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- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Occupancy Rate
As a real estate investor, you may have to understand many parameters to have a successful real estate portfolio.
One of the most important key performance indicators for your real estate properties is the rate of occupancy.
Generally, this parameter is used in hotels, hospitals, and motels; it is still one of the most widely used parameters in the case of rental units.
In this post, we will understand what is occupancy rate in real estate is.
What Is An Occupancy Rate?
It is a rate that indicates a percentage of the units in the property that are occupied or rented for a specific period.
This rate will help the investor to understand how many units are rented in the property that is generating adequate income.
The rate of occupancy is also used in hotels to understand how many rooms in the hotel are occupied for that particular day and what the anticipated revenue is.
Similarly, this rate can be used in hospitals and nursing homes to anticipate growth trends and have enough beds for potential patients.
What Is The Importance Of Occupancy Rates For Real Estate Investors?
This rate is important to real estate investors because it represents a potential revenue outcome.
The real estate investor looking to buy rental unit property may not be interested in properties that are only 30% occupied.
This means that only 30% of the rental units are occupied by all the available rental units on the property.
Real estate investors planning to purchase low occupancy must spend time and money finding additional tenants and risk not filling the space while facing maintenance costs and property taxes.
For this reason, places with low occupancy rates, such as apartments and shops, often sell for less than similar properties with high occupancy rates.
In some cases, low occupancy means there is a problem with the property, such as property location or available equipment.
In a few situations, low occupancy may indicate that the property is not properly managed by its current landlords or is in an undesirable location.
Many real estate investors buying commercial properties like hotels will consider the hotel occupancy rate and amenities available around the hotel.
This analysis can help the investor to know the potential financial health in the area.
How To Calculate Occupancy Rate?
The occupancy of a property is expressed as a percentage. For example, if a hotel has 150 rooms available for sale and 150 of them are occupied, the rate of occupancy will be 100%.
If out of 150 only 75 rooms are occupied then the occupancy rate will be 50%. Below mentioned is the formula to calculate the rate of occupancy in a property:
Rate Of Occupancy = Total Number Of Rental Units Occupied / Total Number Of Units Available for Rent x 100
For Example: If your rental property has 150 total units available for rent, out of which 120 are occupied by the tenants.
Occupancy rate = 120 / 150 * 100 = 80 %
In the above example, the occupancy rate would be 80%.
What Is The Importance Of Occupancy Hotel Investors?
Rate of occupancy, along with average daily rate and revenue per room, is often considered one of the three most important metrics investors use in their revenue management strategy.
However, they have certain limitations as KPIs, so it is important to understand how to read them.
In general, hospitality professionals should focus on a higher rate of occupancy. Because it shows that you are using the rooms with the most productivity.
However, since the goal is to maximize profit, it should be used in concurrence with other KPIs.
Many investors might think about lowering the rates to achieve a 100% hotel occupancy rate.
However, if 80% of rooms are charged at a higher rate, the hotel may be able to make more money with 80% occupancy compared to 100% occupancy.
For this reason, the rate of occupancy must be analyzed in the context of daily average price and income per unit.
Conclusion
The rate of occupancy is a widely used parameter in the commercial real estate business.
If you are an investor who wants to understand the cash flow of rental property you might want to see the rate of occupancy as it you help you to decide whether the property that you are planning to buy is going to make a profit.
