What Is Occupancy Rate?

Why Occupancy Rate Is a Critical Metric

Your occupancy rate is the most direct measure of your portfolio's earning power. Every vacant unit is a unit generating zero revenue while still costing you money in mortgage payments, insurance, taxes, and basic upkeep.

Consider a 10-unit portfolio with an average rent of $1,400/month. At 100% occupancy: $168,000/year. At 95% occupancy: $159,600/year. At 90% occupancy: $151,200/year. At 85% occupancy: $142,800/year.

The difference between 95% and 85% occupancy is $16,800/year. That is real money that goes directly to your bottom line (or does not). And your expenses stay roughly the same regardless of occupancy. So that $16,800 comes almost entirely out of your profit.

This is why savvy landlords obsess over occupancy. Every strategic decision (screening criteria, renewal offers, turnover speed, maintenance quality) is ultimately about keeping units occupied with paying tenants.

How to Calculate Occupancy Rate

The basic formula is straightforward:

Point-in-time occupancy: Occupied Units ÷ Total Units × 100. If you have 8 units and 7 are occupied: 7 ÷ 8 × 100 = 87.5%.

Average occupancy over time (more useful): Total unit-months occupied ÷ Total possible unit-months × 100. If you have 8 units over 12 months (96 total unit-months) and you had 89 occupied unit-months: 89 ÷ 96 × 100 = 92.7%.

The time-based calculation is more meaningful because it captures the impact of vacancies throughout the year, not just at a single point in time. Track this in your rent roll or financial spreadsheet.

What Your Occupancy Rate Tells You

97-100%: Excellent occupancy but question whether you are underpriced. If every unit is always filled instantly, you might be leaving money on the table. Test a modest rent increase on the next vacancy.

93-97%: Sweet spot. Normal turnover and quick re-leasing. This suggests good pricing, good screening, and effective management.

90-93%: Acceptable but worth investigating. Are turnovers taking too long? Are you losing tenants at renewal? Is your retention strategy working?

Below 90%: Red flag. Something is wrong. Possible causes: rent is above market, property condition is poor, management is unresponsive, screening is too strict, marketing is insufficient, or the area has declining demand.

Strategies to Maximize Occupancy

Focus on retention. The cheapest vacancy to fill is the one that never happens. Reasonable rent increases, responsive maintenance, and good communication keep tenants renewing. Every renewal saves you 2-4 weeks of vacancy.

Speed up turnovers. Have contractors pre-scheduled before the tenant moves out. Overlap cleaning and painting. Pre-list the unit with showings starting the day it is ready. Goal: 7-10 days from move-out to new tenant move-in instead of 3-4 weeks.

Price competitively. Research comparable rents monthly. If you are 10% above the market, you will have longer vacancies. Being 3-5% below market fills units fast and attracts better tenant applicants.

Screen efficiently but not too strictly. Screening criteria that are too tight (750+ credit score, 5x income requirement) eliminate good tenants. Standard criteria (620+ credit, 3x income, no recent evictions) balances quality with speed.

Market before vacancy. Start marketing 30-60 days before a known vacancy. Accept applications before the unit is ready. A signed lease on Day 1 of the make-ready is the goal.

Real Example: Occupancy Impact on Cash Flow

6-unit building, average rent $1,350/month. Annual gross potential rent: $97,200.

Year 1: 2 turnovers, each lasting 3 weeks. Occupied unit-months: 70.5 out of 72. Occupancy rate: 97.9%. Actual rent collected: $95,175. Vacancy cost: $2,025.

Year 2 (poor management): 3 turnovers, each lasting 5 weeks. Occupied unit-months: 66.5 out of 72. Occupancy rate: 92.4%. Actual rent collected: $89,775. Vacancy cost: $7,425.

Year 2's additional vacancy cost the landlord $5,400 more than Year 1. That is the difference between 2 fast turnovers and 3 slow ones. Effective gross income dropped by 5.5% just from vacancy management.

Common Mistakes

Only checking occupancy once a year. Track it monthly. You want to see trends and catch problems early. If you normally run at 95% and drop to 88%, investigate immediately.

Chasing 100% at all costs. Accepting unqualified tenants to avoid vacancy is more expensive than the vacancy itself. A bad tenant who stops paying after 3 months costs you more than a 4-week vacancy.

Not comparing to market. Your occupancy rate only means something in context. If the local market is at 97% and you are at 90%, you have a problem. If the market is at 85% and you are at 90%, you are outperforming.

Ignoring the time component. A unit that is vacant for 1 week during turnover barely dents occupancy. A unit vacant for 3 months because of a bad eviction crushes it. Weighted occupancy over time tells the real story.

Frequently Asked Questions

Is occupancy rate the same as vacancy rate?

They are inversely related. Occupancy rate + vacancy rate = 100%. If your occupancy is 94%, your vacancy rate is 6%. Lenders and appraisers may use either metric.

Should I calculate occupancy by units or by revenue?

Both are useful. Unit-based occupancy tells you how many units are filled. Revenue-based occupancy (also called economic occupancy) accounts for the fact that different units have different rents. A vacant $2,000 unit hurts more than a vacant $800 unit. For small portfolios with similar rents, unit-based is fine.

How does occupancy rate affect property value?

Directly. Property value is based on NOI, which starts with actual collected rent. Higher occupancy means higher collected rent, higher NOI, and higher property value. A 10-unit building with 95% occupancy is worth significantly more than the same building at 85% occupancy.