Property management performance can be deceiving at times.
One property management company operator felt pretty good about adding more than 800 doors in a single year because the boost of $963 per acquisition per unit looked really strong on paper. But something was missing. After a little investigating, it was determined that the lifetime profit before sales and marketing expense for those acquisitions was only $1,032 per unit, while the target was $3,000 per unit.
Another operator had a false sense of hope after showing 3 percent profit for managing 153 units. She had created a maintenance division to provide better service to the owners and help reach her goal of doubling doors over the next 12 months. But that would have been a big mistake. Actually, she didn’t know the company was running at a 5 percent loss.
Then there is the client who was writing checks out of his personal account to cover mounting losses each year. The culprit? He simply wasn’t charging enough per unit to cover labor and other expenses related to property management.
These are examples of single family property management operators who were enveloped in what Profit Coach CEO Daniel Craig calls the financial fog that can hide the true performance of a company. In each instance, the operator didn’t have a clear picture of money coming and in and going out.
Craig, author of the National Association of Property Managers (NARPM) Accounting Standards, recently spoke in a Propertyware webcast about how single family property owners can achieve optimum financial business health through the 5X Profit Roadmap.
“We have this desire to grow our business and our profit, but when it comes to really owning and managing and improving the financial outcome of our business, many of us are just too busy doing other things,” Craig says. “If you’re not owning the financial outcome of your business, chances are you are not actually on the road to significant profits.”
Owning up to a company’s financial outcome
In a recent study conducted by Profit Coach, average profitability for property management firms in the U.S. was 6 percent. However, the average profit of the top quartile of companies came in at 25 percent.
Craig said the difference can be found in how well companies are owning up to their financial outcome. It boils down three steps: how well an operator 1) gets clear on the reality of the business, 2) defines realistic targets and 3) stays on track to achieve them. Without these steps, operators can’t really get an accurate picture of whether the company is making enough money – or any at all – to sustain the business model.
He recalls the moment at one trade show when a property manager perused the Profit Coach booth. Craig said the observer took a look and determined he didn’t need Profit Coach’s services. The company was pretty profitable, the man said.
When Craig asked just how profitable, the gentleman though a moment and said he wasn’t sure but that he knew it was.
“You see, many of us as entrepreneurs - particularly in property management - we have this sense that it’s such a great cash flow business, there is money in the bank, we’re probably making money,” Craig said. “If you are running on gut-level decision, chances are you are operating in a financial fog.”
Six do-or-die metrics that provide clarity
The NARPM Accounting Standards are financial tools that help property managers own the financial outcome of their businesses. Within the tool are six “do-or-die” metrics that help operators understand just how well their businesses are performing, and whether they are making money or not:
- Revenue per Unit
- Direct Labor Efficiency Ratio
- Expenses as a Percent of Revenue
- Unit Churn
- Unit Acquisition Cost
In the webcast, Craig describes how to determine the metrics and understand the role they play in proving the financial outcome.
The most obvious is profitability, which can be overstated when operators don’t take into account actual expenses – including their salaries – and other factors. In the example of the company that showed a 3 percent profit, the operator wasn’t accounting for all her labor expenses, including her own salary. Using the 5X Profit Roadmap, she soon learned that her direct labor costs were a whopping 53 percent, well above that of companies operating in the top 25th percentile, and that she was paying herself about $40,000 more per year than she thought.
After trimming some of the excess, the company showed a true 7 percent profit.
“At the end of the day, profitability is crucial because it fuels the entrepreneurial engine,” Craig said.
As for the other operator examples, the 5X Profit Roadmap provided success stories.
The company that added 800 doors discovered it had a churn rate of 39 percent, which well exceeds the 11 percent industry benchmark. Through accurate forecasting, the company was able to reduce churn and improve its unit acquisition cost.
“When you have high churn you’re losing your marketing dollars,” Craig said. “It’s really the silent killer.”
Also, the company that wasn’t charging enough rent per unit discovered that part of the reason was that its leasing agents weren’t billing residents the right amount of fees that were stated in the rental agreement. Using monthly forecasts, the company was able to accurately budget its revenue per unit and track progress toward profitability throughout the year.
“Forecasting is so powerful because it answers and clarifies the ‘why?’ question,” Craig said. “Why am I in this business?” Forecasting helps bridge the gap between aspirations and reality. It simplifies business-decision-making and moves you from reactive to proactive.”
Setting a game plan and sticking to it
Owning the financial outcome of your business is setting realistic targets for the future based upon past performance.
It's also about creating a monthly game plan or forecast for how you’re going to hit those targets, and holding yourself accountable to the game plan throughout the year.