SS263: Tenant Renewal Rate

SS263: Tenant Renewal Rate

One of the most important and challenging aspects of property management is tenant retention. In this episode, Charles discusses tenant renewal and why it might be the most important KPI in multifamily investing.

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Talking Points:

  • The tenant retention rate is the percentage of tenants who renew their lease rather than move out once their lease expires. One thing I am a staunch believer in is that tenant retention is a keystone of successful rental property investing. 
  • How do you calculate the tenant renewal rate?  The tenant renewal rate is obtained by dividing the Number of Renewed Leases by the Number of Expiring Leases, then multiplying by 100. For example, if you divide 70 renewed leases by 100 expiring leases, you have a tenant retention rate of 70%. 
  • What Are the Current U.S. Apartment Renewal Rates?
    • Over the past 12 months, the U.S. apartment renewal rate has been 54%, which is up about 3% from 2019. This differs depending on the type and class of property, according to RealPage.
    • Class A and B properties, on average, experience a 60% renewal rate
    • Class C properties, on average, experience a 57% renewal rate – based on statistics from Institutional Property Advisors.
  • Why Does the Tenant Renewal Rate Matter?
    • As a multifamily investor, tenant turnover is extremely expensive, and it is not uncommon for these costs to exceed $5,000, including renovation costs, lost rent, and marketing. Just having your tenants renew for an additional year allows you to spread the make-ready and lost-rent costs over 24 months instead of 12.  
    • Reduced turnover costs improve the net operating income. It shows your team and a potential buyer’s team that there is tenant satisfaction at your property. This is usually due to good property management. A potential buyer who notices a low renewal lease rate might avoid that property since it signals possible issues, whereas another buyer might see that as an opportunity.
  • What Are the Key Factors that Influence Renewal Rates?
    • 1. Rent Increases. By far one of the biggest factors in lease renewal rates is the rent increase imposed by the property management. 
    • 2. Property Management. If property management responds quickly to issues and keeps the property in good condition with repairs and updates, it pushes renewal rates higher, even with rent increases. There is a point at which one outweighs the other, usually based on market conditions and the tenant’s financial situation.
    • 3. Market Conditions. A high supply of new apartments can push down rents across the market as developers offer large incentives to lease up their properties. As these lease incentives “burn off,” the market comes back to equilibrium.
    • 4. Homeownership. Tenants who are not renewing because they are buying a home is a factor out of the landlord’s control. While tenants renewing because they cannot afford to purchase a home boost the property’s renewal rate.
  • In closing, knowing national renewal rate stats is good, and knowing local renewal rate stats is great, but knowing your property’s renewal rate is the best. My goal is to improve the renewal rate at our properties year over year. That is where you can show your investors and yourself the value that you are creating by correctly managing your properties.
  • If you want to learn How to Retain Excellent Tenants, please check out episode SS50, and we also have an episode specifically on Tenant Retention, and that is episode SS164. 

Transcript:

Charles:
Most investors focus on raising rent, but the real profit often comes from keeping the tenants you already have. Did you know the average US apartment renewal rate is only 54%? And every time a tenant renews, you avoid a turnover that often costs more than $5,000. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re discussing tenant renewal rate, what it is or why it matters, and how it directly impacts your rental properties profit. We’ll walk through how to calculate it, what the national numbers look like, and the key factors that drive tenants to either stay or leave. So let’s get started. The tenant retention rate is a percentage of tenants who renew their lease rather than move out once their lease expires. So one thing I’m a staunch believer in is that tenant retention is a keystone of successful rental property investing. So how do you calculate the tenant renewal rate?

Charles:
Well, the tenant renewal rate is obtained by dividing the number of renewed leases by the number of expiring leases and then multiplying by 100. So for example, if you divide 70 renewed leases by 100 expiring leases, you would have a tenant retention rate of 70%. So what are the current US apartment renewal rates? So over the past 12 months, the US apartment renewal rate has been 54%, which is up about 3% from 2019. Now, this differs depending on the type and class of property according to RealPage. Now, class A and B properties on average experience a 60% renewal rate while Class C properties on average experience a 57% renewal rate based on statistics from institutional property advisors. So why does the tenant renewal rate matter so much? So as a multifamily investor, tenant turnover is extremely expensive, and it’s not uncommon for these costs to exceed $5,000, including renovation costs, lost rent, and marketing.

Charles:
So just having your tenants renew for an additional year allows you to spread that make ready cost and a lost rent cost over 24 months instead of just 12. Reduce turnover costs, improve the net operating income or NOI, and it shows your team and a potential buyer’s team that there is tenant satisfaction at your property. And this is usually due to good property management. A potential buyer who notices a low renewal lease rate might avoid that property since it signals possible issues, whereas another buyer might see that as an opportunity, maybe a value add buyer. So what are the key factors that influence renewal rates? Number one, are rent increases. Now by far, one of the biggest factors in lease renewal rates is the rent increase imposed by property management. Number two is property management. So if property management responds quickly to issues and keeps the property in good condition with repairs and updates, it pushes renewal rates higher, even with rent increases.

Charles:
Now, there is a point at which one outweighs the other, usually based on marketing conditions and the tenant’s financial situation. Number three is market conditions. So a high supply of new apartments can push down rents across the market as developers offer large incentives to lease up their properties that are new. Now, as these lease incentives burn off the market comes back to an equilibrium. Number four is home ownership. So tenants who are not renewing because they’re buying homes is a factor out of the landlord’s control now while tenants renewing because they cannot afford to purchase a home, boost the properties renewal rate. So in closing, knowing national renewal rate stats is good, and knowing local renewal stats is great, but knowing your properties renewal rate is the best. And my goal is to improve the renewal rate at our properties year over year. And that is where you can show your investors and yourself the value that you are creating by correctly managing your properties.

Charles:
And if you wanna learn more on how to retain excellent tenants, please check out episode SS 50. That’s SS 50. And we also have an episode specifically on tenant retention. And that is episode SS 164. That’s episode SS 164. So I hope you enjoyed, please remember to rate, review, subscribe, just make comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS50: How To Retain Excellent Tenants
  • SS164: The Hidden Factors Impacting Tenant Retention

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