There are a number of metrics you should consider when investing in a water leak detection solution as a real estate owner-operator - leak detection rates, false positive rates, ROI… But one metric that often gets lost in the shuffle is actually pretty important when you’re looking at an initial investment: Payback.
What is payback?
Payback, or payback period, refers to the amount of time it takes for an organization to recover its investment in a solution, typically through cost savings and other benefits.
The payback period is crucial for justifying the initial expenditure and making informed decisions about implementing a solution. And a quick payback period is appealing to stakeholders and organizations who want to see good value in a shorter period of time.
If you were planning on piloting a new water leak detection solution, a quick payback period would help you make a successful business case without creating significant financial risk for the business.
What do we mean by a “quick” or “good payback period? It really depends on the organization. A rule of thumb is that the shorter the payback, the better.
How do you calculate payback?
The payback calculation is:
Initial costs / Annual savings = Payback period in years
- If you were considering a water leak detection solution that cost $10K and would save you $20K, your payback period would be 6 months.
- If you were considering a water leak detection solution that cost $20K and would save you $10K, your payback period would be 2 years.
What kinds of costs and savings are typically included in payback calculations for water leak detection solutions?
Costs to include in payback calculations
- Hardware & software - either upfront costs, or the total cost for the period.
- Installation costs - labor, materials, specialist tools, and any downtime required to successfully install the solution.
Savings to include in payback calculations
- Water leak detection labor costs - for example, can you eliminate staff time otherwise spent on manual inspections?
- The cost of repairs, including materials and labor (including specialist labor), fixtures and fittings.
- The cost of downtime due to damage.
- Lower water bills due to decreased water loss from leaks.
- Reduction in insurance premium due to installation of leak sensing devices - many carriers offer this.
What’s the difference between payback and ROI?
Both payback and ROI are valuable metrics for any owner-operated real estate business, so ideally you’d calculate both when considering water leak detection solutions.
Payback
Your payback period is the time it takes for you to pay your investment back via savings it’s achieved. The focus of payback is to show how quickly you can pay those costs back - it’s not about the value of the longer term investment.
For water leak detection solutions, the payback period should ideally be achieved within a much shorter period of time than ROI.
Calculating potential payback asks you to factor in costs within a more immediate timeframe, which means it should be easier to come to a more accurate number. Should the solution detect a leak that would have become catastrophic without it, you’ll find the payback period may become unexpectedly shorter.
Use payback when you’re thinking shorter term:
- Focusing on the speed of the recovery of value from your investment, or dealing with liquidity issues.
- Planning a smaller scale pilot to minimize risk.
- Deciding which projects to fund based on their ability to quickly return invested capital.
- Focused on getting initial approval from stakeholders who want to see quick returns, rather than long-term profitability.
ROI
ROI goes further than just making your investment back - it needs to actively save you additional money. The focus isn’t on making the initial investment back as quickly as possible - it's about maximizing the value over the nominated period of time.
For water leak detection solutions, quick time-to-ROI is always favorable, but the critical measurement is the overall percentage of positive ROI that can be achieved: how much value the business can derive from the solution.
Calculating ROI for water leak detection accurately can be complex, and requires the ability to forecast and re-forecast. We’ve written about this in a separate ROI article and an ROI eBook that you may find useful.
Use ROI when you’re thinking longer-term:
- Focusing on overall profitability - maximizing the return on the investment is literally all about ROI.
- Planning strategically and building a more detailed financial picture.
- Expanding from a pilot to a full installation of a solution.
- Comparing competitive solutions, particularly the longer term impact and overall profitability.
- Aiming to understand the long-term savings from reduced water bills, maintenance costs, and enhanced asset value over several years.
Calculating payback for water leak detection is important
Like any investment, water leak detection solutions need to deliver results that have positive practical and financial impacts. Even when you're piloting a new water leak detection solution, savvy real estate owner-operators expect a favorable payback period.
In fact, beyond technical performance (by which we mean, successfully detecting water leaks without a high false positive rate), the payback period is often seen as one of the key markers of a successful pilot of water leak detection solutions.
What next?
- Want to discuss what the payback period might be for LAIIER's Severn WLD™ early water leak detection solution? Book a call at a time that suits you!