4 Tips for Occupancy Planning
Posted: January 31, 2018 by Anna Jotham
Your commercial real estate investment’s occupancy rate has a direct impact on your business cash flow and your bottom line. But how can you plan for the natural ebb and flow of occupancy? And what are the best practices for occupancy planning? Let’s take a closer look.
Calculating Your Occupancy Rate
Chances are you already know how to calculate your occupancy rate. It’s the ratio of occupied rental units versus the total number of units. So whether you’re calculating occupancy in an apartment building, in senior housing, in a warehouse or a retail facility, the math is the same:
units rented/total number of units = occupancy rate
For any real estate investor, the occupancy rate can be an indicator of market fluctuations, change in supply and demand, changing demographic needs, or even an issue with the property itself. As an investor, minimizing fluctuation and keeping the occupancy rate high are essential to achieving your financial goals. Making sure you are prepared to address issues and manage market changes are key, and that requires occupancy planning.
4 TIPS FOR OCCUPANCY PLANNING
- Know your break-even occupancy ratio. This is the point of occupancy where all ongoing expenses and debt obligations are covered. You can calculate your breakeven occupancy ratio, according to propertymetrics.com, by taking the sum of all debt service and operating expenses and dividing it by the full potential of all rental income from the property. This figure tells you where your occupancy must be to cover your expenses. Most importantly, it enables you to set expectations and goals and raise a flag when occupancy falls below the rate you need to break even.
- Avoid tenant turnover. It’s obvious, but challenging. Here are some strategies that work, according to https://www.biggerpockets.com, “Tenant Turnover: The Biggest Killer of Your Rental Cash Flow.” First, avoid renters who have a history of moving frequently in favor of longer-term renters. Next, be sure to respond quickly to tenant needs, particularly repair requests, as unresponsiveness is a common reason people move. In addition, be sure to maintain your properties and keep common areas clean. And lastly, watch market rents, and keep yours within the range. Rising rents often give tenants the push they need to look elsewhere.
- Unit vacancies get expensive fast, so when someone leaves, plan to move quickly. When you factor in the many costs associated with getting an apartment ready as well as administrative costs, advertising and incentives, expenses stack up fast and vacant units can cost you thousands per month. That’s according to multifamilyexecutive.com. According to the article, turnover rates are at about 50 percent nationwide. Cutting that turnover time to a minimum is key, but getting there can be a challenge. One tip: lease units the minute you know a vacancy is going to occur. When done well, units can be rented before they are vacant.
- Start the lease renewal process early so you get an early head’s up that a unit is becoming available. For some companies, the renewal period starts the minute a resident moves in. But you can start the lease renewal process at 60-days or 120-days before the lease is up, whatever works for your company. Then, be sure to ask your tenant why they are leaving. Track results and watch for trends and common issues to emerge. If the resident is moving due to a life change such as job relocation, be sure to refer them to your properties in other communities, to manage occupancy throughout your organization.
Occupancy Planning: A Strategy for Keeping Your Properties at Capacity
Occupancy planning takes time and nearly daily dedication. In the end, a well-constructed strategy for knowing your occupancy break-even point, finding the right tenants and keeping them happy will ensure your investment properties give you the return you’re looking for.
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