Landlords are in the business of making money while tenants want a nice place to live for as little rent as possible. As a result, there is a natural tension between landlords and tenants that is difficult to navigate.
The dynamics of supply and demand play the largest role in determining which side gets the better deal. When the supply of rental units is abundant, there is downward pressure on rents, and rentals tend to be more affordable.
When rental units are scarce, rents go up and become less affordable. However, there is a limit to how high rents can go because more and more tenants opt out of renting and buy instead. (If you would like to learn more about this phenomena, I refer you to the article To Buy or Rent Singapore Property, That is the Question.) While the relationship of supply and demand is the primary determinant of rental prices, there are three steps that market players can take to strike the proper balance between landlord profitability and tenant affordability.
- Engage competent rental agents;
- Benchmark the home’s rental numbers against that of the market;
- Structure a lease agreement that is fair to both the landlord and the tenant.
Engage competent rental agents.
If you are a potential renter, engage a professional agent to represent and protect your interests. The agent’s commission comes from the landlord so the cost to you is nothing. More importantly, though, you get the help of someone who can find the right home in a market replete with duplicate and ghost listings. Furthermore, they can protect your interests by negotiating the right price and documenting the home’s condition.
If you are a landlord, there are agents in the market who are experts at serving owners of rentals. They know how to price rentals, identify good tenants, and keep the homes occupied. They also know how to identify correctly-priced properties to add to your portfolio. Finally, the good agents know how to help you manage your properties in a cost efficient way.
Benchmark the home’s rental numbers against that of the market.
The landlord’s primary interest is rental yield, which is equal to the annual rent minus expenses and taxes divided by thee purchase price.
The first thing a landlord can do to achieve a good rental yield is to purchase the property at a good price. The purchase price remains the basis of the calculation of the rental yield until he or she sells the property.
The second thing a landlord can do it to improve the rental yield is increase the rent. While market forces restrict how much rent a landlord can charge, he or she can improve the rent at the margins by providing a home that is above average to its peer group in terms of condition, view, orientation, and amenities.
The third thing a landlord can do to improve the rental yield is keep tenants in the home. Every month that the home is unoccupied is a loss of a month’s worth of income.
Finally, the landlord can try to cut expenses, but be careful. If the home falls into disrepair, it may be more difficult to earn the same rent next time, especially in Singapore’s declining rental market.
Unfortunately for landlords, there is nothing he or she can do about the taxes. However, a skilled real estate agent can certainly help with buying the rental property at the right price, maximizing the rent, and finding cost-efficient ways to manage the property.
For those potential renters who have an agent who can negotiate, there are opportunities to be found in the rental yield formula. Even during a down market, there are landlords who have strong rental yields who might agree to discounted rents because they still stand to earn above average rental yields. For example, a quick query in the Investment Tracker module in the SRX Analyzer app finds twelve projects with rental yields above 5% during the last year. One building has a whopping rental yield of 13.3%.
The reason for these high rental yields could be that the rental units were purchased many years back at an advantageous price, either because of a down market, a favorable intra-family transfer price or good negotiations. As a result, because their denominator in the rental yield equation is low, they can earn an above-average yield even if they rent at a lower rate.
As the nearby graphic illustrates, it is relatively straightforward to identify when the rental yield of a home is above average for the area. Simply calculate the gross rental yield using the purchase price of the home and its current X-ValueTM. Then go to facebook SRX Singapore Expat Rentals to get the rental yield for the home’s planning area or HDB town. If the home’s gross rental yield is above average, then your agent should have a good shot at negotiating a more favorable rent.
Structure a lease agreement that is fair to both the landlord and the tenant.
In structuring a fair lease agreement, it is important to recognize that the landlord has a right to protect the home while the tenant has a right to use the home without being placed in a financially precarious position. There are too many stories of tenants who don’t pay rent on time and abuse the premises. At the same time, there are too many stories of greedy landlords who cut corners on the maintenance and force tenants to sue them to get their security deposits back.
As is true in any legal relationship, it is essential to set the rules of the relationship before consummating the final lease agreement. At a minimum, the lease agreement should establish the terms of the security deposit and other pre-payments, due dates for rental payment, deductibles for maintenance, and circumstances in which the lease can be broken prematurely. A common complaint among tenants is that landlords believe the security deposit belongs to them and is nonrefundable. Too often, landlords try to retain the security deposit by claiming that money is owed to them for repairs. The best way to guard against this situation is to document the home or commercial property with a virtual video by v360property.com. Many rental agents use this firm to record the property’s conditions so that there is no dispute.
Operating in the rental market isn’t for the faint-hearted. It can be unpleasant for both sides. Therefore, I would recommend that whether you are a landlord or a tenant, enlist the support of a trusted agent to protect your interests so you can stay above the fray.