When we see "churn rate" discussed, it's most often in a business context. However, this concept is also important for real estate investors, especially landlords and property managers, to understand. With that in mind, we've created a guide that will suit your needs. Keep reading to learn what a churn rate is, how to calculate your own, and how to improve this metric to help increase your revenues.
What is churn rate?
In business, the term churn rate is used to discuss the retention rate of a business. Specifically, churn rates refer to the number of lost customers that a company endures during a set period of time. Often, companies will calculate both a monthly churn rate and an annual churn rate as a means of tracking customer satisfaction. Put simply, if they have a high churn rate, they will seek to lower it so they can increase their retention rate as well as their recurring revenue.
In real estate, this same concept can be applied to tenant retention. Property management companies and landlords alike will use churn rates in the same way as a SaaS business. However, in this context, the calculation will be applied to tenant turnover. Here, the main goal is to increase tenant satisfaction in order to keep monthly recurring rents steady and to reduce unit turnover costs.
How to perform a churn-rate calculation
Now that you know more about what the term churn rate means and how it applies to customer attrition, the next step is to learn how to do a churn-rate calculation. In light of that, we've taken a closer look at this calculation below. Read it over so that you understand how to calculate churn rate for your property management business.
To start, the simplest churn rate formula is as follows:
Churn Rate Formula = Lost Customers / Total Customers x 100
Churn-rate calculation example
Let's say you're the property manager of a high-rise apartment building and that your building has the potential to house 500 residents. To keep the math easy, let's assume that at the beginning of the year, every unit in the building was full. However, by the time you calculate your annual churn rate in December, there are only 450 residents in the building, meaning you lost 50 residents in that timeframe.
In that case, your annual churn calculation would be as follows:
Annual Churn = (50/500) x 100
Annual Churn = 0.1 x 100
Annual Churn = 10%
How to lower your churn rate
Once you understand how to calculate your churn rate, the next step is to figure out how to reduce your overall churn rate. In practice, reducing churn allows you to maximize your recurring revenue while also reducing your unit turnover expenses. Here's a look at some things you can do to keep your churn rate as low as possible.
Get tenant feedback
The first step to creating a better tenant retention rate is to gather feedback from your current tenants. After all, if you have no idea where their dissatisfaction stems from, you won't be able to fix it. Keep in mind that you aren't obligated to address every piece of feedback you receive. However, if there is a clear trend, you may want to take steps to address the issue.
Focus on tenant satisfaction
Along those same lines, if you receive a piece of positive feedback about a particular practice or amenity, you're going to want to make sure to prioritize it going forward. In this case, tenant satisfaction is the key to boosting your retention rate. Happy tenants are far less likely to be willing to go through the hassle of moving to another location.
Keep the lines of communication open
Sometimes, in property management, there are going to be problems and disagreements that are unavoidable. However, if you keep the lines of communication open, your tenants are going to be much more likely to weather the storm with you. Make sure to communicate about any foreseeable issues early on in the process and to create an environment where your tenants feel that they can come to you with questions or complaints.
Know that there's such a thing as voluntary churn
Lastly, know that voluntary churn is unavoidable. Tenants move for a new job or a growing family. They buy their own homes. Sometimes a move is unavoidable. With that in mind, it's impossible to think that your churn rate should always be zero and that your retention rate should be 100%. That said, it's still worth trying to keep these numbers where they should be in order to meet your bottom line.
The bottom line
Whether you're a SaaS company or a real estate investor, churn rate is going to be an important metric by which you measure your success. To that end, use this post as a guide to the concept. Armed with this knowledge, you should know how to calculate your own churn rate and how to improve it going forward.