Most operators have a flaw in their thinking when it comes to marketing. They believe they need to recover their marketing investment after the first month’s rent is paid by the new tenants generated. In reality, as long as cash flow allows, you can wait for several months to begin profiting from your marketing investment.
To help illustrate this important concept, I’d like to walk you through a few scenarios. In the first, tenants are worth $515 and your cost to acquire each is $350, leaving you with $165 net operating income/cash flow. In the big picture, you’ve added approximately $21,994 to the value of your asset using a cap rate of 7.5 percent. Before looking at the math this new way, most operators would consider such a campaign a dismal failure. Ask yourself how you would’ve reacted before reading this article if you spent $3,500 on a marketing campaign and only saw 10 tenants as a result.
Now, let’s look at another scenario. In this case, tenants are worth $735 and your cost to acquire each of them is only $150. This leaves you with $585 of net operating income/cash flow with a big-picture gain of $77,980! Most operators can relate well with this scenario as $150 is a common cost per acquisition (CPA) and the other contributing numbers are not far off.
Are you starting to understand the power of this kind of thinking? Let’s walk through one more scenario just to be certain. This time, tenants are worth $1,010 and your cost to acquire each is a whopping $750, leaving you with $260 of net operating income/cash flow with a big-picture gain of $6,931!
You might think these numbers are unrealistic. If so, speak with a good broker about this as they deal with these numbers every day.
Obviously, operating expenses need to be considered when determining your net operating income. But, even after considering those expenses, you’ll be wise to think in terms of acquiring customers, CPA, lifetime value and cap rates.
I also realize that cash flow is a huge issue with this type of thinking. In the third scenario, you had to wait 7.5 months to get your initial cash back. In a lease-up situation, dealing with this can be difficult, but it’s absolutely the smartest way to think about increasing the value of your asset, which is why proper financing is crucial because you need the cash to sustain aggressive marketing like this.