Setting the Right Rental Price

Sweat your assets, they say. Property is arguably one’s most valuable investment and asset, and for it to realise its full potential, it needs to be both put to work and cared for. Regardless of whether it’s a beachfront apartment or a mountain cottage, that usually means some sort of rental arrangement, especially if you’re not living in it yourself. That, in turn, begs two questions:

• What type of rental is it: fully furnished short-term, holiday lets, or medium- to long-term arrangements that could be partially furnished or unfurnished?
• How can you set the rent at a rate that is reasonable and offers both the tenant and you the best bang for your buck?

Either way, a carefully calculated rental price ensures profitability, attracts the right tenants, and reduces the risk of vacancy. In this article, we’ll look at the pros and cons of rentals at each end of the spectrum, and unpack what’s involved in setting an appropriate rental rate. We also include the important value-adds that rental agents offer property owners.

The rental pricing formula: balancing market, property, and profit

As with most things, start by doing the hard yards. Setting the optimum rental is an art with a hefty dose of property science, combining an understanding of market trends, what makes the property pop and, of course, financial sustainability.

Market research

Start by doing your homework. Regardless of the type of property you’re planning to rent out, the following principles apply

• Compare the going rents: Use platforms like REMAX , Property24, or Private Property to benchmark similar properties in your area. For short-term and holiday rentals, check out platforms like Booking.com, Airbnb and LekkeSlaap.
• Monitor vacancy or occupancy rates: If there seems to be a surplus of comparable properties or units, that tells you that the rates are too high.
• Understand what drives demand: For holiday rentals, sea or mountain views, beach access, and nearby activities will also influence where to pitch your price. Combine this with understanding what lies behind neighbourhood trends. This is where the expertise of a local agent will help – trends also influence prices.

The basic formula to cover costs

With the insights from your research showing what the market is likely to support, it’s time to get a bit more technical. The rent should ideally cover your basic costs (we’ll look at these next), allow for unforeseen events, and yield a profit. As a baseline, the ideal rental income should cover at least the following:

• Bond repayments – if the property is financed
• Rates, taxes and/or levies
• Property insurance
• Maintenance – an amount usually held in reserve
• Fees to the managing agent (if applicable)

Based on this list, the formula for working out the ideal basic rent would be as follows:

Bond + property costs + maintenance contingency + agent fees + profit margin = ideal rental amount

The market might not always support your ideal rental amount, which is why it’s so important to choose your investment property wisely. Working alongside a reputable real estate professional will be invaluable to help you spot the profitable investments from the duds.

Now that we have that covered, let’s look at the other factors that affect each of the rental types:

Long-term rentals

In some respects, long-term rentals are the simplest. To attract tenants, protect your property, enhance its value, and increase tenant appeal, owners often include value-adds such as:

• Excellent condition and quality finishes: Renovated kitchens, modern bathrooms, and a fresh coat of paint to boost perceived value.
• Extras: Pools, braai areas, and gardens can command premium pricing in family-oriented suburbs.
• Environmental and energy efficiencies: Energy (solar systems, inverters) and water management systems (boreholes, greywater) are holding more appeal for tenants because of concerns about loadshedding and as the realities of climate change set in.
• Security: Electric fencing, alarm systems and access control are highly valued in South Africa.
• Connectivity: Fibre-ready properties and/or an existing internet service appeal to remote workers and students.

While amenities and the overall condition don’t factor into the formula for determining the rental amount, landlords sometimes choose to retain control of their utilities, security, and internet service providers. Consequently, if you do include these utilities, then these monthly costs must be considered when working out your ideal rental amount.

Although we said that long-term rentals are probably the simplest of the options, there is still quite a lot of “behind-the-scenes-work” which is both time-consuming and technical. This is where the expert services of a rental agent are invaluable for handling, for example:

• Screening prospective tenants by conducting credit checks, verifying employment records, and checking references.
• Managing the lease: Rental agents will generally have expertly drafted standard leases that comply with the relevant property law; they will also have easy access to legal support for renewals, if contracts need to be adjusted or in the event that something goes wrong, such as late payments (arrears) or evictions
• Managing maintenance, repairs, and regular onsite inspections can all be taken care of through the services of a managing rental agent.

Short-term, weekend, or holiday property rentals

Renting a property for short-term and holiday accommodation, especially if you purchased it for your own enjoyment, is the most complicated option. You will have to finely balance your enjoyment of the property and how best to maximise the return on the investment.

These rentals are always fully furnished. The level of service and amenity – cheap and cheerful versus high-end luxury – will influence what you offer, e.g. a mandatory cleaning and linen-changing service, the provision of essentials such as tea, coffee, toiletries, and cleaning materials. These costs will have to be recovered and, together with other factors ranging from the location of the unit, the surrounding area, the prevailing market demand, and where you’re pitching your offering, will impact the going rate.

