Rental deposits may result in your tenant not paying their rent.
27 October 2016
Yes, the heading is correct, the historical deposit that gave Landlords peace of mind and provided security for any damages may now be the worst idea.
Having concluded over 10.000 leases all with at least one month's deposit and preferably more, this new way of thinking certainly took me by surprise. In fact, if you were to ask me what is the most important aspect of property management,I would have advised securing a deposit before the tenants move in to be top of the list.
So what has changed:
By monitoring tenants and having access to far more data, we now know far more about tenants behavior.
The reality is that even quality tenants battle to come up with a deposit.They will only get their previous deposit back after some weeks and often there will be amounts deducted. We now know that many tenants resort to taking a loan for a deposit.This is where a problem may come in. An agent may push for as high as possible deposit but if this needs to be borrowed then this can take a tenant that was coping and push them to a point that they now start defaulting. Simply put, a double deposit that comes from a loan really does not assist the Landlord with obtaining his monthly rent.
Every month a property sits empty the loss is approximately 8% on the ROI. If the property is sitting empty because a quality tenant was not able to come up with a sufficient deposit then it would perhaps be worth considering alternatives.
One may argue that a higher quality tenant would not normally need a loan. What we now understand is that the average tenant is trying to service 8 CPA accounts and 3 NLR accounts. On average this amounts to a monthly repayment of R10.620. This represents 43% of the average tenant's income which is R24.442 after tax. Electricity alone, which previously amounted to only 6% of the rental amount, now accounts for a sobering 22% of the rental amount. Of course, all the normal pressures on consumers have only compounded the issue with petrol, food and many other expenses far exceeding CPI.
Data also shows us that high-end rentals are not immune from these factors with tenants' performance actually decreasing with rentals in excess of R15.000 P/M.
The question that all of this poses in my mind is "how do we protect our Landlords and not expose them to the risk of "no deposit?" while also providing far more protection.
Payprop Capital which in underwritten by RMB structured insurance has introduced a groundbreaking product. The product covers the Landlord with a deposit of 2.5 x the rental value. This covers one month's rent and then a further 1.5x for any damages or outstanding accounts. The tenant, rather than pay a deposit, pays a monthly premium to the insurer. This, of course, protects the Landlord but at the same time reduces pressure on the tenant. The result is that properties are rented quicker and tenants are able to meet their rental obligations.
The cost of the extra cover is paid for by the tenant and having implemented the extra cover across our portfolio has enabled us to really increase our Landlords peace of mind.
Shaun du Bois
Principal Just Property Pietermaritzburg
Master Practitioner in Real Estate
Selective data from Payprop