When analyzing a rental property for its profitability, it is important to calculate the rental occupancy rate of the property before investing.
The occupancy rate of a rental property can significantly impact its performance. Let’s say you own a property with a monthly rental rate of $10,000. If it’s only occupied for one month in a year, its rental income will still be lower than a property that’s renting out for $1,000 per month for a full year.
Table of Contents
- What Is Rental Occupancy Rate?
- Occupancy Rate for Long-Term Rental Properties
- Occupancy Rate for Short-Term Rental Properties
- Where to Calculate the Occupancy Rate of Rental Properties for Sale
For this reason, merely looking at the amount of rent that you can ask for the property is never enough. It is absolutely crucial also to make the necessary calculations and take into account important factors like rental expenses, mortgage payments, taxes, and occupancy rates. Such things need to be looked into before you can determine how profitable it will be.
But how can you calculate the occupancy rate for a rental property? How does the process of calculating the occupancy rate differ from one rental strategy to another, like with short-term and long-term rentals? What tools can you use to calculate the occupancy rate quickly and with ease?
We will try to answer all of the above questions in this article to help you understand how to calculate the occupancy rate and its importance in order to maximize your returns when investing in real estate.
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What Is Rental Occupancy Rate?
The occupancy rate of a rental property is the number of days in a year that it will be occupied by a tenant versus the total number of days it is actively listed on the rental property market.
It is important to know because a rental property without a tenant will not generate any sort of income, even though most of its expenses will still incur. A rental property’s occupancy rate will either help boost its income or take away from it.
As a rental property investor, it is important to know what is the local neighborhood’s average occupancy rate so you can make the necessary adjustments. It will ensure you have enough to cover all your monthly expenses and have some money left over to take to the bank.
For this reason, rental properties need a healthy occupancy rate to be profitable investments. When we say healthy here, we don’t necessarily mean a 100% occupancy rate (although that is never a bad thing). We’re talking about a high occupancy rate that is suitable for a specific investment property in order to generate the desired income amount.
Rental property owners who are aware of their neighborhood’s occupancy rates and other similar factors affecting rental income are ahead of the game. Knowledge of the essential data will allow them to make informed decisions and come up with more effective rental strategies.
Occupancy Rate for Long-Term Rental Properties
The rental occupancy rates of long-term rental properties are generally much simpler to analyze and calculate compared to short-term rental properties.
Simply, with long-term rentals, the relationship between profitability and occupancy rate is mostly a positive correlation. In most cases, the higher the occupancy rate of a long-term rental, the better its rental income.
Additionally, since long-term rentals are, well, rented out for longer periods, you will mostly want to find tenants that want to rent them for as long as they can. It typically means renting the property and living in it for about a year or two.
Most long-term rental properties, especially those that are rented out to families, will mostly see an occupancy rate of nearly 100%. We say “nearly” because, in some cases, tenants only rent out a property for an average of six months. You need to factor it in, as well as the transition period between tenants.
Generally, landlords already anticipate the transition and include them in their rental rate calculations.
Long-term rentals with occupancy rates of 100% are ideal, but that is not always the case. Most tenants are on a one-year lease that can either be renewed or not, depending on the tenant’s circumstances. In this case, to improve your occupancy rate, you will need a creative rental strategy like renting it out for a number of only a few months at a time.
Related: When’s the Best Time to Find Rental Property?
Occupancy Rate for Short-Term Rental Properties
Unlike long-term rentals, when you want to calculate the rental occupancy rate for vacation houses, there is much more to take into consideration. The equation isn’t as simple as +Occupancy Rate = +Rental Income.
The relationship between a short-term rental’s occupancy rate and the rental income is a bit arbitrary due to the number of factors that can inflate and deflate both elements individually.
For example, there might be areas where both the occupancy rate and the rental income are very high, while in some areas, they are both low. However, there are also areas where one is very low and the other is very high, or vice versa. It creates a new set of possibilities that could turn into investment opportunities when utilized creatively.
Short-Term Rentals Regulations
One of the major factors that have been increasingly influencing the performance of short-term rentals is the emergence of new laws and regulations on short-term rentals. They are now always being taken into consideration when calculating the occupancy rate of a property.
Such regulations can slightly or severely limit – and sometimes outright prohibit – short-term rentals in certain cities and areas.
The laws and regulations can place limits on the number of days in a year that you can use your property as a short-term rental, effectively setting a maximum limit to its occupancy rate. The limitations make it impossible for the property to achieve its full profit potential.
Some cities have even enacted laws that require the owner of the property to reside in it for a specific number of days during the year, which has the same effect on its occupancy rate.
Related: How to Buy an Airbnb Investment Property
Additionally, a short-term rental property’s performance can be extremely seasonal, depending on its location. Since short-term rentals mostly attract vacationists and travelers, not all short-term rental markets go through the same peak and off-peak seasons. The influx of tourists in a given location will depend on what it can offer by way of tourism.
