Owners and managers of apartment complexes often use physical and economic occupancy rates to measure the success of their businesses. Physical occupancy tells you the percentage of apartments that you rent out; economic occupancy tells you how much rent your renters actually pay. Physical occupancy is a useful measure, but an economic assessment shows you the financial performance of your complex.
Economic occupancy is the amount of money that is collected from renters compared to the amount of money that actually could be collected. It shows how well -- or badly -- you are maximizing revenue potential.
You calculate economic occupancy by dividing the rent you collect from tenants by the amount of rent that you could collect if all tenants paid full rent. For example, if your complex has 10 occupied apartments that rent out at $800 per month, but only eight tenants pay their rent, then the economic occupancy would be $6,400/$8,000, or 80 percent. Your physical occupancy, however, would be 100 percent. Ideally, the economic occupancy percentage should be close to or match the physical occupancy percentage.
Economic occupancy shows if an apartment complex has issues with turnover and rent collection. Low economic occupancy signals that these issues are present, either because the management at the complex is poor or because the tenants cannot or will not pay rent. Rental payments are not pure profit, and you have to meet your own operating costs from them. Low economic occupancy rates may eat into your profits.
Economic occupancy is a better means of assessing an apartment complex’s success than physical occupancy. An apartment complex can be completely full in terms of tenant numbers, yet it may lose revenue because it does not earn all of its rental potential. This is why realtors will look at economic occupancy when determining the value of apartment complexes.
You should calculate economic occupancy the same way every time to avoid misconceptions about the property’s value and management. For instance, if you calculate it weekly, your complex might show high economic occupancy the last week of the month and low occupancy the first week of the month, especially if you have to chase payments as the month progresses. If you switched to calculating economic occupancy by the month, the variances that appeared from week to week would be eliminated. However, a sudden elimination of economic occupancy fluctuation could be taken as a resolution of complex problems, when in reality the only thing that might have changed was the frequency of calculation.