Covid-19 compromises that landlords should consider

The Covid-19 Lockdown and resulting economic impact is expected to shift the rental market further this year with rental rates in many areas coming under pressure.

Rates have been in decline since December and according to PayProp, growth measured just 2.9% y/y for March, well below the inflation rate and is expected to worsen. Given the significant impact on salaries and wages, tenant distress is rising with almost 24% in arrears with their rental by end of April and TPN expects this to rise further for May and June.

Consequently, landlords in many areas are facing significant challenges. On the one hand, they may prefer for struggling tenants to exit, but on the other hand, it may be difficult to find the same calibre tenants. A non-paying tenant or vacant property can have a huge impact on a landlord’s yield and can quickly become quite costly.

Making certain compromises in these times, could help landlords mitigate some of the challenges and protect their rental investments. It costs money to replace good tenants and every month that your property stands vacant, is a financial loss.

Seeff suggests five compromises for landlords to consider in the post-Lockdown market.

1) Hold on to good tenants. The first prize for any landlord should always be to hold onto their current tenants. If you have tenants who pay on time and look after your property, then you should try to keep them. Landlords often think that replacing a current tenant is an opportunity to earn a higher rental, but there are costs involved in replacing a tenant and there is no guarantee that higher rentals can be secured in this market.

2) Offer a financial compromise. If your tenants have been struggling to maintain their rentals during the Lockdown period due to their incomes being affected and the chances are good that they will recover, negotiate a solution where you can offer some assistance, but the tenant perhaps also repaying some of the arrears. If feasible, negotiate an extension of the lease as this could give you a better chance to recover some of the arrears.

3) Drop the monthly rental. During a tough financial climate even the most diligently paying tenants can run into financial difficulties and they simply cannot maintain their rental rates. Consider dropping your rental rate slightly rather than having to incur more costs to secure a new tenant.

4) Keep your rental market related. If you need to fill a property in this market, then a market related rental is more important than ever. A high asking rental is often the top reason for a vacant property. Hence, landlords holding out end up having to drop their rate to fill the property. Rates vary with market cycles and in a downturn, growth and existing rentals often come under downward pressure, so get advice from a skilled agent about re-evaluating your rate.

5) Reduce the deposit required. Understandably, many good tenants may be strapped for cash and might not be able to come up with double deposits during this market phase. Landlords should take advice from their rental agents and consider a one or one and a half month’s depot. If necessary, a landlord could also consider taking a one-month deposit and raising the rent slightly to build up a bigger deposit buffer if necessary.