‘Don’t buy rental property until you know the vacancy rate’
According to Tobie Fourie, the national rentals manager for the Chas Everitt International Property Group, most seasoned investors will make allowance for their rental property to be vacant about 5% of the time - and deduct the cost of this vacancy from their gross income estimates.
“However, it is also important to consult a reputable managing agent to establish the average vacancy rate for the area as a whole - and find out about the factors that could affect this rate in future,” said Fourie.
“At around 5%, there should be steady demand and landlords in the area should be able to achieve moderate annual increases in rent, but when the vacancy rate drops below about 8%, that can become difficult. It may also suggest that the area has fallen out of favour with tenants.”
There are, however, several factors that can change the vacancy rate in the short or longer term, and prospective investors need to explore these with a local expert, he said.
“The most important of these is the overall availability of rental property in the area versus demand. If there has been overbuilding, for example, the vacancy rate will rise and it will be difficult for landlords to raise rentals until the oversupply is absorbed. But if the local population is expanding faster than the number of units required to provide housing, the vacancy rate will fall and higher rents will become possible.”
Secondly, said Fourie, investors should consider the position of the specific rental property within a particular area.
“A home to let in a visible position will generate more enquiries, while the hard-to-find property is likely to stay vacant for longer, at the expense of the landlord, even if the vacancy rate in the area is low.
“On the other hand, most tenants don’t want to live on a busy road, but prefer properties that are close to schools, shopping centres, public transport and arterial roads. It is important to look at development plans for the area as a whole and find a balance.”
Keeping the property in good condition can also have a significant impact on the vacancy rate. “Rental homes need to be well-maintained or any proposed rental increase will swiftly prompt tenants to move to a newer or better-managed property.
“And this will leave the landlord with a unit that will in all likelihood have to be cleaned, painted and repaired to attract a new tenant.”
Fourie noted that when buying a sectional title property, investors also need to consider the state of the building or complex as a whole.
“Tenants prefer to rent in a well-kept scheme with good security, and that is only possible when owners are paying their levies and the body corporate has sufficient income, so investors should always ask to see the current financial records of a sectional title scheme before they buy there.”