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Factors affecting Rental Demand

Listed below are a few examples of factors that affect the rental demand for a property, which essentially has an effect on its investment potential.

Price

Setting the rental amount higher than similar rentals in a similar area often results in the property not being rented out in a timely fashion. Although a higher rental price would mean a higher rental income for the investor, it often isn’t worth the cost of having an empty unit when a suitable tenant isn’t found before the lease expires. With a broad variety of online property listings aspirant renters have a wealth of information at their fingertips, and will often “shop around” when they come across an area or complex that they like. This means that property that is priced too high in comparison with other property in the area is simply skipped over. But if the rental is set too low the landlord loses money – this is detrimental if the property is bonded as the owner would have to fund the shortfall out of his savings.  The rental amount, therefore, directly affects the rental demand. Reputable estate agents are able to give a comparative market analysis that has the owner’s best interests at heart – namely pricing the property correctly to rent it out in a timely fashion. But investors should always do their homework before buying property as an investment.

Location & Proximity to Amenities:

The property’s location and its proximity to major work nodes, public transport routes, highways, schools, shopping and leisure facilities and other amenities will have a large impact on its rental demand. The importance of lifestyle and convenience for working professionals and families is becoming increasingly more evident in the areas that they’re looking to rent in and what those areas include in respect of amenities and facilities. In relation to that, what the property or complex offers also has an effect on the net rental return. For example, if the complex has a pool and clubhouse facility this potentially raises the demand for a unit in that complex and allows for a slightly higher rental to be charged when compared with a property of similar specs without a pool or clubhouse. However, the levies are higher in complexes that have a pool, which affects the landlord’s net rental return. The same could be said for a neighbourhood community hiring a 24hour guard, with the guard’s wages falling into the direct costs category affecting the yield.

Over-capitalisation, where the purchase price paid for a property is greater than its real market value, can have negative consequences on the investor’s attempts to obtain a sound return on investment. The price ceiling of the neighbourhood/area of a potential investment property is extremely important to avoid over-capitalising. An astute investor will know and understand which areas to invest in and the financial homework required to make informed decisions regarding purchase price and location. Location and price appreciation go hand-in-hand!

Security:

The overall security of the property is another factor of high importance. Whether it’s an apartment in a secure complex with a guard or a freestanding house with an alarm system and electric fencing – security is a top priority for any tenant. Features such as a boomed-off street, a 24hour guard, trellidoors or ccTV will add value to your property and increase the demand for it.

Layout & Finishes:

The majority of South Africans are looking for a low-maintenance home with an open plan layout and modern finishes. The number of bedrooms, bathrooms and whether there is sufficient covered parking all play a vital role. The rest is then left up to the tenant’s personal preference- apartment or freestanding, gardens or balconies, ground or 1st floor, pet friendly etc. As the general condition of the property is usually the first thing that potential tenants will take note of, landlords should make a concerted effort to maintain their properties to a level that is satisfactory and habitable, especially with older properties.

In terms of whether to invest in an apartment or freestanding home, rental returns are higher on smaller properties and it is often easier to find tenants for one/two bedroom apartments than it is to find tenants for a four bedroom house. Tenants looking to rent are in the market for low-maintenance lock-up-and-go homes in secure communities, making sectional title units more popular than free-standing houses. Percentage wise, the rental returns decrease with an increase in property value. Buying several smaller properties as opposed to a larger and more expensive one increases rental return as well as spreading the investment risk.

Body Corporate & Managing Agents:

Complexes have become a popular choice for many South Africans because of the security and lifestyle benefits they offer. The management and governance of a Body Corporate/Managing Agent is advantageous to both tenant and landlord, and both parties are aware of the value of buying into or renting in a well-run complex with high-quality communal facilities.

From an owner’s perspective, maintenance costs are usually lower with a sectional title property as the maintenance and repairs to the interior of the unit, such a painting, carpeting, replacing bulbs etc, fall under the landlords’ care.  The exterior maintenance and upgrades (the structure) are typically covered by the monthly levies and attended to by the Body Corporate/Managing Agent.

Price, location, proximity to amenities, security, layout, finishes, age of property and the governance of a body corporate all have significant roles in the demand for a rental property.