Tenant screening the new name of the buy-to-let property game
Specialist tenant screening has become a priority for landlords and estate agents
Where rent collection and evictions were the primary pain-points for landlords in the past, it is now finding quality tenants. This, together with ever-escalating property costs, is eating away at their profits in an environment which does not bode well for rental prices.
It is, therefore, no surprise that risk avoidance is the new name of the buy-to-let property game, according to the latest TPN Residential Rental Commission survey. More than 50% of landlords and 35% of estate agents surveyed felt that finding quality tenants was their number one problem.
Property management solutions company Mafadi Property, which manages about 10,000 property units, describes quality tenants as respectful, responsible and paying their rent on time, every time.
According to one Johannesburg landlord, he turned down three applications for his townhouse due to concerns that the tenants would not be able to afford the property, for which the rental had already been lowered to attract quality tenants.
“In the past, rent collection was singled out as the primary pain-point for landlords. Nowadays, specialist tenant screening has become a priority. It is not about placing the first applicant but rather the best applicant,” Michelle Dickens, MD of TPN Credit Bureau, says. On the plus side for seekers of accommodation, it is a tenant’s market, Dickens says.
Modicai Mnculwane, chief operations officer at Mafadi, says in the current buy-to-let market quality tenants can bet on staying only in the best buildings. They value high-speed internet and security most when looking for good properties, he says.
Dickens says estate agents are reporting a lack of rental stock from their main customer base — landlords with fewer than 10 buy-to-let properties. Deeds data show that almost 99% of property investors have fewer than 10 leases. Microlandlords — defined in the survey as those with between two and 10 investment properties — report that double-digit increases in municipal rates, taxes and levies are eroding their profits.
In addition, FNB’s January Property Barometer paints a muted picture of rental prices in the near term. According to FNB property analyst Siphamandla Mkhwanazi, lower rental price increases were recorded across all the major provinces in the third quarter of 2019 except in KwaZulu-Natal. Rental increases are still the highest in the Western Cape at 6.6% year on year in the third quarter, compared with 1.8% in Gauteng.
The muted demand from tenants and a surge in the supply of new flats have been responsible for the downward trend in rentals, Mkhwanazi says in the barometer.
Dickens says landlords have listed ever-escalating property costs, including repair and maintenance costs, as yet another challenge in the TPN survey. While many leases provide for the landlord to pass the costs of these increases on to tenants, this leaves little room to increase the base rental, she says. Dickens adds that while the overall cost of renting has been increased for tenants, the profits landlords make are marginal as the increase mostly goes on recovering the higher property expenses.
According to her, microlandlords are now looking to cut expenses by managing their properties themselves or limiting repairs and maintenance as estate agents charge varying commissions for placing tenants. These commissions include a tenant placement commission which can amount to 8.3% of the annual rental; monthly property management fees; a lease or administration fee which the majority of agents charge but is passed on to tenants; inspection fees; credit check fees (to ensure the placing of quality tenants); and repairs and maintenance surcharges.
Dickens says landlords are running lean portfolios where literally every expense must be carefully considered. She advises landlords to rather hold out for a quality tenant than incur the loss of rental income and the legal expense of a squatting tenant. “As always, legal expenses are best avoided. Steer clear of unnecessary expenses and focus on selecting the right tenant,” she says.