As a multifamily real estate investor, it is important to understand the difference between economic occupancy and physical occupancy. These two terms refer to the percentage of units that are occupied and generating income for the property, but they measure different aspects of occupancy.
Economic occupancy is the percentage of units that are occupied and generating rent. This is the primary measure of a property’s financial performance and is used to determine the property’s net operating income (NOI). If a property has a high economic occupancy, it is likely generating a strong NOI and providing a good return on investment for the owner. Economic occupancy is calculated by dividing the total rent collected from tenants by the potential rent that could be collected if all units were rented at market rate.
Physical occupancy, on the other hand, is the percentage of units that are actually occupied by tenants. This measure takes into account units that may be vacant or being used for non-rental purposes, such as storage or maintenance. A property may have a high physical occupancy, but if many of those units are not generating rent, the economic occupancy may be lower. Physical occupancy is calculated by dividing the number of occupied units by the total number of units in the property.
It is important to monitor both economic and physical occupancy to get a complete picture of a property’s occupancy and financial performance. For example, if a property has a high physical occupancy but a low economic occupancy, it may indicate that the property is not being effectively marketed or that the rent rates are too low. On the other hand, if a property has a high economic occupancy but a low physical occupancy, it may indicate that the property is being used for short-term rentals or other non-rental purposes.
In conclusion, economic occupancy and physical occupancy are two important measures of a property’s occupancy and financial performance. While they measure different aspects of occupancy, it is important to monitor both to get a complete understanding of a property’s performance.
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