First time buy-to-let investor?
Category Newsletter: Article
So you are now the proud owner of an investment property and will now be looking to capitalise on the demand for rentals in the area.
One of the first things to consider, is how much your monthly asking rental should be. Generally, as a ‘rule of thumb’ in South Africa, you would take the purchase price or value of the property and calculate 1% thereof as the monthly rental. Deposit requirements these days, fluctuate between one to three month’s equivalence of the monthly rental.
Say you paid R1.85m for an apartment, then your ‘rule of thumb’ rental rate would R18 500/month. This however, does not always work in practice as there are many considerations and aspects to take into account. In boom times, you could charge this rate and even higher, but under declining economic conditions, you would likely need to lower your rental expectations.
Some factors that affect the monthly rental rate include:
Economy – the state of the economy will directly impact the demand for rentals and rental rates. The better the economic conditions, the higher the rentals that landlords can charge. In tough economic circumstances however, rental rates tend to come down.
Rental stock available – rental rates are a direct function of supply and demand. When there is an oversupply of rental properties in an area, you would likely need to lower your rental expectations if you want to find a tenant. On the flipside, if there is a shortage of properties in an area, or even if it is a shortage of a particular type of property, then you are likely to be able to charge more.
Modern or old, renovated or un-renovated – the state of the property and the finishes will also play a role. So, the 1% rule tends to assume that you property is in a good state and current in terms of finishes. Higher rental rates are generally possible for new builds as these offer the latest finishes and may even come with extras such as heated towel rails, special flooring, a fireplace and so on.
Neighbourhood – each area is unique in terms of the rental rates that tenants will pay. Generally speaking, upper income areas tend to achieve much higher average rental rates for a property that might be similar to one in a middle-class neighbourhood. Similarly, a luxury house in a top end luxury neighbourhood might achieve a rental rate of 50%-100% more than in a mid-market neighbourhood.
Facilities and amenities – properties in high demand areas such as those close to schools and good transport networks or infrastructure can achieve higher rental rates. Similarly, properties close to the beach, with special views or those perceived to be conveniently located for easy access to business or commercial areas could also achieve higher rentals. This, simply because the demand for rental accommodation would be greater and tenants will be prepared to pay more.
Rental trends – rental trends such as for example the prevailing average rates in an area will also have a bearing on the rental rate that you likely to achieve. A starting point is to look at the online portals and the rates advertised for similar properties.
Ensuring that you attract the right calibre of tenants and that your property is fully occupied will mean that you are able to realise maximum benefit and returns on your rental investment. In today’s world of property rentals, the role of a skilled agent has become critical to assist landlords and investors to set their expectations at the right level, attract and vet prospective tenants and to manage the property and occupancy for the best possible outcomes.
Author: Coastal Property Group
