Almost two full years into the pandemic, it is safe to say that being caught in a survivalist state has changed the property investment game for renters, landlords and developers alike. The persistent reality of fluid employment, shrinking budgets and ever-increasing expenses has placed immense pressure on parties to streamline the costs that matter most to their quality of life.
With many tenants forced into being financial minimalists, landlords face the uncomfortable question of whether they should increase their existing tenant rates or not. As we go into 2022, rental rates remain almost flat, with a national average rental increase of only 0.4% across the board of rental categories countrywide.
Shanaaz Trethewey, CEO of RentMaster, rental collection specialists with a 20+ year track-record, shares her top 6 ways property investors and landlords can navigate the landscape in 2022.
Compensate for inflation
Landlords are facing two macro-economic pressures; increasing inflation and changing monetary policy. In order to compensate for the increased cost of maintenance to their properties that these forces create, it is imperative that property owners ensure effective rental collection and stringent budgeting, as compensating for increased costs by increasing the rental rate is less of an option.
Set your minimum rental rate carefully
Unfortunately, there is no exact formula to work out your non-negotiable minimum rental rate. However, a great place to start is to calculate your fixed costs such as your bond instalments and your rates and taxes to equal a baseline number. Keep in mind that most properties also have variable costs that need to be paid monthly such as property management fees, levies, and whether utilities like water and electricity will be covered in the rent.
For any landlord who has financed their property and doesn’t want to run into financial difficulty, I recommend coming up with the total number of fixed and variable costs and comparing this to other properties in the area and the rental index for the suburb.
If this rental rate is higher than the competition you need to be able to justify what makes your property more valuable to recoup the value. Alternatively, you can adjust your variable costs in your expenditure budget to ensure you can make all the required payments and not affect your credit score.
If your property is not financed by a bank then take the rental rates according to the rental index, levies and maintenance savings into account to find your baseline number. You should ideally also look at what similar property investments are returning to assess whether the investment is giving you the growth you want. To simplify the lives of our landlords RentMaster provides rental property reports which pulls this information together.
Pay attention to good standing ratios
In today's economy, every cent counts. As a property owner and landlord the good standing ratio as reported in rental payment monitoring - as supplied by TPN Credit Bureau - is a good way to measure how successful you are at collecting rent.
Good standing measures if rent was paid on time in the grace period - or in the month it was due and paid in full - thereafter rent is classified as paid partially or not paid. This ratio also tells you how people in your market are able to afford your rent. The quality of tenants also indicates the levels of affordability and how they are meeting their debt obligations. That is why debit order collections are certainly proven in this ratio; it shows that using this payment method over EFT, takes away the ability for tenants to give property owners the run around about when they will be paid.
Right now the good standing ratio industry norm is sitting at 80.34% (Q1 2021) as reported by TPN. Certain portfolios are falling below that, but if you are above that benchmark you know that you are performing in line with expectations. Also, if you are employing further strategies and are effective in your rental collection you may be higher, like with RentMaster our good standing ratio is 95% which is far above the market average.
Stay aware of the competition
Understand the vacancy rates in your area by reviewing other properties that are advertised. The key is to keep up to date with what your competition is doing and understand where you rank amongst them. You can plot yourself in line with the average rental for each rental band, or if vacancies are high in your area, you can deduce that securing a tenant will be challenging.
Maintain a good relationship with quality tenants
Beyond budgeting carefully having a fruitful relationship with loyal tenants will save you from the expense and potential loss of income involved in replacing tenants often. Furthermore, tenants who feel fairly treated are less likely to negotiate on price.
A large part of building this kind of relationship and trust is to be crystal clear on the rental agreement. Contracts and how well they fit the landlord and tenant play an important role in this initial relationship-building process. For example, tentative landlords may prefer month-to-month contracts as they allow for quick action on non-payment. There is also the mechanism of the rental collection and ensuring you have effective strategies to collect your dues – like collecting rent via debit orders.
Create opportunities for tenant control of costs
Landlords should create opportunities for tenants to have better facilities with the autonomy to control the costs that go with it so that tenants can adjust their lifestyles without it impacting the income generated from the property. Simple adaptations such as prepaid electricity meters, gas stoves, access to a backup power system during load-shedding and fibre internet all make your property more attractive. You can also provide the tenant with a maintenance plan for windows and gardens.
Also, do not use the deposit as your last month’s rental because data shows if you do this it decreases your chances of collecting rental as the lease comes to an end.
In conclusion, landlords looking to increase rent in this highly competitive market now run the risk of having a quality tenant move to an available property in the vicinity that they find more affordable. However, landlords who budget carefully, set their rate correctly for their particular case, keep abreast of macroeconomic trends and create opportunities that foster great tenant-landlord relationships should emerge in a prosperous position for all parties involved.