How to set appropriate rental rates for current market conditions
By: SHANAAZ TRETHEWEY
IT IS no secret that many industries have been hit hard by the 2020 pandemic, with the rental industry being particularly vulnerable. As tenants’ income became unpredictable, many landlords were placed in the grey area between being understanding of changing economic circumstances and be-coming an accidental financier of their tenant’s homes. The idea of a passive income always requires an active role, and in challenging conditions the rental process can quickly turn from a charming idea to a real ordeal. Here is how you can make sure as a landlord that your rental rates are just right in 2021.
Understand your rental bracket
Data for property rentals is actively monitored and tracked by category. The industry norm, published by industry specialist TPN Credit Bureau, categorises rental properties into the following five categories: Less than R3 000 per month R3 000 to R7 000 R7 000 to R12 000 R12 000 to R25 000 Over R25 000. To set your rent realistically, it is important to understand how these different brackets were impacted economically during this last year. This will help you understand how cost-sensitive your tenants are. You need to understand your tenants’ spending habits so that when a crisis hits, you can prepare for and understand their distress. After interpreting the rental data, we found those under the R3 000 bracket were the hardest hit, indicating little or no savings to tide them over in the hard lockdown. Similarly, those in the highest bracket, over R25 000, are also showing distress as they deal with substantial pay cuts and larger overheads. If you are considering buying property, the R7 000 to R12 000 bracket has proven its stability in 2020, and is set to remain constant into 2021.
Understand how affordability is affected
It is important to look at social indicators, such as the employment rate and levels of affordability, to assess whether the rental price can be paid in full or needs more negotiation. Employment rates dropped by 13% in 2020, and double-income households became single-income households, meaning that many families needed to reconsider how they could adjust their lifestyle and rental choices in order to keep a roof over their heads. Since August 2020, as those that could return to work were able to, tenants have found ways and means to begin catching up on arrear rental payments, while others have continued to have honest discussions with their landlords or agents on how the gap can be bridged.
Check tenant affordability
So, how do you check if your potential tenant can afford your rental rate? It is about consistently scrutinising bank statements, determining spending behaviour over an extended period, and verifying potential occupants’ income and employment. If there is a change in employment, your level of scrutiny should increase, and the time over which you draw your data should be longer—especially for individuals who earn their money in more fluid ways, such as being self-employed. It is also extremely important to be monitoring changes in payment behaviour, so that you can address affordability issues before they become problems—this way you have your finger on the pulse of ever-changing circumstances.
Make sure that you vet your tenants properly
In the same way that you cannot draw blood from a stone, you can-not get money from a tenant who simply doesn’t have it, so it is extremely important to know who you are leasing to on a financial and historical basis. RentMaster reviews the bank statements of potential tenants to ensure that they can pay on time, every time. This is why they have a good standing ratio of 85%—a full 10% above the industry average—even in one of the toughest years the property industry has faced.
A good tenant is worth the wait
As landlords, we are often all too aware of the increasing levels of vacancies and can feel an acute urgency to get tenants into our pro-perties. However, be cautioned against making hasty decisions—RentMaster often sees landlords submit potential applicants where the vetting process showed that the applicants were not able to afford the rental. Ultimately, the cost of having a property vacant whilst seeking a good quality tenant far outweighs having a tenant occupy the property, only to end up having a loss of income because of non-payment, subsequent lease cancellation, and potential eviction.
Have an air-tight lease
Many landlords invest in property to have an asset that can grow in value whilst earning them an additional income. Usually, you would look at the property’s overheads—including bond repayments, levies, utilities, and other third-party payments like rates and taxes to set your price. One also has to consider changing interest rates and how you as a property owner are able to create a buffer for your own expenditure on your investment. Hidden costs such as repairs and maintenance should be identified, and a portion of funds set aside so you are ready when it comes time to revamp and revitalise your property. These are not always costs that you are able to pass onto your tenant; however, they are certainly ones that should be on your radar as a property investor. Be mindful that covering your full rent is likely to be more challenging in the beginning of 2021 for tenants, and come to a proper solution that works for all parties. All of these intricacies must be explicit, detailed, and time-bound in your lease agreements for them to be binding and to prevent any potential conflicts.
Be careful considering raising your rent
RentMaster has seen minimal to no rental escalations—with many landlords choosing instead to keep their trusted occupants by allowing for rental reductions until the end of 2020. Right now, what is important for landlords to understand is that they should rather look at what a good quality tenant can afford whilst still covering their overheads, rather than trying to increase their profit margins.
What has become clear this year is that as the world changes, we must adapt. Setting a rental value is no longer a signed, sealed and once-a-year kind of activity. Landlords will need to take a far more active role in managing their passive incomes than simply reviewing their lease terms every 12 months. Where we find that landlords already have a full-time job, we make it our business to be that partner to them and protect their rental income with active collection. Just like you would employ a broker to handle shares and monitor the markets, property rental specialists can be essential to your financial success with your physical asset.
Determining rental is not an exact science, and as much as we would love a mathematical formula that all landlords could follow in order to be successful despite changing variables, there simply isn’t one. As tenant circumstances change, landlords need to adapt their expectations and their perspective on the level of activity that rental recovery requires. Often these aren’t easy conversations and come with emotional ties and stress for both parties. Making the right call—both ethically and financially—on the right rental rate is more challenging now than ever. If you feel that you do not have the time and expertise, or would be more comfortable not having to deal directly with tenants on a day-to-day basis, it is well worth appointing a professional to help the tenant and landlord have the ideal rental relationship by giving tenants understanding and relieving the pressure on landlords.
Shanaaz Trethewey is the chief executive officer of RentMaster.
Source: TPN Rental Monitor—Residential section (Q3, 2020)..
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