How Real Estate Accounting Can Help Tenant Retention Rates
Tenant retention rates directly affect rental profitability. Here are the accounting best practices that property managers can implement today for better tenant retention tomorrow.
February 15, 2022
If you’re a property manager or owner, then you have likely given a lot of thought to tenant retention rates, but you may not have considered just how much your real estate accounting can increase tenant retention rates.
Here at Proper, we’ve sourced key insights from our expert property accountants and investigated the real estate accounting factors that affect retention rates.
Defining and Calculating Tenant Retention Rate
Tenant retention rate is the turnover rate of tenants at a specific property, and according to our internal property management accounting experts, it’s one of the biggest factors when it comes to a rental property’s profitability.
Your tenant retention rate also impacts how often you need to spend money during turnover. The most common costs for tenant turnover include:
- Loss of rental income during vacancy for owners, and loss of management fees for the property management company
- Maintenance and upgrades
- Marketing costs for finding a new tenant
- Showing costs including time and transportation for leasing agents
- Screening applicants
- Resident referral fees
How To Calculate Tenant Turnover Costs
You can use this handy calculator in your budgeting to more accurately forecast your annual budget.
How To Calculate Tenant Retention Rate
To calculate your tenant retention rate, collect a couple of data points over a 12-month period: (1) number of tenants and (2) number of tenants moving out. Divide the number of tenants moving out over a 12-month period by the total number of tenants in the same period. Then, multiply by 100.
How Does Real Estate Bookkeeping Affect Tenant Experience?
There are a myriad of factors at play impacting tenant retention. While some are out of your control (global pandemics, natural disasters, neighborhood crime) there are many that are very much within your control, so we’ll focus on these specifically.
The top factors impacting tenant retention rates are:
- Tenant Comfort
- Safety: Do tenants feel safe?
- Necessities: Are tenants able to access necessities with ease? Be it the mail, trash shoot, dumpster, laundry facility, or parking.
- Mail and Packages: Is there a system in place to keep packages secure?
- Repairs: Are common areas and exteriors in good repair?
- Communication: Are repairs and maintenance requests answered in a timely and efficient manner?
- Forward Planning: Are inspections performed regularly?
- Customer Service
- Tenant Relations: Do tenants have a good rapport with the property manager? Are they easily accessible and professional?
- Online Portals: Can tenants pay rent and put in maintenance requests online? Are tenant’s accounts kept current automatically?
- Rental Rate
- Market Standards: Is the rent reasonable and does it reflect the current market accurately?
- Change Communication: Are tenants given adequate warning of rent raises?
- Amenities and Upgrades
- Market Standards: Are amenities and upgrades to the property in line with current market offerings? Be it laundry facilities, a fitness center, a coffee station, a dog run, and everything in between.
*Bonus Read: Ways To Decrease Tenant Turnover.
Property Accounting From The Tenant’s Perspective
Our property management accounting experts say that accounting and maintenance are neck and neck in tenant experience. Here’s why: The fewer reasons a tenant has to contact you, the better. If your tenant knows your accountant’s name, they’re probably not happy!
If payments they’ve made haven’t been posted to their account, or if they see surprise fees, or balance miscalculations, chances are they’ll be calling your accountant.
Remember: Any kind of negative interaction has an impact on the tenant’s experience and their desire to stay, and because most properties now utilize online portals, tenants have access to everything in their ledger any time of day or night.
You can minimize negative interactions by ensuring your ledger is always accurate and up to date. An accurate ledger means your tenants have less reason to reach out with questions, and fewer chances of making incorrect payments. Accuracy instills trust in you as a property manager, which is crucial to your relationship with the tenant. If payments are not processed on time or tenants are receiving notices for money they don’t owe, it not only reads as unprofessional, it breaks your tenant’s trust.
What Could Go Wrong With Property Management Accounting That Might Negatively Impact A Tenant’s Desire To Stay?
A question that almost always precedes disaster: What could possibly go wrong?
Awareness of common property management accounting mistakes will help you steer clear of them.
Accounting Mistakes That Impact Tenant’s Desire To Stay
- Unrecorded payments
- Twice recorded payments
- Recorded payments in the wrong ledger
- Inaccurate late fees
- Receipts applied to the wrong charges
For example, if receipts are not applied to charges and do not show as available funds in the owner’s account, then vendors and utilities may not get paid, and power and water can be shut off. Tenants who have to unexpectedly forgo showering before work or are unable to charge their devices (a truly terrifying scenario) are not likely to stay.
Accounting Mistakes That Could Result In Tenant Nonpayment
- A tenant’s balance is incorrect
- A fee is incorrect
- An unwarranted late fee
- Charges they’ve paid showing as due in their portal
For instance, let’s say Connie in 23G’s toilet began to leak like the Titanic on a Friday night and she had to call an emergency plumber to have it repaired. Having paid for this out of pocket, she then deducted the cost of said repair from her rent payment… only to then be slapped with a late fee for not paying the full amount. Due to this billing mishap, Connie’s now a doubly unhappy tenant.
Shoddy bookkeeping has larger ramifications with tenants as well. There can be legal consequences if you’re not sending out security deposits on time (under the fair housing act). For example, under California law, tenants can take landlords to small claims court if their security deposits are not returned within 21 days of move out and accompanied by an itemized statement (and receipts for items over $125) for deductions.
Your Checklist To Get Ahead Of Bookkeeping Mishaps
- Ensure there are two separate accounts for payments — an owner account and a property management company account.
- Ensure late fees go into the property management company account (not the owner’s).
- Make sure rent goes to owners first, before any fees the property management company is owed.
How Does Tenant Retention in Commercial Real Estate Accounting Compare To Multifam?
While many of the fundamentals for retaining multifam tenants remain the same for commercial ones, accounting for the two is significantly different. When assessing the risks between the two, keep in mind some of these key differences.
Commercial Versus Residential Accounting
- Commercial has fewer bills, but more complex leases and bill backs. While volume is higher for multifam, the complexity is lower.
- Commercial tenants (and possibly owners) are generally savvier – they are more familiar with the market and motivated to negotiate leases.
- Commercial has bigger numbers and therefore bigger ramifications.
- e.g., air conditioning repair is going to be much higher in commercial property than it is for multifam.
Is Your Tenant Retention Rate Indicating You Need Help With Real Estate Bookkeeping Services?
If you find yourself struggling with tenant retention due to less than desirable accounting practices, talk with us! Proper provides expert accounting and bookkeeping services to property managers, asset managers, and anyone in the world of property. We can implement property management accounting best practices today that will impact better tenant retention tomorrow.