“You can raise occupancy and rent at the same time” is one of the more expensive assumptions a lease-up model can carry.
It is also the natural one. The property sits below the occupancy an agency lender will accept, and its rents sit below comparable units nearby. Two gaps, both visible, both fixable. So the proforma closes them together: occupancy climbs quarter by quarter, rents climb alongside it, and by year two the building looks stabilized on paper. The problem is that the building cannot do both on the same clock, and the model that assumes it can is understating the cost of the fill and overstating the speed of the rent.
Two gaps that do not behave the same way
Start with what the two gaps actually are, because they do not move the same way.
Physical occupancy is the count of units with a paying tenant. Rent is the price each of those tenants agreed to. When a property is under-occupied, the first job is getting qualified tenants into empty units (emphasis is on qualified). Raise asking rents while those units are still empty and you slow the very thing that has to happen first. Fewer prospects sign, the units that would have leased sit longer, and the occupancy curve the whole plan depends on flattens.
The sequence matters for a reason beyond leasing psychology. The financing you are underwriting toward will not fund until the property is stabilized. Fannie Mae and Freddie Mac generally define a stabilized property as one holding ninety percent physical occupancy for roughly ninety days, with a minimum economic occupancy in the range of seventy-five percent. Physical occupancy fills the units. Economic occupancy asks whether those units are actually collecting rent, or whether concessions and unpaid balances are hollowing out the rent roll. A property can show ninety percent physical occupancy and still fall short on economic occupancy if the doors were filled with a month of free rent each or with unqualified tenants. The refinance does not close on the first number. It closes on both.
Phase one: fill the doors
The first phase is filling the doors. Hold asking rents near market entry, prioritize qualified tenants, and drive toward stabilized physical occupancy and, more importantly, a stabilized rent roll. The metric that governs this phase is economic occupancy, not the headline physical number. A rent roll that reads ninety percent occupied but collects on seventy is not stabilized.
Filling vacant units accomplishes little if you are losing residents as fast as you replace them. At a renewal rate of fifty percent or below, you never catch up: for every unit you lease, another one comes back empty, and the occupancy curve runs in place. This is why caring for the residents already in place and keeping maintenance responsive matters as much as the leasing itself. Retention is what lets the fill accumulate instead of tread water, and getting renewals to seventy percent or higher is the target that makes the whole phase work.
Phase two: move the rent
The second phase is where rent moves. Once the roll is genuinely stabilized, you burn off the concessions used to fill it and begin closing the loss-to-lease gap, the difference between what units are leased at and what the market will bear. This is the phase that repositions the asset for a refinance or a sale, modeled in most plans around year three. It works only because the first phase earned the right to it.
Holding rents steady while you fill, then pushing them once the roll is stable, is the discipline that protects the downside. It is slower on paper than the dual climb. It is also the version that actually funds.
The expenses the model tends to miss
The sequence also changes what the expense side has to carry, and this is where dual-lever proformas tend to be thinnest.
The early quarters are the most expensive ones. More units are turning at once, so turn costs are front-loaded rather than spread evenly across the hold. Repairs and maintenance and contract services run higher while the property is being brought up rather than kept up. If the plan includes unit renovation, the rehab budget should carry a real buffer, and that buffer should be priced after the unit walk-through, not from a spreadsheet assumption made before anyone saw the condition behind the doors.
The refinance assumption deserves the same scrutiny as the rent assumption. The whole sequence underwrites toward an exit or a recapitalization that funds only at stabilization. So the loan-to-value, the rate, the fees, and the timing all have to be modeled at levels the market will actually offer at that point, not at levels that make the return work. A refinance assumption chosen to make the return work is not diligence but hopium.
The question the proforma has to answer
The cost of the simultaneous-lever model runs deeper than optimism. It hides where the risk sits. When occupancy and rent rise together on the page, the fill looks cheaper and faster than it will be, and the refinance the plan depends on looks more certain than it is. The deal does not break on the rent gap. It breaks on the order in which you tried to close it, and on a fill that took two more quarters than the model allowed while the expenses ran ahead of the income.
The question to work through is not how high rents can go. It is this: does the proforma separate the two levers on a calendar, does it solve for a stabilized rent roll before it pushes price, and what happens to the refinance if the fill runs two quarters long. A model that answers those three is underwriting the deal. A model that shows both lines climbing together is underwriting a hope.
Vessi Kapoulian
Breaking down multifamily underwriting one step at a time to create educated and empowered investors
P.S. If you would like a second set of eyes on a deal or want to sharpen your underwriting through a risk lens, feel free to connect with me.
P.P.S. And if you want to go deeper into analyzing multifamily investments step by step, my Mastering Multifamily Underwriting book and the Mastering Multifamily Underwriting program walk through this process in plain English, from acquisition to exit.