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5 steps to pricing your investment property rental right

 

A few years ago, landlords could pretty much set their rental price. Because of the abundance of tenants vying for the good properties, these got filled quickly at the requested price with years of escalations to follow. More recently, however, prices have come under pressure due to a few coinciding factors. The tables have turned and there is now an abundance of properties for tenants to choose from, meaning they can easily go for – or ask for – lower rentals than landlords have initially set. In this market environment, it’s really hard for independent landlords to know how much rent they can reasonably expect to charge while still filling their property relatively swiftly with a reliable tenant.

But first, why are rental prices under pressure?

Supply vs demand

Between 2010 and 2018, the residential rental industry was booming, with an annual growth rate of new developments of over 50% in 2019. Because the market was so attractive, these developments came onstream very close to each other, contributing to the flood of supply of apartments.

 

The demand from tenants didn’t grow as fast, and tenants became spoiled for choice, which gave them more negotiating power when it comes to things like rental price.

Struggling economy

Moreover, the economy has struggled in recent years, causing tenants to not be able to afford as much rent. Young South Africans are staying with their parents longer before being able to afford to move out, and it is a feature of this generation that tenants are willing to share with digsmates for longer. So for each property that tenants are interested in, fewer of them can comfortably afford the property.

Introduce a pandemic

Lastly, Covid-19 and its lockdowns dealt a further blow to the economy. With tourism grinding to a halt, holiday rentals flooded the market in search of long-term tenants, exacerbating the oversupply on the market. And tenant’s affordability also took a beating. In a survey HouseME recently conducted, 28% of tenants had their income negatively affected, and a further 21% feared for their income security. Only 10% of tenants admitted they could afford a rental increase, and 88% said they’d need to cut rent by more than 10% to get by. As a result, 62% of tenants are considering moving if they find a better rental deal.

 

These factors combined are putting pressure on landlords to reduce their price in order to retain tenants or find new ones before their property becomes vacant. But 85% of landlords surveyed by HouseME have bonds to pay on their investment property, so there is not that much room to play with. How, then, to arrive at the ideal price?

Step one: calculate your yield

First of all, you will need to consider your bond repayment and costs such as levies, taxes and rental agency fees. Ideally, you add about 12% buffer onto that for unexpected expenses such as maintenance emergencies and vacancies. This gives you your preferred price.

Step two: do some market research

Now, you’ll need to figure out if this price is within range of the current market ‘rental value’ of your property. Taking 20 minutes to do some research could save you a lot of money later on. Go to a popular online marketplace such as Gumtree or Property24, and enter the search criteria matching your own property. Browse the results to see what similar properties in your neighbourhood are charging. Ideally, you want to be at or under that average price. But beware, these listings typically only show you the asking price, not the price the properties eventually got rented for, so they may still be inflated.

Step three: test the market

Post your listing at your researched price, and see how many tenants respond. Typically, if you haven’t had more than 5 responses in the first week of listing your property (assuming you have beautiful photos and a detailed description), and a couple of viewings booked, this is a sign that your property may be overpriced. Act swiftly to adjust your price, and do so in large enough increments. The earlier you list your property, the more time you have to adjust before the occupancy date.

 

If you list your property with HouseME, they have a digital two-way auction that allows tenants to place competing offers on your property above or below the asking price, thus giving you a sense in real-time of what the current market value is.

Step four: reassess your costs

If you’re struggling to find reliable tenants at your preferred price, let’s look at how you can lower your price. Some questions you might ask yourself include:

 

  • Does the interest rate change allow you to pay less on your bond? Could you refinance your mortgage?
  • If not, how much could you afford to self-finance each month in case the rent doesn’t quite cover the bond?
  • Can you save costs on agency fees by switching to a digital renting platform like HouseME?
  • Do you have some funds set aside to self-finance your bond in the event of vacancy while you wait for the tenant who can afford the full price?

Work through these questions, and arrive at the minimum price you can afford to charge, bearing in mind that it may only be temporary – by the time this lease is up, the situation may have stabilised in your favour again.

Step five: negotiate

So you’ve found a tenant who is interested but wants to negotiate. If you’re already near or at your bare minimum, there are other concessions you could offer to sweeten the deal. For example, there might be some maintenance that the tenant would like done before moving in. Wifi is a big deal to many tenants, so you could offer to make the property fibre-ready. Perhaps allow for an additional couple of days before the month starts, so they can use the weekend to move in. Although these are costs, at least they are just once-off costs in exchange for a steady income.

 

A recent survey by HouseME revealed that tenants are extremely sensitive to upfront costs such as deposits and agency fees. You could consider switching to an agency with lower tenant fees, or if the tenant is in good standing, waive a portion of the deposit. The one thing you don’t want to compromise on, however, is the tenant’s affordability. Don’t skip the credit checks and vetting, because this could cause you more trouble further down the line.

Key Learnings

In conclusion, advertising at the right market price, and being open to negotiating, are key to finding a great tenant in a terrible economy. Although it may mean you need to compromise in the short term, supply and demand is bound to stabilise, as is the Covid-19 situation, so this is likely only a temporary situation.

 

If you’d like more help advertising your property, vetting your tenants, or getting your rent guaranteed, have a look at HouseME’s property management services and check out how we can make renting easier and more affordable for you.

 
Credits:

 


About HouseME: 

HouseME Founders Ben Shaw and Kyle Bradley

We’re on a mission to transform residential renting using technology and placing data-centric decision making at its heart. We’re committed to be the smartest way to rent, for landlords and tenants alike, making the whole process fair and stress-free. Register here and start renting smart. 

 

 HouseME’s Co-Founders, Kyle Bradley and Ben Shaw.

 


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