One of the first questions we’re always asked at Forest is, “Well, how much incremental revenue can a revenue system actually bring in?” and often, they are amazed with our answer. So we figured this is a great chance to show everyone how much value a Revenue Management system can provide for Single Family Home Operators.
What Does Revenue Management Do For Other Industries?
Revenue Management had its humble beginnings in the airline industry, where razor thin margins and incredible competition had become commonplace after the deregulation of the US airline industry in 1978. Though airlines remain the peak of revenue management, the practices quickly spread out to other industries, starting with hospitality, then moving its way into Multi-Family Residential.
For the airlines, a revenue management system is one of the most fundamental pieces of their commercial organization, with over 65% of global tickets being sold through a revenue-managed product, with that number climbing over 90% within the United States. It’s such an engrained function within the airlines that they don’t even attempt to estimate how much it contributes to their bottom line, because they know that their airline would be at a significant competitive disadvantage without one.
On the hospitality side, revenue management is responsible for approximately 3-6% in incremental revenue capture for companies that implement revenue management systems1. This number continues to climb as hospitality companies start to implement more robust revenue management processes, such as requiring a premium for refundability.
Meanwhile, in our own sector of the woods, our friends in the Multi-Family side state that moving onto a revenue management system is worth at least 2% in incremental revenues, with many reporting numbers in the high single-digits2. This is a simply amazing accomplishment within an industry renowned for its stability. Truly, a 5, or 7% incremental revenue gain could have dramatic effects on the trajectory of any REIT or property management company.
Furthermore, across all these industries, the best part is that these revenue gains directly translate into profitability gains3, with almost no incremental costs incurred, it means that revenue management systems result in some of the highest ROIs that one can make within the Real Estate space.
How Much More Revenue Can A RM System Do For SFR Operators?
Given the numbers seen across different industries above, it’s easy to make an assumption of what the estimated revenue achievement can be, but we can go a step further than that. A quantitative breakdown of concrete forecasted revenue gains, broken down through the various areas that our top-in-class revenue management system, Forest, optimizes for our clients.
The study data here comes from in-depth analysis of our initial results with partners, through A/B testing, blind study, and overall market monitoring.
Part 1 – Triangulating Better on Market Rent For New Leases
Understanding where the market stands is one of the heaviest focuses on asset management and leasing teams within SFR Operators. With Forest, we use a proprietary database with over 550,000 homes sourced from MLS and Non-MLS sources to better select the appropriate comparable homes. This leads to more accurate forecasting of market-clearing rents, which in our testing, has provided shocking results:
That’s right, throughout our study, homes that had a listed price that was $100 or more than Forest’s predicted price ended up staying on the market over two and a half times longer than homes where Forest and the listing price were within $100 of each other. On the other side, homes that were listed for more than $100 below what Forest believed they were worth spent just about half as much time on the market, implying that there was perhaps some revenue left on the table.
Furthermore, there was a clear correlation between the variance to Forest and the amount of time that a home spent on the market, with homes that are listed significantly above Forest’s recommendation finding themselves spending significantly more time on the market, as seen from the analysis we performed for one partner:
Similarly, other demand indicators, like Zillow contacts, show an inverse relationship between demand and variance to Forest, meaning that homes priced below Forest saw heightened demand while those above it found their demand to be weak:
Even in our most conservative estimates, the result of the testing and potential adjustments to initial listing prices resulted on an additional annual revenue of over $800 per home, via an offset of vacancy loss on some homes, while increasing yields on others. That means for a typical 2000-5000 home portfolio, you could be seeing between 1.6-5 million in total portfolio revenue on an annualized basis. For a portfolio with an average rent of $2200/month, this accounts for 3% additional annual revenue capture alone.
And that was just the first step!
