SS245: How Occupancy Drives Multifamily Performance

SS245: How Occupancy Drives Multifamily Performance

Raising rents may seem like the fastest way to boost profits, but if your units are empty, rent increases won’t matter. In this Strategy Saturday episode, Charles Carillo explains why occupancy is the true backbone of multifamily performance. From the difference between physical and economic occupancy to why lenders classify 90%+ as stabilized, occupancy affects financing, net operating income, and property value. Charles also reveals why keeping units filled is more important than chasing rent growth during market downturns. For investors, understanding occupancy is essential to building stable cash flow and long-term multifamily success.

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Talking Points:

  • When speaking to a lender about purchasing a specific apartment complex, one of the first questions they will ask is, “What is the property’s occupancy?” This is because occupancy is a fundamental driver of making money with multifamily properties. 
  • In previous episodes, I broke down vacancy and the cost of tenant turnover; these episodes are SS237 and SS240, so I do not want to go into these too much, but rather focus on why occupancy is an essential metric to track since it will be one of the first things that lenders, brokers, and buyers ask you. When I refer to high occupancy, I mean a property that is 90% or more occupied, as this is typically what lenders consider a stabilized property. 
  • As a side note, there are 2 types of occupancy: physical occupancy, which is the actual number of units occupied, and economic occupancy, which is the percentage of potential rental income that is actually collected, as opposed to the total potential rent if all units were leased at market rates. Physical occupancy is what I am referring to in this episode, and it is what most professionals typically refer to when discussing “occupancy” in general.
    • 1. High occupancy immediately equates to a good, well-managed property. When I see a property with an occupancy rate under 85%, I immediately try to determine what is wrong with the property. A property is considered exceptionally well-managed if its occupancy rate is 95% or higher. At 100%, your rents may be too low, and at 85%, it may seem that your rents are too high; alternatively, there may be other issues lurking beneath the surface. That high 90% occupancy range is typically the sweet spot that investors strive for.
    • 2. Occupancy has a direct impact on the property’s revenue and profitability. You cannot maximize a property’s net operating income or value without achieving a high occupancy at the property. Additionally, every occupied unit increases the property’s operational efficiency, as fixed costs are now spread over more units. For example, it costs the same amount of money to light the parking lot or mow the grass, regardless of whether the property is 70% or 90% occupied.
    • 3. Impact on Financing. Financing can vary significantly depending on the property’s occupancy rate. Two properties next door to each other, one that is 60% occupied and one that is 90% occupied, will usually not be financed by the same lender. The loan-to-value ratios will differ, the interest rates will vary, and the loan terms will also vary. Major lenders, such as Fannie Mae and Freddie Mac, consider all properties with an occupancy rate below 90% as “unstabilized.” In short, high occupancy ensures the lender that the property generates sufficient cash flow to cover the debt servicing.
  • Occupancy is the backbone of profitability when investing in multifamily properties, especially during down or stagnant parts of the market cycle. During these times, keeping your units filled and not chasing rent increases is the smart strategy, while pushing rents and doing major renovations is best suited for markets on the upswing.

Transcript:

Charles:
If you think raising rent is the fastest way to boost profits, think again. Because if your units are sitting empty, what you charge for rent doesn’t matter. Welcome to Strategy Saturday! I’m Charles Carillo and in this episode, we’re breaking down How Occupancy Drives Multifamily Performance and why top investors obsess over it, especially during market pullbacks. So let’s get started. When speaking to a lender about purchasing a specific apartment complex, one of the first questions they will ask is, what is the property’s occupancy? And this is because occupancy is a fundamental driver of making money with multifamily properties, really rental properties of all types. And in previous episodes, I broke down vacancy and the cost of tenant turnover. And these episodes are SS 2, 3 7 and SS two four oh. So I don’t wanna go into these too much, but rather focus on why occupancy is an essential metric to track since it’ll be one of the first things that lenders, brokers and buyers ask you.

Charles:
When I refer high occupancy, I mean a property that is 90% or more occupied as this is typically what lenders consider a stabilized property. As a side note, there are two types of occupancy. There’s physical occupancy, which is the actual number of units occupying and economic occupancy, which is the percentage of potential rental income that is actually collected, as opposed to the total potential rent if all the units were leased at market rates. Now, physical occupancy is what I’m referring to in this episode and is what most professionals typically refer to when discussing occupancy. In general. Number one is that high occupancy immediately equates to a good well-managed property. When I see a property with an occupancy rate under 85%, I immediately try to determine what is wrong with the property. A property is considered exceptionally well managed. If its occupancy rate is 95% or higher at a hundred percent, your rents may be too low, and at 85% it may seem that your rents are too high.

Charles:
Alternatively, there may be other issues lurking beneath the surface. That high 90% occupancy range is typically the sweet spot that investors strive for. Number two is occupancy has a direct impact on the properties revenue and profitability, and you cannot maximize a property’s net operating income or value without achieving a high occupancy at the property. Additionally, every occupied unit increases the properties operational efficiency as fixed costs are now spread over more units. For example, it costs the same amount of money to light the parking lot or mow the grass regardless of whether the property is 70% or 90% occupied. Number three is an impact on financing. Financing can vary significantly depending on the property’s occupancy rate. And since financing is really that lender is really your largest partner in your deal, right? Sometimes bringing 70, 80% of the capital to buy the property, two properties next door to each other, and one with a 60% occupied, and the other one that’s 90% occupied will usually not be financed by the same lender.

Charles:
I mean, the loan to value ratios will differ, the interest rates will vary, and the loan terms will also vary. Major lenders such as Fannie Mae, Freddie Mac, consider all properties with occupancy rate below 90% as unstabilized in short, high occupancy ensures the lender, the property generates sufficient cash flow to cover the debt servicing, which is what the lender is really concerned about. And occupancy is the backbone of profitability when investing in multifamily properties, especially during down or stagnant parts of the market cycle. And during these times, you know, keeping your units filled and not chasing rent increases is the smart strategy. While pushing rents and doing major renovations is best suited for markets on the upswing. So I hope you enjoyed.

Links Mentioned In The Episode:

  • SS237: What Is the Cost of Tenant Turnover
  • SS240: Tenant Not Paying Rent? Do THIS Before It’s Too Late

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