Advice and Opinion

How landlords can avoid rental defaults

Budget Finance Generic

Like most other consumers in SA, residential tenants are under considerable financial pressure at the moment, and battling to meet all their commitments. And the longer this situation continues, the more likely it becomes that there will be an increase in rental defaults, says Greg Harris, CEO of Chas Everitt Property Rentals.

“At the moment, landlords with tenants in place are not having too much trouble, especially if their properties are professionally managed. As the latest TPN Rental Monitor shows, an average 84% of tenants are still in ‘good standing’, which means that they are paying their rent in full, even if some are paying later than due date”.

“However this may not accurately reflect the financial position of most tenants, because rent tends to get paid as a priority, and landlords will generally not be aware if an increasing number of other bills are not getting paid – until the day comes when even the rent cannot be paid.”

The deteriorating credit profiles of many tenants are, however, becoming evident to landlords and to managing agents currently screening new tenants, he says, and this is also confirmed by the latest TPN credit profile analysis. This shows that among active tenants, 4,2% shifted from having an “excellent” or “good” credit profile to having just an “average” profile in the 12 months to end-October 2016.

Closer analysis of the TPN figures also shows that the “good standing” percentage is already much lower than the national average in certain rental price categories and in some regions, he says.

“In the under-R3000/month rental category, for example, only about 76% of tenants are currently in ‘good standing’, and in the over-R25 000/ month category things are not much better, with only about 77% being in ‘good standing’. Also, the ‘good standing’ percentages in the Free State, Gauteng and KwaZulu-Natal are all slightly lower than the national average of 84%.”

Harris says all this underlines the increasing need for professional rental property management  – which begins with an extremely thorough screening process to help landlords lower the risk of renting to someone who is already sliding deeper and deeper into debt.

“On the other hand, the TPN figures indicate that there are some excellent opportunities now for landlords in the R7000 to R12 000/month category, which currently has an 88% ‘good standing’ ratio – although once again, professional help is to be advised when investors are seeking the best specific areas to buy in.”

He says a knowledgeable agent with their finger on the pulse of the market will be able to identify the localities with the strongest tenant demand, lowest vacancy rates, and highest average rents and escalation rates – all of which can make a really significant difference to your return on a rental investment.

“In KZN, for example, the average rent is currently around R6400/month and the average annual escalation is around 4%, but we can direct clients to potential investments that are performing much better than this.”