Short-term rentals in coastal areas and beachfront, for example, will generally see a high demand during the summer season as more people come to the area for vacation. They are the kind of people who will only stay for a few days and who are most willing to pay a higher amount of money for their stay in exchange for a good experience.
Regulations and seasonality are not the only factors that can be included when trying to calculate the occupancy rate for short-term rentals.
The beautiful thing about investing in such types of rental properties is the creativity that can go into the marketing of your property. If you do it right, finding the right type of tenants to attract who are willing to pay your price will be a lot easier.
For example, you can turn your property into a semi-luxury rental, which will probably lower your rental occupancy rate but give you a much higher rental income (if you manage it correctly). Ultimately, this strategy has the potential to generate a sufficient amount of money with a good return on investment.
The secret to increasing your rental property’s occupancy rate and rental income is appropriate rental property management. It is what will set your property apart from your competitors. The competition is what makes investing in this niche market very exciting.
Related: 4 Don’ts for Airbnb Occupancy Rates
Where to Calculate the Occupancy Rate of Rental Properties for Sale
As you can see, calculating the occupancy rate of rental properties can be a massive challenge. It can be especially challenging when trying to calculate the average rental occupancy rate for properties that you don’t own or have historical records for.
Short-term rental websites, such as Airbnb, provide data that allows you to see the number of days when a subject property was occupied, when it was off-market, and when it was vacant. Airbnb’s website was never about providing information in a format that helps to sell the property, but instead to help the owner of the property manage it more efficiently.
On the other hand, Mashvisor, a real estate website that specializes in rental properties, pulls data from Airbnb and turns it into investment insights with the use of analytics.
By looking at the occupancy history of each property listed on Airbnb, Mashvisor’s platform is able to predict the future performance of a property.
However, a subject property’s performance is based on the previous owner’s management of the property; anyone who buys the property can either boost its occupancy rate or lower it. Whether the rates go up or down will largely depend on how efficiently it is managed.
Such information becomes much more useful since Mashvisor also provides you with the median occupancy rate for that area or neighborhood. On top of that, the platform uses actual rental comps to give users a better insight into other properties that are very similar to the one you want to purchase.
It includes all the relevant data, such as their occupancy rate, their rental income, cash on cash return, listing price, and distance from one another.
By using the aforementioned information, the investor can determine a fairly accurate and realistic ROI and profitability projection.
Let’s say that if your property’s historical occupancy rate is 30% while other similar properties in the area show a 60% occupancy rate, it means that something is lacking. This knowledge will make it possible for you to make the necessary adjustments. It will help you increase your occupancy rate, so it becomes on par with the competition.
Sometimes, all it takes is good property management. Other times, you just need to know the actual market conditions by staying updated with the current trends and market movements.
Mashvisor: Your One-Stop Real Estate Investing Shop
As a real estate investor, you need to know which tools you should use to come up with the most accurate investment property analysis. One of the reasons why countless investors choose Mashvisor is its unique set of investing tools that give them greater confidence in real estate investing.
The platform uses machine-learning algorithms to learn how to calculate the effect of positive reviews on a particular property’s occupancy rate. It gives users further insight into the amount of management and creativity they need to achieve their desired occupancy rate and ROI.
The website also includes an investment property calculator that lets you crunch the numbers easily in a fraction of the time. Since Mashvisor uses data pulled from very reliable sources, computing rental rates and ROI projections are much more accurate and realistic. The high accuracy in computation results gives investors like you greater investment confidence.
Another feature that investors find very useful is the real estate heatmap. It allows you to see the rental market condition by city according to how a neighborhood performs under the following criteria:
- Long-Term Rental Monthly Income Average
- Short-Term Rental Monthly Income Average
- Long-Term Rental Cash on Cash Return
- Short-Term Rental Cash on Cash Return
- Listing Price
- Short-Term Rental Occupancy Rate
Depending on which filter you choose, you will see how a particular neighborhood performs. Areas highlighted in green are the ones that are doing really well, while those colored red are the ones that are struggling.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.
After reading this article, we hope we’ve answered the following question for you: “How do I calculate the rental occupancy rate?”
The truth is, you shouldn’t be solely focusing on how to calculate your property’s occupancy rate. Your ultimate goal is to boost your income and get a good return on your investment. A metric like the rental occupancy rate doesn’t tell you enough to determine whether a rental property is a good investment or not.
If you’re looking for a tool that allows you to see how that occupancy rate translates into returns, then Mashvisor is the platform that you should be using. It will give you a greater understanding of the market of your choice. Such understanding will allow you to increase your returns by making appropriate adjustments to your rates or management style.
With the use of predictive analytics and machine-learning algorithms, Mashvisor’s platform is very popular among rental property investors. It is especially true for those looking to invest in short-term rentals. Due to how easy it is to make sense of the numbers when using the platform, finding the right investment properties is a lot easier.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.