The High Cost of Tenant Vacancy

Astute property investors know just how valuable a comprehensive investment strategy is to the long-term success of their prospective investment. These buyers factor a number of different costs into their investment calculations before putting pen to paper on a new buy-to-let property to ensure a positive cash flow. These costs include, but are not limited to, the initial transfer and bond registration fees, deposit, conveyancer and administration fees, monthly bond repayment, costs involved in the ongoing management and maintenance of the property, insurance and utilities. Inadequate research into the costs associated with purchasing and owning property can have a negative effect on the investment’s rental return.

One cost investors often overlook is tenant vacancy.

Tenant vacancy is an investor’s worst nightmare! Simply put, passive income cannot be earned on a property that’s sitting empty. It goes without saying then that one of the largest factors affecting rental return is whether or not the property is occupied by a paying tenant. If there is no rental coming in every month the investor has no choice but to fund the rental shortfall from their own pocket.

It’s crucial that an investor makes provision for tenant vacancy in their financial plan. A general rule of thumb when calculating a property’s investment potential is to factor in a vacancy rate equivalent to ± 5% to ensure that there is adequate personal cash flow available should the property remain vacant for an extended period of time. The vacancy cost should also take into account the amount of time estimated to find a suitable tenant for a particular property based on demand in the area and similar property turnover.

For example, there is a greater number of prospective tenants for a 2 bedroom townhouse in Northriding with a monthly rental of R7000 than for a furnished 1 bedroom penthouse of R18 000 in Sandton. Provided the property is in good condition, the rental is market-related and the area is not saturated with many similarly-spec’d properties, finding a quality tenant should not be difficult for the townhouse in Northriding. The penthouse on the other hand is directed at the smaller niche market of high-earning corporate individuals working in the Sandton area; therefore finding a tenant that earns three times the monthly rental is estimated to take longer and may require a more aggressive approach to marketing and advertising before the current lease agreement ends. Although a high-risk property may bring in higher returns, the returns on a low-risk property are oftentimes more reliable even if they are lower on a month-to-month basis.

Vacancy Rate

Before buying in a particular complex, estate or area an investor should determine the vacancy vs occupancy rate from a reputable area agent and use that as a metric for determining the demand and rentability of the property.

There is often much to be said about a complex with a high volume of vacant units. Investors are advised to investigate whether any of the following are true of the complex/estate:

  • Tenant vacancy is high because the scheme is not well-run by the managing agent/body corporate
  • The rentals are not market-related, general disrepair and poor condition of the complex/estate
  • Unreasonably high levies
  • Proximity to undesirable facilities like power stations and rubbish dumps
  • Difficulty in accessing public transport routes.

Many of these can also be applied when determining the investment viability of a particular suburb or area.

Reasons for Vacancy:

Inadequate Advertising & Tenant-Screening

Landlords should begin marketing their property well before the current tenant vacates, giving them ample time to find, screen and place a new tenant to avoid an empty unit. Advertising the property on a number of different property platforms will reach a greater audience of potential tenants. More so, utilising the services of a reputable estate agent such as Etchells & Young is a valuable resource. Their in-depth market knowledge and experience, wide database of potential clients and access to popular property portals like Private Property and Property24 are advantageous to finding and placing quality tenants in as short a time as possible.

Furthermore, established rental agents follow a comprehensive tenant-screening process involving affordability, credit history and reference checks. This process minimises the risk of vacancy; placing quality tenants that pay in full and on time.

Internal research shows that one of the leading reasons tenants break their lease is due to affordability issues related to rising household costs and poor credit performance; vacancy is oftentimes avoidable if the necessary procedures are followed in securing the tenant.

When tenants break their lease early, the high tenant turnover rate causes investors to suffer financially whilst a new tenant is placed. Investors should therefore make finding and securing quality tenants a top priority, and this can be done with the help of an established estate agency.

Maintenance & Repairs

The general condition of a property can play a large role in tenant vacancy – aspirant renters will not want to live in a property that’s not well looked after or clean. It’s absolutely vital that the deposit is collected from the tenant prior to occupation to cover any damage or wear-and-tear to the property made by that tenant during their lease term. If maintenance and repairs are needed before a new tenant can occupy the unit, such as repainting or carpet cleaning, the time required to complete the repairs while the property stands vacant needs to be taken into account as this will temporarily affect the investor’s cash flow. The longer the maintenance and repairs take to be completed, the longer the property sits without a tenant.

It’s absolutely vital that serious investors make provision for tenant vacancy in their financial plans as a risk management measure. This will improve the viability and success of their property investment in the short and long term.

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