How to make sure your rental rates are just right in 2021
It is no secret that many industries have been hit hard by the pandemic with the rental industry being particularly vulnerable. As tenant’s income became unpredictable, many landlords were placed in the grey area between being understanding of changing economic circumstances and becoming an accidental financier of their tenant’s homes.
Shanaaz Trethewey, CEO of RentMaster, knows that the idea of a passive income always requires an active role, and she has seen from experience how quickly the rental process can 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
RentMaster actively tracks data for property rentals and monitors each rental bracket to ensure that their client’s expectations of what they can earn from their rental properties are realistic and achievable. The industry norm, published by industry specialist TPN Credit Bureau, categorises properties into 6 categories: Property rentals for less R3000, those between R3000 and R5000, R7000 and R12000, R12000 and R15000, R15000 and R25000 and those over R25000.
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, Shanaaz found those under the R3000 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 R25000, are also showing distress as they deal with substantial pay cuts and larger overheads.
If you are considering buying property, the R7000 and R12000 bracket has proven its stability in 2020 and is set to remain relatively constant in 2021.
Understand How Affordability is Affected
As an expert, Shanaaz consistently looks at social indicators, such as the employment rate and the 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 many double-income households became single-income households, meaning that many families needed to reconsider how they could adjust their lifestyle and rental choices to keep a roof over their heads.
Since August 2020, as those that could return to work did so, tenants have found ways and means to begin catching up on arrear rental payments. And others have continued to have honest discussions with RentMaster, and their landlords, 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 extremely important to be monitoring changes in payment behaviour so that you can address affordability issues before they become problems; this way you have a finger on the pulse of ever-changing circumstances.
Make Sure You Vet Your Tenants Properly
In the same way that you cannot draw blood from a stone, you cannot 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 they can pay on time, every time. This is perhaps 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 properties. However, Shanaaz warns against hasty decisions as she often sees landlords submit potential applicants, who after the vetting process, are shown to not be able to afford the rental.
Shanaaz cautions that the cost of having a property vacant whilst seeking a good quality tenant far outweighs having a tenant occupy the property – only to have 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 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 2021 for tenants, and it is important that you come to a proper solution that works for all parties. All 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
Unsurprisingly, Shanaaz says that RentMaster have seen minimal to no rental escalations with many landlords choosing to keep their trusted occupants by allowing for rental reductions. 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 than trying to increase their profit margins.
What has become clear this year is that as the world changes, we must adapt. Shanaaz says that 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.
Shanaaz says, “Where we find that landlords already have a full-time job, we make it our business to be a trusted 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.”
Determining rental is not an exact science, and as much as we would love a mathematical formula that all landlords could follow, due to 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 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. But there are those specialists, like Shanaaz, who despite our distressed economy want to help tenants and landlords have the ideal rental relationship by encouraging understanding and communication and relieving the pressure off of landlords.