The Investors’ Game Plan, Part 2: The 5 Ps of Developing a Rental Business Strategy
In this 3-part series, we’re showing rental investors how to approach building a business the same way that entrepreneurs do it. In Part 1 of The Investors’ Game Plan series, we talked about some of the most important considerations to think about before setting up your rental business.
This installment is about creating a foolproof rental business marketing strategy, A.K.A. your blueprint to success!
For Part 2, of The Investors’ Game Plan, we’re using the famous 5 Ps of Marketing (also commonly known as the Marketing Mix), which has been a tried and tested strategy for decades. This method maps out the 5 basic aspects of marketing a business (Product, Place, Price, People, Promotion) and helps entrepreneurs identify strategies to address customers’ needs and make their business stand out in the marketplace.
Let’s look at how each of these 5 Ps applies to marketing a rental business:
In marketing, your product should always align with the wants and needs of your ideal customer. Your property is the product offered by your rental business, so it’s important to consider how the type of properties you want to invest in appeal to potential tenants.
Here’s a quick run-down:
a. Single-family home (most common property type, usually available across various property classifications, flexible enough to cater to various markets depending on which area you focus on)
b. Vacation home (common for short-term rentals and highly seasonal, ideally situated in areas that attract tourists)
c. Multi-tenant buildings (such as apartments or condominiums, great for multi-families or student tenants, etc.)
This means that, if your goal is to have young professionals as your tenants, stick to the kinds of units that will appeal most to this tenant base. And make sure that this ideal tenant actually exists in your target market, so that the demand for your type of property will be there.
For a traditional business, physical location can impact profitability significantly. For example, if you have a trucking company, you want to be close to major highways to reduce transportation times and costs, whereas if you have a retail business, being in an area with heavy foot traffic is essential. For rental businesses, the Place aspect of your marketing strategy is even more important.
As we saw in Part 1 of the The Investors’ Game Plan series, choosing the best location for your rental business is key to getting started on the right foot. Make sure your location has a high rental demand, and that it’s an area where your target customer wants to live. Different rental markets also come along with their own unique set of advantages and challenges for property owners, so knowing these will help you determine your budget for things like CapEx and accurately account for vacancy periods.
In the rental industry, just as in marketing, the Pricing of your product will depend largely on the cost of materials – in this case, the purchase price for your property. The aim when setting your Pricing is to ensure it’s at a level that makes sense for your target market (i.e. not higher than what tenants are willing to pay in your area), while still generating a healthy profit for your business.
The key to getting this balance right is to buy rentals that are financially viable from an investment point of view. Your purchase price should leave you with an ARV (after-repair value) of no more than 100x the monthly rent amount (known as the 1% rule). If a property doesn’t meet this rule, you’ll have lower margins and it will take you longer to recoup your initial investment.
What if you can’t find any rentals in your target area that conform to this rule? Consider investing somewhere else (like Metro Detroit, where we operate) that does have strong rent-to-price ratios, be prepared to do some work on a distressed property, or get better at negotiating. If you find the right kind of property with a seller who’s motivated, you shouldn’t be paying full price anyway.
Promotion in marketing refers to the ways in which you get the word out about your business, including any offers you might run and the platforms used for advertising. Most new landlords know they’ll have to market their rentals to potential tenants, but what about promoting your business to find acquisition leads? This aspect of rental marketing is often overlooked.
Buy and hold investors should aim to get their rentals at a price that’s slightly below market value, if possible, and the best way to do this is to source off-market deals, where both you and the seller can save money on fees and commissions. However, it’s not easy to find great deals – that’s why there’s money to be made by being good at it.
Put in the energy to promote your business both online and offline, specifically, in places where you can find motivated sellers to do a deal with. Join networking groups (like BP or your local REIA), work with agents who can hunt out deals for you, create your own Facebook business page, and develop an email or snail-mail contact list to get in touch with potential sellers in your target area. This will give you access to properties before they’re available to the general public, increasing your chance of securing a good purchase price.
People (also called Partnerships)
Every successful business thrives on finding the right partners and tapping into the right network to help promote and run the company. When hiring people (like a PMC, contractors or lawyers) or finding partners to invest with, it’s important to remember that these are the people who will be the face of your rental business, and who will ultimately contribute to making it a success (or not). At the bare minimum, you need a real estate agent to find properties and write offers, an attorney to review offers, leases, investor & partnership agreements and other contracts, a tax professional to advise on business structure and finances, banker or lender for loans, and contractors for rehabs and ongoing maintenance.
For that reason, we really can’t stress enough how crucial it is to thoroughly vet these players prior to letting them join your rental business’s team. The right people will make or break your investments, so make sure that they have the skills and experience needed to handle their responsibilities well, and that their way of working aligns with yours. You can gauge how good of a fit these people are by asking how they communicate, how frequently, what systems they have in place for accomplishing specific tasks, how their processes work, and what they expect from you in the partnership.
If you’re a DIY landlord who handles all aspects of property management yourself, you still have to think about how you as a person represent your business to the world. If you’re stronger in some areas than others, consider outsourcing some of these weaker points to an expert, rather than diminishing the quality of your business by trying to be a jack of all trades.
These five points are pretty much going to serve as your bible throughout the whole process of launching your rental business.
Now that you know how to plan and market your rental business, the next step is to optimize the results, to help you make this success repeatable and scalable. So stick around for Part 3 of the Investors’ Game Plan series, where we’ll talk about the various ways you can optimize and grow your business using technology and automation.
Thoughts on the 5 Ps? Share them in the comments below!
Image Courtesy of Karolina Gabrowska