Today’s REI Classroom Lesson

Danny Johnson discusses why it’s crucial to track the effectiveness of your marketing. Know where your leads are coming from so that you can allocate your marketing budget to the most effective campaigns.

REI Classroom Summary

It’s good to test out and see which campaigns work better for you so that you can focus on ones that are bringing you the most leads.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Danny: Hello, I’m Danny Johnson. Today, I’ll be your host for the REI Classroom and today, we’re going to talk about how to make sure your marketing, your motivated seller marketing, is cost effective.
Mike: This REI Classroom real estate lesson is sponsored by FlipNerd Investor Coaching, your blueprint to investing success.
Danny: And basically, you want to track your return on investment because especially for new investors, I think one of the issues that they come up against is they feel like they’re maybe throwing money into this black hole. They’re spending money on marketing. They’re not really getting many leads, not being able to convert those leads into a deal, and they start to feel like they’ve thrown away all this money. They get more and more scared and they start pulling back.
I did the same thing. I would do some marketing, not give it enough time to work, and then I would stop doing it and I would never get traction and wonder how people ever made it in the business. I think this is where this idea that “it doesn’t work in my area” comes from. It’s because people would try certain marketing methods. They’d sent out a hundred letters or something like that and not get any calls and feel like, “Oh, this doesn’t work.” Basically, it will work and it’s been working for so many people all over the place. Direct mail, online marketing, all this stuff works. It’s just a matter of sticking to it and committing to it and knowing that this is an investment.
So what you want to do is track that return that you’re getting on the investment. I can give you some numbers today, too, so you kind of get an idea of what people are typically seeing and paying per lead and per deal so you kind of know what to expect. Maybe this’ll help you to not give up too soon. Basically, what we want to do is determine what our cost per lead is and our cost per deal. And with the cost per deal, you can figure out what your return on investment is after you profit from the investment.
The cost per lead is not nearly as good a measure as the cost per deal. The reason that you need to keep track of this is you could be getting tons of calls from your direct mail and it could be costing you thousands of dollars every week. That could cause you to think that you’re getting a great response and it’s worth it to keep mailing because you’re getting all these calls. You don’t really have any documented proof that these things are becoming deals unless that’s all you’re doing and you know that the only deals you’ve got were from the direct mail.
If you knew what the cost per deal ended up being, you could figure out what your return on investment is for that marketing strategy, and then it’s a no-brainer whether you want to scale it or stop it, put that money in play somewhere else in some other kind of marketing so you can sort of maximize the return on investment. Because if you have several different lines in the water, which you should when you’re marketing to motivated sellers, you want to determine which one to put most of your money into that’s giving you those best results.
Keeping track of these things is very important. And a great example really is I was doing billboards at one time. I had 10 billboards, I think it was, throughout San Antonio. They weren’t the huge ones, just the smaller ones that you see on busier streets. I thought that they were doing really well because I was getting a lot of calls, but whenever I got to looking at the numbers after six months, I realized that I hardly got any deals. I think the whole year, maybe I got two deals and the profit wasn’t all that great on those.
So although I did have a good return on investment, compared to everything else I was doing, the cost per deal was double or triple, I think, what I was getting from other marketing methods. That money obviously was better spent doing those other things because I could double the amount of deals I was getting from the other marketing methods. So that’s what I did. I wouldn’t know that had I not kept track of those numbers, basically just for a frame of reference.
This varies all over the place, varies on your competition in your market, what you’re spending when you’re doing the direct mail, how much you’re spending for SEO or AdWords. Basically, people are generating leads at anywhere from $50, $75 up to . . . I’ve heard some home investors franchises and some other people, I’m not sure, I forget who was telling me this, but $450 per lead in some places. It’s all over the board. Typically, I think if you’re doing about $150 per lead, you’re doing pretty good. From there, it’s really about how many leads it takes for you to then get a deal, turn one of those leads into a deal. For us, we’re usually about 1 out of every 7 to 1 out of every 10 leads we turn into a deal. Sometimes it’s better, sometimes it’s a little bit worse, but usually a little bit better.
With that being said, the deal cost ends up being right around between $1000 and $1500, which is really good, and that’s typically for our online marketing. I’ve heard people tell me that they’re doing about $2500. Actually direct mail, we’ve been between $2500 and $3000, maybe a little bit more cost per deal. I’ve heard people tell me $3500, $4500 per deal. If you’re making $30,000 on a fix and flip, $3500 or $4500 for a deal is still really good. That’s what you can look at.
So if maybe your area, maybe people are spending upwards of $2000 and these are experienced investors doing this for a long time, $2000 a deal, and you just spent $500 and didn’t get a deal out of it, you shouldn’t feel crushed. Because if you got a deal off of $500, you’d probably be doing better than most people out there. Just understand, and I think that’ll help with people’s expectations when doing that.
It’s one of the things that I built into the software system that I use. I used to be a software developer before I got into flipping houses so I’ve always had these systems to track this stuff for me. I recently put that all into a web-based system so I can get access to that info and enter that information no matter where I am. That’s what became REImobile. I’m the founder of REImobile software for investors. Check that out if you haven’t.
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