As a business venture, renting property can be very lucrative. Not only does the monthly rent create a regular source of income, the value of the brick-and-mortar property itself is likely to increase over time, making it a capital asset. Like any other business, however, rental property needs to be managed well to maximize profits. Apartment owners (or the managers they hire) can track both physical and economic occupancy rates to measure business success.
Physical Occupancy vs. Economic Occupancy
Physical occupancy refers to the _percentage of apartments that are rented ou_t, and it should be monitored carefully to ensure maximum occupancy at all times. For instance, if 12 apartments are in a complex, but only nine apartments are occupied, the physical occupancy rate is 75 percent. For obvious reasons, it’s desirable to have a physical occupancy rate of 100 percent, because empty apartments don’t bring in any money.
On the other hand, economic occupancy reveals how much rent the tenants actually pay, and it’s a clearer indication of financial performance than physical occupancy. In other words, economic occupancy is the amount of money collected from tenants, compared to the amount of money that could be collected.
How to Calculate Physical Occupancy
To calculate one month’s physical occupancy, divide the total number of units into the number of units currently occupied. To reach a percentage figure, multiply by 100. For instance, if an apartment complex has 50 units, and 34 are occupied, the calculation is 34/50 x 100, which comes to 68. Therefore, the physical occupancy rate is 68 percent.
The calculation for average monthly occupancy over one year is slightly different. First, multiply all available units by the number of months in the year. In this example, the calculation is 50 x 12, which is 600. Next, work out how many units were occupied each month and add those amounts together. If 34 units were occupied in the first six months of the year, but only 30 months were occupied for the remaining six months, the calculation is (34 x 6) + (30 x 6). This comes to 381. Divide this figure by 600, then multiply by 100. The final answer is 63.5, which means the average monthly occupancy over one year was 63.5 percent.
Economic Occupancy Calculation
The economic occupancy formula involves calculating the amount of rent collected from tenants and dividing it by the amount of rent that could be collected if all the tenants paid the full rental amount (i.e., gross potential rent, or GPR). For instance, if the apartment complex has nine occupied apartments that rent out at $750 per month, the total amount of rent that should be collected is $6,750 per month. However, if only eight tenants pay their rent, the total amount of rent that actually is collected is $6,000 per month. This makes the economic occupancy $6,000/$6,750, or around 88 percent.
In an ideal world, the results of the economic occupancy calculation should be close to or match the physical occupancy rate.
Working out economic occupancy is a better way to determine the success of an apartment complex, because the complex can be completely full but still lose money because it’s not achieving its rental potential.
To ensure consistency, it’s important to calculate economic occupancy the same way each time. For instance, calculating it weekly for six months, then switching to a monthly calculation for the rest of the year may create a false picture.
Causes of Low Economic Occupancy
The most obvious cause of low economic occupancy is having vacant units. However, issues with rent collection can also lead to a low economic occupancy rate. This may be due to several factors, such as poor management or a tenant’s inability or refusal to pay rent. Additionally, rent isn’t pure profit; operating costs must be deducted first.
Sometimes, property owners offer discounts to attract tenants, which means less rental income. Unfortunately, some tenants move out owing money. These are two common problems that can lead to low economic occupancy. But good management practices can help keep them to a minimum.
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