Here’s how zero-deposit rentals earn landlords MORE per year
Traditionally, when renting out a property, a landlord would charge a tenant for the first month’s rental and a deposit equal to the first month’s rental prior to giving the tenant occupation to the property. The difficulty with this model is that it is affecting the growth of the residential property market; not so much from an affordability perspective, but more from a cash flow perspective.
The vast majority of rentals are concluded by estate agents on behalf of landlords, and the tenant’s affordability is calculated on their gross income. For example, if a tenant is renting a 1-bedroom apartment for R6,500 per month, they would need to earn a gross monthly income of three times the rental amount i.e. R 19,500 per month. This is the same formula that the banks use in order to qualify prospective buyers for a bond. The difficulty is that before a tenant can move in, they would have to pay a lease fee of R1,000 to the agent, a deposit of R6,500, an electricity deposit of R1,000, the first month’s rental of R6,500, and, in some cases, a key deposit of R500. That is a total of R15,500 that needs to be paid by the tenant, who is only earning a gross income of R19,500, which still needs to be taxed. This is hardly affordable at all for a tenant who still needs to get through the entire month with no money for basic items like food, groceries and petrol.
Landsdowne Property Group rents and manages residential properties on a large scale for a number of listed property developers. When renting out and managing over 1,700 apartments in the same development on behalf of a single owner it goes without saying: the higher the occupation, the happier the owner.
“One strategy to achieving a higher occupation that has worked wonders for us is charging ZERO deposit,” says Jonathan Kohler, CEO of Landsdowne Property Group. “We are not only placing tenants more quickly than usual, but we are actually able to charge a higher than market related rental which improves our clients’ yield.
In keeping with the above example, units that that would usually rent for R6,500 are now renting for R7,300 with zero deposit. Even with an increase of R800 per month, in this price sensitive part of the rental market, tenants would rather pay R7,300 per month than outlay R15,500 upfront. If you think about it a different way, the extra R800 per month over a 12-month period gives you R9,600 extra for the year, which covers what your deposit would be and more.
The argument from a landlord’s perspective would be that the deposit is held to offset any damages in the apartment caused by the tenant.
“I have found that placing a tenant that has the affordability but, more importantly, the accountability is a much better guarantee of a tenant looking after your property instead of holding a deposit,” says Kohler. “For example, a young professional who works for a bank, understands their obligation to pay their rental on time and understands what will happen to their credit record and borrowing ability should they damage the property and not return it to its original state. A judgement against a tenant’s name will remain there for 30 years, and if you have done the correct credit checks, the potential tenant has affordability and is a professional working for a respected corporate, this is a far greater security than having a deposit in place.
“The question that I would like to pose to landlords is, if you could charge zero deposit, get a higher rental return and have your property occupied sooner, would you not take the chance? More importantly, if you are a tenant, should you not be asking your landlord why they are asking you to pay a deposit? In my opinion the rental market’s accepted norms are being challenged and are changing rapidly. Landlords need to adapt with the times, or risk having their assets generating no rental income.”