Today on the Fourandhalf blog we’ll compare two major ways to grow your property management business: acquiring an existing property management portfolio vs. investing in a Google Adwords campaign.
Lifetime Customer Value
Before we get started on these methods, remember our most important metric, which is your lifetime customer value. Property management companies are subscription based businesses, just like a lawn care company, or even us here at Fourandhalf; you charge people on a monthly basis for a service you provide. A lifetime customer value is an important evaluation factor because this is what you can expect to get out of each new customer you sign up.
When you sign an agreement on single property, you’ll get a specific fee every month. Let’s use an average of $100 per month. There might also be a lease up fee that you get when you put a tenant into the property in addition to other fees you may charge over the client’s lifetime. As time progresses, you continue to collect the monthly fee every month. If you keep your client for three years, you can average a lifetime customer value of $4,200. That’s what you can expect in revenue each time you sign a new property.
Purchasing a Portfolio
When you buy a portfolio, you aren’t necessarily buying a company. You’re getting a specific number of units to manage. For the purposes of our comparison, let’s say you are buying a portfolio with 50 units. The numbers vary across the United States in different markets, but in general you will pay between 8 and 12 times the monthly fee for those units. So, in our example, you’ll be paying about 10 times the monthly fee, which is $1000. The overall price for your 50-unit portfolio is therefore $50,000.
There are a couple of advantages to this avenue of growth. Most importantly, you’ll get momentum. You already have 50 units in hand and referrals will come in from those. The process is fairly easy and in most cases, you’ll get some kind of guarantee, so if any accounts don’t transfer over to you, you won’t have to pay for them. You can usually finance this purchase with an owner-based financing plan. There won’t be any additional sales expenses because there is no selling involved in getting that business. It’s a quick way to get a portfolio.
A disadvantage is the time you’ll have to take to oversee this whole purchase. You’ll have to assume an executive role in managing the purchase, and you will also have legal fees to consider. There is an eroded customer lifetime value as well because you’ll be getting clients and properties that are at different points in the customer lifecycle. They may be with you for 20 years – but, on the other hand, they may only stay with you a couple of months, because they had put in almost 10 years with the previous company. You won’t be starting with that $4,200 customer value for each property – you’ll often be starting with much less.
Based on our experience with what we have seen at Fourandhalf, you can get those same 50 units by investing $20,000 in a Google Adwords campaign. Right away, you’ll notice a $30,000 savings, and that’s because it will cost you between $100 and $500 to attract one new property for management with Google Adwords. So, if you take $400 as the average, on 50 properties, that’s $20,000.
This cost savings is a huge advantage to an Adwords campaign. It costs less than half what you’d have to spend acquiring the 50 existing units. Another advantage is that you’re getting a predictable lead flow. You can choose to spend $1,000 per month, for example, and for that money you will get a specific number of leads and then you’ll close a predictable percentage of those leads. It’s pretty mathematical.
It’s very important to remember that a customer gained through an acquisition could be anywhere in their lifecycle, but new customers are usually at the beginning of that lifecycle, so will more reliably get you the maximum lifetime value. Cheaper cost to gain, and higher average lifetime value are reasons you should strongly consider Google Adwords as an arrow in your marketing quiver when you want to grow your portfolio.
The disadvantage, of course, is that you do need professional oversight. You cannot expect to have a successful Google Adwords campaign that you run yourself as a property manager. A lot goes into this type of campaign, and you don’t want to wind up paying for searches that bring you tenants instead of landlords. You need to get the best return on your investment by targeting landlords with properties that need management, and professional campaign management will achieve that for you.
There are only so many homes out there needing management in any given month. Buying a portfolio gives you an immediate boost in your unit count and income. Google Adwords is a measured, timed release approach to growing your property management business.
Here’s the bottom line: both are viable ways to grow your property management business. You can buy a portfolio for immediate units and income, but it’s expensive and brings more risk. With Google Adwords, you sign brand new customers as you go, which gives you that full lifetime customer value.
If you have any questions, contact us at Fourandhalf and we’d be more than happy to help you grow your property management business.
I’m considering selling a management company that has gross management fees of about 1.1 million a year and an average NOI of $150,000 over the last 4 years how do i value this company to sell
I’m considering selling a management company that has gross management fees of about 1.1 million a year and an average NOI of $150,000 over the last 4 years how do i value this company to sell to another firm
Hi John, good question. I would recommend getting in touch with someone who’s handled a number of Property Management company purchases to help you work through the valuation. I am happy to make the introductions. Fill out the Contact Us form and I’ll connect you with the right person. Alex