However, these are not the only line items to include in your calculations: you will have to include the costs associated with marketing, listing, liaising with guests, and managing very short stays, which can sometimes be inherently more risky than a longer-term let.

Before taking the leap, it’s essential to consider whether any legal reasons might stand in the way of short-term lets. As Susan Watts of REMAX Living, Cape Town, notes, “You should check the rules set by your body corporate or local municipality (by-laws) to ensure short-term letting is allowed in your zone, area or complex.”

Similarly, and increasingly due to pressure from local residents, municipalities are clamping down on short-term lets, limiting them to a maximum of thirty days. This restriction could be extended in some municipalities, such as Cape Town, to freehold or standalone properties.

Returning to the rental rate, and building on the basic formula, you’ll have to include the cost of décor, furnishings – hard and soft in addition to the service-related value-adds we’ve already mentioned. The list doesn’t end there: you will also need to add marketing expenses and the commissions that holiday rental portals charge, as well as factor in the cost risks associated with short-term lets.

To work out a baseline rental rate (price) for a short-term let, consider a minimum target occupancy rate – for example, 50% or around 183 nights – in relation to your costs and the income you wish to generate. Divide this figure by your target number of occupied nights to estimate both your per-night rate and expected gross income.

In other words:

(Total annual costs + a profit) ÷ 183 = notional per night rate

For owners considering short-term rentals, Adrian Goslett, Regional Director and CEO of REMAX Southern Africa, cautions, “Short-term letting is not as simple as merely uploading photos of your home onto an app and waiting for the cash to flow in. There are various legal and financial implications involved in these short-term rentals, which could land homeowners in some serious trouble if they fail to adhere to the requirements.&rdquo

A managing agent can be a critical asset as you navigate the challenges associated with a short-term rental. With access to seasonal data, they can assist with dynamic pricing, manage listings across booking platforms, and provide support for social media, marketing, and promotions.

That’s not all, they can also handle the day-to-day guest enquiries, vetting and check-ins, as well as coordinate cleaning and maintenance. Beyond these logistical matters, they keep a close eye on market trends that could impact your investment.

The strategic value of rental agents

Agents do so much more than deal with maintenance issues and place tenants. They provide valuable market insights, ensure compliance, provide access to legal support and deliver tailored operational support specific to each type of rental. This is summarised in the table below.

Managing the income to keep the tax man happy

Rental income must be declared to SARS, and while legitimate expenses can be deducted, it’s complicated especially for short term lets because they can only be deducted “in proportion to the amount of days the property was rented out, which can in some cases lead to a homeowner paying more in tax for the year than what the short-term rental amount earned him/her in profit.,” says Regional Director and CEO of REMAX of Southern Africa, Adrian Goslett. Read more on how landlords can reduce tax on rental income.

A last word or two

Setting the right rental price is a strategic decision that blends financial planning with market awareness. The foundation to determine your ideal rental amount begins with a base formula on which the cost of additional features, amenities, and services is added. Then it depends on what the market can afford based on comparable listings in the area and greater economic and suburb performance.

There are key differences between the residential rental pricing options. These differences are summarised in the table below.

By applying a structured formula and leveraging the expertise of rental agents, landlords can optimise returns, reduce risk, and boost tenant satisfaction, whether they rent their properties for weekend escapes or on a multi-year lease.

Have more unanswered questions? Here are some related questions – and answers – that might help…

Can I charge what I want for rent?

The short answer to this question is, yes, you probably can. However, if you set the rate too high, you won’t get a tenant. On the other hand, if you set the rent too low, you may not cover all your expenses, or could end up with a tenant who does not look after your property. In either of these scenarios, you could end up losing. It pays to do some homework and charge a realistic rent based on what the market will support.

What is the 2% rule for property?

The 2% rule is that a property should realise a monthly rental of at least 2% of the purchase price, and is a useful tool for quickly assessing whether a property is a viable investment for renting out.

How much should rent increase per year in South Africa?

There is no hard and fast rule governing rental increases in South Africa. Many rental agreements include a standard 10% escalation clause, but this is not a rule. If you have a good tenant, you may agree to an inflation rate-linked increase, which could be less than 10%, keeping them happy. On the other hand, if the area has become more popular and rents have increased substantially, you could have grounds for a higher increase.

Why do some tenants choose medium-term (1–6 months) rentals?

Medium-term rentals offer flexibility and convenience, which is especially attractive to corporate travellers and people relocating to a new city. These tenants often prefer partly or fully furnished properties where rentals include utilities and value-added services such as WiFi, cleaning, and linen changes.

How should I price a furnished medium-term rental?

Landlords can set the price of a furnished medium-term rental in a similar way to a long-term rental. In these cases, it’s important to factor in the natural wear and tear on furniture and décor, plus a small buffer for unexpected replacements, and the fact that you’ll have to go through a tenant screening process more regularly (which can be costly). Taking all these costs into consideration, furnished medium-term rentals generally come at a higher rental price.