How to Avoid Vacancies and What Happens if the Rental Market Starts to Soften?
I was recently asked by a client what they should do if the rental market begins to soften and tenants become harder to get? As such, I thought I’d expand a little on this topic and discuss some of the options available.
First and foremost, it is worth noting that we only provide packages for clients that are located in areas which have low vacancy rates. As a rule we don’t like to invest in a suburb that has a vacancy rate of above 3%. This ensures that we are at less risk than other suburbs with higher vacancy rates.
We also look at other factors to mitigate vacancy risk and lessen periods without tenants.
Some of the key initiatives that we employ are as follows:
- Using experienced and reputable rental mangers who know the area in which the property is to be leased, who have also had experience with dual occupancy properties, and also who has had experience with the product of the builder that produced the property.
- Adequate lead in and advertising time prior to the dual occupancy / auxiliary being handed over. By effectively managing the handover process and engaging the property manager as early on in the process as practicable, we are able to ensure that the property manager has adequate time to advertise and look for suitable tenants at a good market determined rate. This means there is less time between handover and tenants moving in to the dual occupancy property.
- Avoid investing in land located in large estates which have a high percentage of investors, and large numbers of lots registering at once. Or within an area which has a large number of comparable rental product coming on to the market at once. We try and avoid having investors located in areas which have oversupply meeting the market. Whilst the oversupply is usually only temporary and corrects itself over time, it is worth trying to avoid it where possible. As a rule we prefer small infill style developments as opposed to large green field developments, and where possible developments which have restrictions on the number of dual occupancy / auxiliary properties allowed.
- Know your suburbs and know the demand. Know the demand for dual occupancy / auxiliary rentals. We know the suburbs which our clients are investing in. We know what the rental demand is like before clients purchase a property. We speak regularly with our expert property managers to ensure that we can provide accurate rental appraisals and know when there are signs of too much supply in certain suburbs. This allows us to avoid having clients invested in suburbs which could lead to vacancy periods.
- Know the comparable product. We are experts in dual occupancy / auxiliary and duplex product. We know what the comparable product on the market place is and how much demand there is for it. For example, many of the dual occupancy properties that we provide have a 1 or 2-bedroom auxiliary or second dwelling on them. The areas in which we provide these have very small amounts of similar product available. If we were in the CBD there would be hundreds of comparable products with large numbers of one and two-bedroom apartments or townhouses available. But in the radius of 15-30km from the CBD where we have our investment product available, there is very little supply comparable to the auxiliary dwellings. This means the vacancy rates are very low and they are always in high demand for the dual occupancy / auxiliary and duplex investment properties.
Now that we’ve discussed some of the steps that we take to try and mitigate the risk of prolonged vacancy periods, let’s discuss what steps could be taken in the event of a softening rental market. It’s worth noting here that rental markets, like property sales markets, are often cyclical, and given adequate time will generally correct themselves. The rental market is fundamentally dependent on demand and supply, and with demand and supply of property tending to rise and fall in cycles this is transposed onto the rental market. So, if the dual occupancy property is located in a suburb which has good investment fundamentals the soft rental market should only be short term.
Should you reduce rent in the short-term to attract a tenant?
Now, let’s look at whether you should drop your rent slightly to get a tenant in if the market is starting to soften. I have prepared an example below regarding reducing rent. In the below example, we have a dual occupancy property which has a total combined rent of $700 per week.
In the yellow row, we look at a combined reduction of $20 per week over a 52-week year. The difference for the year is $1,040 which works out as an equivalent loss of 1.48 weeks rent. Therefore, if it is going to take longer than 1.48 weeks to rent the property for a 12-month lease at $700 per week, the investor would be better to reduce the rent by $20 per week.
In the blue row, we look at a combined reduction of $40 per week over a 52-week year. The difference for the year is now $3,120 which works out to an equivalent loss of 4.45 weeks rent. Therefore, if it is going to take longer than 4.45 weeks to rent the property for a 12-month lease at $700 per week, the investor would be better to reduce the rent by $20 per week.
|Weekly Rent||Annual Rent||Reduction Amount||Reduction Amount Annually||Annual Difference||Equivalent in Weeks|
|$700||$36,400||$680 (-$20)||$35,360||$1,040||1.48 Weeks|
|$700||$36,400||$640 (-$40)||$33,280||$3,120||4.45 Weeks|
So the above table shows that over a short period such as a 12 month lease, it can be worth dropping rent by small increments in order to get a tenant into the property. Please note that the above is simply an example used to make a point and that individual situations would need to be looked at carefully to ascertain the best course of action.
In summary, there are ways of mitigating the risk of not having tenants in your property, with the most important being to choose an area with a low vacancy rate and solid investment fundamentals. A good knowledge of your suburb means that you can make a sound investment decision knowing what the potential risk factors are. In some instances, it may be necessary to reduce rent slightly in the short-term to entice a tenant for your investment and avoid having weeks with no income.