a global leader in the investment, development and...
ATLANTA, GA - TerraCap Management, a privately held investment firm based out of Estero, Florida,...
ATLANTA, GA - Preferred Apartment Communities announced that it closed on a loan investment of up...
The latest multifamily industry news delivered to your inbox.