Peter Lohmann's Mailing List - Issue #74

An Important Update on Churn

Do you track your client and/or unit churn?

Trying to grow a property management company with high churn is like trying to fill a leaky bucket.

Software companies often track and report churn using a monthly number, but it’s customary in property management to use annual churn. Here is our client churn for the last few years:

• 2020: 18.4% (started the year with 103 clients)

• 2021: 17.9% (started the year with 173 clients)

• 2022: 25.0% (started the year with 217 clients)

• 2023: 15.1% (started the year with 232 clients)

(We prefer to track client churn instead of unit churn because we manage a lot of multifamily properties, and I believe client churn is a more accurate reflection of how well we’re doing for our customers.)

The longer you’ve been in business and the larger your grow, the more impact churn starts to have on your growth and profitability. In fact given a set rate of lead flow, churn actually puts a ceiling on your company size. I was first introduced to this idea by Alex Hormozi in this video.

Let’s say you manage only single-family rentals, you’re getting 22 valid leads a month, and you’re closing 27% of those (fairly typical for a mid-sized PM company). This means you’re going to add roughly 6 new clients per month.

Let’s also say your company has the industry-average unit churn rate of 19.5% (this data is from the NARPM / ProfitCoach financial performance benchmarking study, for the year 2021.)

Given only this information, if nothing else changes, I can say with certainty that your company will never grow larger than 369 units!

How? It’s a simple calculation. Just take your units added per month (6) and multiply that by 12 months, giving you 72 clients added annually. Just divide that by your churn rate (72 / .195) and you get 369. Remember, that’s the MAXIMUM size your company could ever grow to, unless either your churn rate or your units added per month changes! What’s more — if you buy a book of business and suddenly you have 700 units under management, you will quickly shrink down to that same number, 369 units!

What’s worse is that you will approach this number asymptotically (fancy word that just means quickly at first, then slowly). The closer you get to your ceiling, the more slowly you will approach it.

One more comment before we move on. I believe the above calculation has important implications for those of you executing a rollup or multi-location strategy for your PM company. I think in that case, you need to track lead flow, closing rate, and churn on a per-metro basis and get crystal clear on the implied maximum size for each location. What you do with that information is left as an exercise for the reader.

I’ll use my company as a real-world example. We’re receiving about 28 valid leads per month right now, with a closing rate of around 20%. That works out to 5.6 new clients per month, or 67 per year. Divide 67 by our 2023 annual churn of 15%, and our client ceiling works out to 447 clients. At 2.4 units per client on average, that caps us at 1073 units. If I EVER want to grow larger than that, I will need to either increase lead flow, increase closing rate, or reduce churn.

Minor detail: I prefer to track churn on a monthly basis by looking at the number of clients we lost in a given month and dividing that by the number of units we started that month with. Then you just add up all those figures to get your annual churn. This is more accurate than just looking at the number of units lost over the whole year divided by the number of units you started the year with. Here’s what this looks like for our company for 2023:

You can see that your client churn translates directly into your average client tenure, by the way (for us, about 6.6 years). Just divide 1 into your annual churn rate.

Jordan Muela Interviews “Peter & The Wolf”

Wolfgang Croskey and I sat down for a wide-ranging conversation with Jordan Muela (co-founder of LeadSimple, ProfitCoach, and RentScale).

Jordan is a fantastic interviewer, and I’ve enjoyed listening to his podcast for many years now. It’s no exaggeration to say that things I’ve learned and people I’ve been introduced to as a result of listening to his podcast has altered the course of my life & career. Appearing as a guest on his show for the first time back in June of last year was an electrifying experience for me, so I was thrilled to return and get a chance go deep on a few more topics that I’m passionate about.

(By the way, that recording from last year, #115, still holds the record for the longest-ever episode of the Profitable Property Management podcast, clocking in at 1 hour and 52 minutes!)

In this episode, we discuss community, leadership, and technology in the property management space. Wolf and I also share the origin story behind Crane - a private community we co-founded, tailored for growth-oriented property managers. Additionally, we discuss finding fulfillment vs chasing scale, leadership styles for modern teams, and key issues holding back innovation in PropTech. You can catch the recording on YouTube (below), or just search your favorite podcast player.

This week’s issue is sponsored by: PayProp.

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Subscriber testimonial:

Industry News and Events

• Nick Huber is hosting a series of free webinars that I’m really looking forward to. Topics include Real Estate Tax 101 with Mitchell Baldridge, Delegation 101 with Shaan Puri, SEO Workshop with BoldSEO, and Sales Training 101. Nick’s content is very high signal-to-noise. He comes from an operationally-intensive background (a moving company and self-storage management); his insights are very tactical and relevant.

• The NARPM Capitol Summit (Feb 13-15th) is open for registration.

• Here is a PM company for sale in New York (they are asking 650k).

• Here is an association mgmt company for sale in Florida (asking 350k).

• Here is a PM company for sale in New Mexico (lots of STR - asking 895k).

Vendor Shoutout

We have a new digital marketing partner at RL Property Management — LeadFlowDepot. We just signed up our first new client as a result of their google ads campaign:

Their co-founder, Parker Cox, is the owner of 1,000+ door management company with offices in CA and ID. So he knows how to grow PM companies. I’ve been looking for a great google ads vendor for forever, and finally found one. Check them out.

Closing Thought

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That’s all for this week! Have a great weekend and a Happy New Year! -Peter

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