Coastal properties: Is playing in dual markets possible?
The landlord-tenant game is an entirely different animal in South Africa’s popular coastal towns. Landlords and investors realise the potential for significant rental income over the busy holiday periods, while acknowledging that good long-term tenancy, and the stable income, arguably holds more benefits for an owner. But can a landlord have the cake and eat it too?
Mary-Anne Nielsen, rental agent for Lew Geffen Sotheby’s International Realty in False Bay, says that in her experience, many landlords understand that the work involved with holiday lets is a full-time job and that it involves further financial considerations than simply the rental income to be achieved.
“Landlords need to weigh the pros and cons of holiday letting. On one hand the income generated may be fantastic but they have to furnish the property with not only furniture but crockery and bedding, and if you are going to charge a high rate the decor has to be of a certain standard. This alone can be a very costly exercise and you may not earn enough to cover these additional costs,” explains Nielsen.
She adds that it is difficult to find a longer term tenant once the holiday season is over since the rental market becomes practically non-existent during Cape Town’s winter months, with a furnished property being especially difficult to rent long-term.
One head, one hat
Grant Rea, rental specialist for RE/MAX Living in Cape Town, says that he is inundated with a flood of requests from landlords to find tenants for furnished properties after every holiday period. According to Rea, most owners soon realise that a stable long-term rental income is the best option, especially when faced with the demanding holiday market, or if the property does not achieve the returns envisioned due to too high a rate of vacancy.
Rea is adamant that the safest and most profitable course of action for a landlord over the long-term is to decide what market to operate in and stick to that decision. He adds that, in his experience, most long-term tenants will not be happy to sign a contract for 10 or eight months to give the landlord the option to rent out properties to the holiday market as it becomes really cumbersome and expensive for locals to secure a home during the holiday months. The other side of the coin is that it is almost impossible for landlords to secure the highest rental during winter months because of the slow-down in the rental market typically experienced during that period.
Do you want a stable income, or a holiday home?
While it is quite reasonable to say that secure long-term tenancy makes the most sense for an investor wanting a stable income from their property, John Quincey, MD of Lew Geffen Sotheby’s International Realty in Hermanus says that the majority of the Hermanus rental market consists of short-term rentals.
“Many of the owners are upcountry investors who let out the property on long-term rentals which obviously does not give them the opportunity to enjoy the property for holidays,” says Quincey. “For this reason most owners prefer to rent their property out over short-term periods to pay for the costs of the property with the benefit of being able to enjoy their holiday home when not in use.” He adds though, that this does expose the owner to potential losses if not managed properly; mismanagement could lead to high vacancy and the cost of the property potentially not being covered.
Janine van Heerden, rental manager for Seeff Hout Bay and Llandudno, says that in her experience landlords in the area are also keen to secure eight or 10 month lease periods primarily because they wish to take advantage of the property themselves during holiday periods. She does advise that clear communication with your agent remains paramount.
“Let your estate agent know well in advance what your intentions are and they will be able to advise you of a daily or monthly rate for your house during season,” she says. “When properties are advertised timeously they stand a good chance of achieving a ‘longer let’ during the holiday, thus eliminating some of the risk of the house being vacant.”
Have it all
Dinis Martin, COO for Seeff Atlantic Seaboard, V&A Waterfront and City Bowl, says that the most sought-after, popular South African coastal areas such as the Atlantic Seaboard and City Bowl, even as far as Hout Bay and Llandudno, enjoy very vibrant and diverse short-term rental markets.
“The market is in fact much broader than just a holiday rental market. There are scenarios of rentals of one, two, three and up to six months,” he explains. “That then leaves a wide range of options for the investor, so we do not often find specific leases where tenants have to vacate over holiday periods.”
According to Martin these markets occasionally produce the proverbial sweet spot: When an owner will find a long-term tenant who wants to vacation somewhere else so is happy to leave the rented property for the two months or so during the busy holiday period, giving the owner the opportunity to use the property for personal break-aways or holiday rental income, and then to return as a tenant during the off-season or winter period.
Martin cautions though, that all terms and conditions of the lease must be included in the lease agreement to protect all parties involved. “The terms of any lease, regardless of the rental period, should be agreed and contracted upfront,” he adds. “Tenants and landlords need to ensure the terms’ suitability is included in the lease to avoid any surprises.”
Using an agent, with market insight, has its perks
Wouter Pentz, Seeff Blouberg and Melkbosstrand licensee says that most owners who have decided to do short-term letting on a permanent basis have started managing it themselves with systems such as Airbnb. While this system is great, it might not always give the owner the market insight an experienced agent could. Case in point: Pentz is currently advising his clients to opt for long-term rental as this market is achieving great rental returns.
According to Pentz the risk with trying to operate in the long-term and holiday rental market simultaneously, or permanent short-term letting does not justify the increased return a landlord could possibly earn if the property is occupied as required.
“Too many tenants will be in and out of the property on an annual basis,” he explains. “Short term letting also means your home needs to be furnished. There is a bigger demand for unfurnished long term rentals.”
As an owner you need to ask yourself some pertinent questions before entering either of the markets:
- Are you financially able to carry the cost of not just the bond but utilities too, if a property should be vacant for too long?
- Do you want to use your property yourself for holidays over the busy peak season?
- Do you have the time, and motivation, to be available to holiday-makers basically 24/7?
- More importantly, do you have the cash needed to invest in the furniture, décor and other needs a holiday rental demands?
- Are you willing to settle for lower rent during the winter months if your property has been vacant over the holiday period and you need a stable tenancy urgently?
Your answers to these questions are important in helping you decide how to let your coastal property.
The bottom line is, unless you own property in the rental markets that lend themselves to extended short-term letting and tenants who are willing to vacation elsewhere you are unlikely to be able to operate in both markets.