Holding out for a high rental can prove costly

Landlords need to guard against pricing themselves out of the market as rental prices slow in tandem with the movement out of a seller’s property market.

That’s according to Lorraine-Marie Dellbridge, Rentals Manager for Lew Geffen Sotheby’s International Realty in the Southern Suburbs, Noordhoek and False Bay, who says: “In 2014 property rental rates were already hitting a ceiling, but this year they’ve exploded through roof and we are finding that many properties, especially at the upper end of the market, are now sitting empty for months.

This estate in upper Constantia boasts a main house with four spacious en suite bedrooms, four expansive entertainment areas, a fully fitted kitchen, swimming pool and five garages. The cottage, with two en suite bedrooms, open plan living and balcony, is included at R95 000 per month rental and the property is most suitable for corporates or diplomatic missions.

“This essentially means that the landlord is actually losing money as the property is not earning anything while it is empty, so over a year it will yield a much smaller return than if the property had been rented out immediately at realistic, market-related rental.”

While the goal is to maximise return on investment, the rent should be set at the highest point that will easily attract tenants, and Dellbridge advises that the best way for landlords to determine a realistic rental price is through research.

“They need to see what is happening in their areas and compare their properties to those that are similar in offering. It’s is also advisable to consult a reputable real estate agency with experienced and knowledgeable agents who can offer up to date advice with regards to the ins and outs of the rental arena in their area.”

Dellbridge says just as sales agents are able to appraise properties to help sellers set realistic market prices for their homes, rental agents offer exactly the same service to landlords.

“My advice would be to call in three agents. If two come in at the same price and the third comes in a lot higher, chances are that the two are likely to be correct. But don’t only rely on what they tell you; take their advice in tandem with the research you’ve done about your area and then set the price accordingly.

“It’ll be clear soon enough if you’ve over-priced the property, because the tenant market will simply not respond, or they’ll respond with lower offers.”

Dellbridge says it’s understandable that landlords want to cover all their property expenses with the rental income, but, it’s not always possible and this is where research is invaluable. Property rates are higher in certain areas and an older properties and homes with gardens usually have higher maintenance costs.

“New investors in the rental market also need to realise that they won’t see an immediate return on investment. It usually takes up to four years before they do start to see returns, and if a property stands empty for a few months the return on investment will be further delayed,” says Dellbridge.

Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty says: “Landlords should be aware of the fact that nowadays tenants also do their own research and will view many different properties before making a choice; often as many as ten.

“If two properties are the same price and are on a par in general but one has three bedrooms while the other has five, the tenant will understandably choose the larger home. Similarly, if they can rent a property for R32 000 per month which is just as appealing as the house down the street which costs R40 000, there is no guess work about which property they will apply for.”

Geffen adds: “The rental market has become more like the sales market in that tenants now also negotiate and make offers. Gone are the days when a landlord can be positive he’ll realise the rental price he’s set.”

However, Dellbridge says that in spite of the growing trend of negotiation in the rental market, some landlords get stuck on an amount and will sometimes not accept a good offer. 

“For instance, let’s say a property is being marketed at R40 000 per month and an offer of R38 000 is made, but the landlord declines and holds out for the R40 000 which could take a month or even two to realise while the property stands empty. 

“Potentially the landlord has then lost two months’ income, which in real terms equates to a loss of R78 000 (at R38 000 per month) for the sake of the R24 000 they would have made that year with the additional R2 000 per month. They can’t recoup that in a year or even two.”

Dellbridge says that the market is currently very buoyant and correctly priced properties are usually let within two to three weeks, but it’s not uncommon for over-priced properties to sit vacant for up to four months before an offer is made that the landlord accepts.

There are also other factors which influence the time a property spends on the market, especially in suburban areas.

“We are seeing more and more landlords stipulating that no pets are allowed and, as most families have pets, this definitely makes the landlords’ potential rental pool smaller,” says Dellbridge, “This means the property could sit on the market for longer and the owner will lose income.

“Landlords who are worried about damage pets may cause should keep in mind that they hold security deposits for just such scenarios.”

Other than loss of income, there are also other drawbacks when a property stands empty for some time. Not only is it at risk of being broken into but squatters can also move in and take possession and properties tend to degrade when empty.

Geffen concludes: “To minimise risk and capitalise on investment it’s prudent for investors to research the general demographic of the areas they are considering and decide which segment of market they’ll be servicing. Families will need to be in close proximity to good schools, sports facilities and shopping amenities, while corporate or diplomatic tenants favour an upmarket suburb with easy access to freeways leading to the airport and typically close to business hubs.”

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