The occupancy rate of a rental property has a drastic effect on its performance. Even if your property can be rented out for $10,000 per month, if the property is only occupied for 1 month/year, its rental income will still be lower than a property that you can rent out for $1,000 per month but that rents out for 12 months/year.
For this reason, looking at the amount of rent that you can ask for the property is never enough. It is absolutely crucial to also calculate the occupancy rate of the property that you want to purchase 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 (short-term vs long-term rentals)? And what tools can you use to calculate the occupancy rate quickly and with ease?
I will try to answer all of these questions in this article to help you understand how to calculate the occupancy rate and the importance of it in order to maximize your returns when investing in real estate.
Calculate the Occupancy Rate for a Rental Property
The occupancy rate of a rental property is the number of days in a year that the property will be occupied by a tenant.
This is extremely 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.
For this reason, rental properties need to have a healthy occupancy rate to be profitable investments. When I say healthy here, I don’t necessarily mean a 100% occupancy rate (although that can never be a bad thing), but I’m talking about an occupancy rate that is suitable for each specific property in order to generate a desired amount of profits.
Calculate the Occupancy Rate for Long-Term Rental Properties
Long-term rentals, or traditional rental properties, are generally much simpler to analyze and to calculate the occupancy rate for than short-term rentals.
Simply, with long-term rentals, the relationship between profitability and occupancy rate is mostly a positive correlation. Meaning, in most cases, the higher the occupancy rate of a long-term rental, the higher its rental income.
Additionally, since long-term rentals are, well, long-term rentals, you will mostly want to find tenants that want to rent them for the long term, which typically means for a minimum of a year or two years.
What this means is that most traditional rental properties, especially those that are rented out to families, will mostly have an occupancy rate of 100%.
In fact, a long-term rental that has an occupancy rate that is below 100% might be bad news, unless you’re using a creative rental strategy that is medium-term and you’re only renting it out for a number of months at a time.
Calculate the Occupancy Rate for Short-Term Rental Properties
Unlike long-term rentals, when you want to calculate the occupancy rate for short-term rentals, there is much more to take into consideration, and the relationship isn’t as simple as +occupancy rate = +rental income.
The relation between a short-term rental’s occupancy rate and its rental income is a bit arbitrary due to the massive number of factors that can inflate and deflate both elements individually.
For example, there might be areas where the occupancy rate is very high and the rental income is very high, and areas where they are both low. But there are also areas where one is very low and the other is very high or vice versa, which creates a new set of possibilities which turn into investment opportunities when utilized creatively.
One of the major factors that has been increasingly influencing the performances of short-term rentals, which is now always being taken into consideration when calculating the occupancy rate of a property, is the emergence of new laws and regulations that can slightly or severely limit, and sometimes outright prohibit short-term rentals in certain cities and areas.
These 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 and making it impossible for the property to go above that level. Some cities have even placed laws that require the owner of the property to reside in it for a number of days during the year, which has the same effect on its occupancy rate.
Additionally, and since short-term rentals by nature mostly attract tenants in the form of tourists, travelers (both business and leisure), visitors, and vacationists, their performance can be extremely seasonal depending on their location.
Short-term rentals in coastal areas, for example, will generally have a high demand during the summer season as more people come to the area for vacation. These are the kind of people who will only stay for a few days and who are mostly willing to pay a higher amount of money for their stay in exchange for a good experience.
And these are not the only factors that can be included when trying to calculate the occupancy rate for short-term rentals. But the beautiful thing about investing in these rental properties is the amount of creativity that can go into it in terms of marketing your property and finding the right type of tenants to attract and for the right price.
When doing that, you can either keep your occupancy rate low, but turn your property into a semi-luxury rental, which allows you to set a much higher rental rate (if you manage it correctly), ultimately generating a high enough amount of money with a good return on investment.
The secret to increasing the occupancy rate, the rental income, or both when it comes to short-term rentals is appropriate rental property management. This is what will set your property aside from its competitors, and this is where all the exciting competition in this niche of an investment market is.
Learn about: 4 Don’t for Airbnb Occupancy Rates
Where Can I Calculate the Occupancy Rate of Rental Properties for Sale?
As you can see, to calculate the occupancy rate of rental properties can be a massive challenge, especially when trying to calculate the occupancy rate for properties that you don’t own or have historical records for.
While short-term rental websites, such as Airbnb, provide data that allows you to see what days the property was occupied, what days it was off-market, and what days 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 effectively.
Mashvisor, on the other hand, pulls that 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, and since this historical performance is based on the previous owner’s management of the property, anyone who buys the property can increase/decrease this occupancy rate depending on whether they manage it more or less efficiently.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
The information becomes much more useful since the platform also provides you with the median occupancy rate for that area or neighborhood, as well as rental comps that give you insights about other properties that are similar to the one you want to purchase, their occupancy rate, their rental income, and their distance from one another.
By using this info, the investor can determine that, if the property’s historical occupancy rate is 30%, for example, and other similar properties in the area have a 60% occupancy rate, that it should be possible for him/her to increase the occupancy rate of the property by 30% with good property management.
On top of this, the platform also has an experimental tool that uses machine-learning algorithms to learn how to calculate the effect of positive Airbnb reviews on the property’s occupancy rate. This gives users further insight into the amount of management and creativity that they will need in order to achieve the occupancy rate, and possibly the return on investment that they are hoping for.
After reading this article, you might be wondering: So, how do I calculate the occupancy rate?
The truth is, you shouldn’t be trying to calculate the occupancy rate. Your goal is to increase your income and your return on investment, and a metric like the 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, and whether you can increase it to increase your returns or whether you should focus more on increasing your rental income, then Mashvisor is the platform that you should be using.
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
With the use of predictive analytics and machine-learning algorithms, Mashvisor’s platform is becoming a very popular choice among rental property investors, especially those looking to invest in short-term rentals, due to how easy it is to make sense of the numbers when using the platform, and to find investment properties and find solutions for them that can help you make wise investment decisions, and large amounts of money.