A vacancy is a substantial risk for a buy-to-let property investor. Without a tenant-paying rental, the buy-to-let investor is not receiving an income from the property, and must – in addition – fund the expenses associated with the property out of their own pocket. This can have a significant impact on the investor’s cash flow and the viability of the investment.
However, according to Paul Stevens, CEO of Just Property, common sense dictates that even the best property in the best area will not be tenanted every day of every year for the next 10 or 20 years. For this reason, says Stevens, it is crucial to understand the risk thoroughly and address it before purchasing an investment property.
Understanding the risk
A vacancy can be the result of a number of issues, and there may be a number of contributing risk factors, each of which needs to be addressed. Fortunately, with the right planning, each one of these risks can be addressed in advance to ensure vacancies are minimised and that a vacancy does not derail the investor’s investment strategy.
One of the very first aspects a property investor must investigate is the market demand in the area. For example, is the demand the strongest for entry-level properties or for secure units in a sectional title development? You also need to investigate the current developments and planned developments in the area to ensure similar units will not flood the market, as current and future developments are completed.
Speak to numerous reputable estate agents and letting agents in the area to establish the market demand in the area, the current and future developments in the area, the market-related rentals, and the average vacancy rate for the area, “all of which must be factored into your investment decision”says Paul Stevens.
Smart investors factor in a vacancy rate of 5% into their cash flow calculations, as a risk management measure, even if the current vacancy rate for the area is lower.
A vacancy may simply be due to the fact that the property is not marketed properly. It is advisable to use a reputable and professional letting company that already has a database of potentially suitable tenants, as well as the expertise and resources to advertise the property widely and to match your property with the right tenant. If your property is not marketed correctly, you may end up with a high turnover of tenants.
Using a professional rental agency will ensure that you find the right tenants, who are trustworthy, with good payment histories and solid references from previous landlords, and who can be expected to stay longer, pay regularly and on time, and look after your investment better.
Rental is too high
If you have done your research properly before buying a property, you will know what the market-related rentals are. However, if you cannot find a tenant at the market-related rental, consider reducing the rental on a short-term lease basis. Receiving a lower rental for three to six months is far better than receiving no rental income at all.
A vacancy may be the result of the condition of the property, if it is damaged or in a poor state of repair. For this reason, it is crucial to get a deposit from every tenant for the purpose of repairing damages caused by the tenant. Also make further provision in your cash flow for ongoing maintenance, and for the repairs – such as repainting and carpet cleaning – which must be completed before a new tenant can be placed.