Before your new tenant has even moved in, you’ve already spent money to acquire him. The Cost to Acquire a Customer (CAC) is how much you spend for one customer. If you’re paying to share listings on third-party sites or hire brokers, how effective is it? The easiest way to tell is to look at how many renters these marketing avenues are bringing in. How much are you spending?
If your marketing budget is $1000 and it gives you ten customers, you’re spending $100/customer. Alternatively, if you’re spending that much in one channel (e-mail marketing) and it only gets you, one customer, you’re paying $1000 for one customer, which is too much! This is why it’s essential to know where your marketing is most cost-effective and worth your time. Map your marketing spending.
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Then ask yourself: How much is one customer worth, and how much am I willing to spend to acquire a tenant? Knowing the CAC will allow you to be smart about portioning your marketing budget. Look at the breakdown of your marketing spending and the leads that result from those efforts. The CAC should always be less than the tenant’s Lifetime Value (LTV), and you still want the CAC to be decreasing - this means more profit for you! For example: Let’s say it costs $200 to acquire a tenant. If a tenant’s one year lifetime value is $6000 (rent is $500/month x 12 for a one year lease), this means that you will make $5800 the first year of their lease, and $6000 the second year. You save $200 for each additional year they stay with you because you don’t need to spend money to market a vacancy. Your CAC is $200, and the LTV for a 1-year lease is $5800, so the tenant is profitable.
As you can see, your CAC also depends on how long a tenant rents from you, so convincing them to renew their lease for a second or third year will make them even more profitable. This is why you should focus on retention. CAC: Cost to Acquire a Customer $0 $5,000 $10,000 $15,000 $20,000 1 Year 2 Year 3 Year $17,800 $11,800 $5,800 $200 $200 $200 CAC LTV Length of Lease Increase profits with lease renewal.
How much is one customer worth? $1000 $1000 10 customers 1 customer e-mail marketing Craigslist Paid Ads Website Facebook $100/ customer $1000/ customer. We broke down the numbers to make it simple, but remember that the costs of property maintenance, repairs, mortgage payments and taxes will also factor into a tenant’s LTV. Once you subtract those costs from the period they’re paying rent, you get their net LTV.
In order to accurately calculate a tenant’s LTV, you also need to know how much it cost for you to fill the unit. Next we talk LTV and CAC: Tying Them Together. Stay tuned for More On the Economics of Rental Retention and How Keeping Residents Happy Drives Profit. In Future Newsletters, we’ll break down the economics behind tenant retention and look at how applying strategies to reduce turnover will have a positive impact on your profits, operating budget, and long-term success as a rental property manager.
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