Economic Occupancy Rate is the proportion of the gross potential rental income of a property to the actual money earned by a business.
Economic occupancy rate is the measure of the total rent that the owner receives from the occupied spaces against the total rent that he should be receiving if the property were 100% occupied. In simple terms, it compares the income that the property is generating against the income that the property should be generating.
In a rental property, the owner’s primary source of income is the rent that he gets from the tenants. If some units of his property are unoccupied or if a tenant fails to pay rent, then his income is hit. Hence, property owners use this metric to calculate the efficiency of the rental property.
Generally, an economic occupancy rate of 90% and above is considered good. Anything less than this percentage goes to show that the property is not generating ideal rental income.
We know that economic occupancy means the consideration of total rental income currently against the total income the property should be generating if it is fully occupied. On the other hand, physical occupancy simply means the number of units that are occupied currently by tenants. Or, it can be referred to as the rate of occupancy of a rental unit.
If there are 10 units in a property and out of these 6 units are occupied, then the rate of physical occupancy is 60%.
The economic occupancy rate can be calculated by dividing the total rental income of the property by the total potential rent of the property. Let us understand this through an example.
Suppose there is a multi-family apartment building with 20 apartments. The rent for each apartment is $500. Now, out of these 20, only 15 apartments are occupied by tenants and they pay their rent on time each month. We need to calculate the economic occupancy rate here. The formula for this is:
Economic occupancy rate = Gross rental income / Gross potential rental income
Economic occupancy rate = 7,500 / 10,000 = 0.75 OR 75%
Therefore, in this case, the economic occupancy rate is 75%.
The economic occupancy rate is important to understand exactly how much income the property is generating and how much income it should be generating. This gives the real estate investor an idea about his income and if he needs to do anything else to ensure he gets the maximum rental income from his property.
If a real estate investor invests in a shopping complex or an office building which is 70% occupied, he will receive a steady source of income. However, if this income amount is not enough for him to meet his obligations, he will need to incorporate measures to maximize the occupancy. This means the economic occupancy rate helps the investor to plan ahead for the future. Additionally, if he sees this rate going low constantly, he can decide to sell the property or reconstruct it for something else.
As an investor, it is important to monitor the economic occupancy rate as being unaware of it may mean that you aren’t getting your investment’s worth. It may also mean that your property is not well managed or that you need to make upgrades to make the property more desirable.
To ensure that your property is generating the maximum possible income, ensure everything is up and running smoothly in the property and that the tenants are paying rent on time.