By Ben Shaw, CEO, HouseME, Smart Property Rental for Landlords and Tenants.
Reading Time: 3 Minutes
Investing in the first property that you’re going to rent out is a big decision. Tenants are hard to find, bonds need to be paid off carefully, maintenance can be a worry, and you’ve previously been scared off by the word “yield”. Never fear! We’ve compiled some helpful landlord tips on what to look for when making your first property investment.
Let’s firstly agree that you, as a landlord, want to make a return on your investment. In the property industry, this is called “yield”. It is what you earn in rental each year expressed as a percentage of what the property cost you. For example, if you earned rental of R50 000 in a year on a property that cost you R1 000 000, you would have earned a yield of 5%.
Yield is the single most important factor in a successful property investment – because rent received helps you pay off a mortgage, afford maintenance, and pay for renovations! But how in today’s world do you know if you’re getting the right rent? How can you increase your yield – and therefore your investment?
Let’s use the R1 000 000 property as an example. If you try to rent the property for R6 000 per month you should earn R72 000 each year – which would be a yield of 7.2%. But not all of this will go to you! If you choose to use a traditional letting agency, which charges between 8-12%, suddenly your R72 000 becomes R66 000. And if the agent cannot find a tenant for a month and so suggests dropping your price by R500, you’ve lost rent by this price drop AND for the month that your property was vacant! So in this – unfortunately rather common – example, your actual yield was:
R5 500 x 11 months – agency fee (8.3%) = R55 000 (or 5.5% out of a required 7.2%).
But if an agency cannot guarantee that there will be no vacancy, and through its fees will reduce your yield, why not do it all yourself? Why pay away your investment return? Most landlords have two good answers: it’s a lot of work managing a tenant, and there is significant risk in placing the wrong tenant.
So let’s have a look at these two concerns. Managing a tenant can be stressful, especially if you don’t have a strong lease in place. A strong lease helps enforce rules, establishes deposit and rental payment dates, and provides for a range of eventualities in terms of damages or possible lease renewal. It doesn’t mean that the tenant always pays every month, but is the basis of demanding it!
Placing a good tenant is equally challenging, unless you are set up to perform credit screening, reference checking, and affordability analysis. And then you still have to collect rent for the year! Using a payment collection system with a debit order can help with this, but is often expensive. Which is why many landlords decide to rather pay an agency to manage the tenant and their rental collection each month.
When HouseME manages a property, we solve all of these challenges for you. In fact, we go a step further and even offer to guarantee your rental. We’re that confident in our process, our technology and our tenants.
Back to the R1 000 000 property example; this time listed with HouseME. You asked for R6 000 rental per month and just like the agency, HouseME identified that that tenants simply were not interested at that price point. Because we have the dynamic PlaceME® tool, tenants automatically were able to inform us what they would pay to rent your property, and we received a bid within three days ahead of the lease start, for R5 700 rental per month.
HouseME credit checks and screens all prospective tenants, and we have a rental guarantee available to further mitigate the potential risk of non- or late-payment, for 1%. Taking into account our fees of 2.5% for the payment collection, lease management and tenant screening (what we call the HouseME Home Package), your yield would have been:
R5 700 x 12 – HouseME fee (3.5%) = R66,000.
This is R10,000 more than if you had used a traditional estate agency, and is precisely the calculation you should be most interested in if you’re thinking of becoming a landlord. We know it’s a big decision, and we’ve designed our technology to help property investors maximise their yield, while minimizing their risks.
About The Author:
Ben Shaw is the CEO and Co-founder of Proptech Company, HouseME, Winner of Seedstars World’s Best Start-Up Company in Cape Town.
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HouseME’s Co-Founders, Ben Shaw and Kyle Bradley.