Part 2: Increasing Retention
Similar to pricing new leases correctly, the importance of pricing a renewal in line with market rents is also significant. High turnover in a portfolio can lead to an operational breakdown, with a lack of maintenance personnel available to turn the influx of homes that become available, and too many properties for the leasing teams to be able to appropriately manage. One of the best ways to achieve higher revenues in the SFR industry, as mentioned on many times by the space’s large public companies, is through increased retention. But many have decided to increase retention simply by limiting the increase that is sent to residents. This ultimately leaves big chunks of revenue left on the table for operators.
With Forest, correctly triangulating a renewal offer price has resulted in increases in retention of approximately 5-10 percentage points. This means, for a 2000-5000 home portfolio and an average turn cost of $2500, an operator could be saving $250,000-$1.25 million a year in turn costs alone! This also ignores the increases in revenues for underpriced homes, which our tests showed could result in an additional $300 a year per underpriced home. In some of our early work, 25% of homes were underpriced, meaning a potential revenue capture (again on a 2000-5000 home portfolio) of $150,000-$375,000 per year. On top of all this, an increase in retention of 5 percentage points would result in a recapture of almost $1600 per home of vacancy loss that occurs from the average home requiring 22 days on the market to re-lease. That’s a big chunk of change.
Part 3: Optimizing for Seasonality
The last major pillar of the Forest Revenue Management System is the ability to optimize your portfolio based on seasonal demand. In markets where demand peaks in the summer months, moving more leases to the premium months could provide an extra boost to your portfolio’s bottom line. Though with it, operational concerns need to be factored in, to ensure that the maintenance team responsible for turns will have enough bandwidth during peak times. Forest solves for this with an algorithm that takes your desired outcomes and solves for that, and the effects can be absolutely huge. In a portfolio where only 10% of the leases are moved into higher demand months (where rent growths are 5% more on average than the low months, a conservative estimate here as well), our hypothetical 2000-5000 home portfolio would see an additional $250,000-660,000 a year.
Part 4: The Intangibles
All of the items so far given have described firm, quantitative advantages to your portfolio. But beyond that, there are a number of qualitative measures that will improve your overall revenue situation within your company:
- Analysts currently responsible for managing rents will spend less time on operational tasks (comp selection, stepdown monitoring, etc) and more time to do analytic projects that can provide incremental revenues.
- Leasing teams with fewer OTM properties will be able to ensure appropriate handling of all leads into the current ecosystem, creating further leasing synergies, and leasing up existing homes even faster.
- Maintenance teams, often overworked due to labor shortages, will spend less time on turning homes, and will be able to leverage the system ensuring that no particular month has too many homes expiring in short order, preventing a backlog of maintenance
All of these things ensure that your operation will run much smoother as a result of consistent, correct application of revenue management principles.
OK, So How Much Can You Really Make Me?
Using the numbers from above, assuming a $2200/month average rent on a portfolio of 2000-5000 homes or so, we can break down the numbers as such, using the absolute most conservative numbers we gave:
| Area | % of Portfolio Affected | $/home | $ per total portfolio home |
| New Lease Pricing | 35% | $810 | $284 |
| Renewal Retention Increase | 5% | $1791 | $90 |
| Seasonality | 100% | $135 | $135 |
That gives us a whopping total of $509 per home, per year of incremental revenue in our worst case scenario, an increase of 2% of total revenue. For a 2000 home operator, that’s $1 million per year in revenue. However, from the previous work we have done with partners, we believe that this number is in actuality easily within the 3-6% range, depending upon the current processes used in your portfolio, which would be a range of 1.5-3 million for that same 2000 home operator.
What are you waiting for? Reach out to Forest today for more information!
Sources:
1. Wright, Tiffany C. (2022). An Introduction to Revenue Management for the Hospitality Industry. https://smallbusiness.chron.com/introduction-revenue-management-hospitality-industry-72531.html
2. Bergeron III, Paul R. (2015-2016). Revenue Management: Why it Works. National Apartment Association. https://www.naahq.org/revenue-management-why-it-works
3. Burgess, Cathy & Bryant, Keith. (2001). Revenue management – The contribution of the finance function to profitability. International Journal of Contemporary Hospitality Management. 13. 144-150. 10.1108/09596110110388936.