Rental Value: What Is It & How to Increase It?
Category Market Insight
What Is Rental Value?
Rental value is the fair market price to rent a property. This is always influenced by current market conditions such as supply and demand. In addition to the overarching market dynamics, the specific features of a property influence rental value. East facing properties are typically more desirable than west facing properties but even this rule of thumb is dependent on location. For example, in Cape Town's Southern Suburbs the east-facing versus west-facing debate is mitigated by the fact that west-facing windows may enjoy stunning views of Table Mountain despite not getting the most morning sun. Similarly, south-facing properties are often worth more in Cape Town than north-facing ones because they overlook the ocean. Determining rental value is both a science and an art. It requires raw data on similar properties' rental prices and occupation rates as well as a keen ability to appraise the unique feature combinations of a property.
What Improves Rental Value?
Just as there are identifiable features which determine the rental value of a property, there are ways to improve it! Let's take a look at a step-by-step method for improving rental value:
- Identify the features of the property which cannot be changed. These are the location-specific features like a suburb, if it's a ground-floor or a top-floor unit if it's east-facing or west-facing, and so forth. There is no point in focusing on these factors, but it is important to consider them for step 2.
- Consider the area's ceiling price for rentals. If the most luxurious apartments in an area with the same number of bedrooms, bathrooms, etc. in the suburb or block are fetching a specific price then investing on renovations to match or exceed them is probably a bad idea.
- Eliminate the features which you can change but would not yield a return on investment (ROI). For example, improving the natural light in a room is a great thing but if it comes at the expense of cutting down a feature tree, then the nett ROI will not necessarily be worth it. (Figuring this out is a lot easier with the help of who understand appraisal as well as zoning laws).
- Hone in on the features which you can change and may yield an ROI. An outdated bathroom, chipped paint, or scuffed kitchen countertops will certainly dissuade tenants from taking occupation... Investing in routine maintenance and updating the interiors of a property is a great place to start, just be sure not to overinvest.
- Ask your rental agent about professional photography. More so than ever before, tenants are finding places to stay online. If the photography doesn't present your property in the best light then you will lose potentially great tenants with a bad first impression.
What Is a Fair Rental Value Increase?
According to the Centre for Urbanism & Built Environment Studies (CUBES) at the University of Witwatersrand a 10% increase per year is considered reasonable. However, real-world data shows that this is not necessarily the case. In fact, during the financial strain caused by the COVID-19 pandemic average rental prices in the Western Cape saw negative growth for the first time in over a decade. Figuring these things out is a delicate balancing act and considering human factors is vital.
Rental Value Bottom Line
The bottom line of getting a viable rental income from your investment properties is the value provided to your tenant. That means, a viable rental value is only as much as tenants are willing to pay. Professional leasing agents have access to real market knowledge and insights which can be instrumental in guaranteeing occupancy. They will know which price points for comparable properties are not attracting quality tenants and they can share this information to advise you.
Author: Paul Wasson
