With 3-month leases, Singaporean landlords could up grappling with frequent vacancies and lower rental income.
A recently announced change to private home rentals lowers the minimum rental period from 6 month to 3. The move is expected to benefit groups such as academics, students on exchange programmes, and professionals on short-term assignments.
Although hailed as a step in the right direction, the change doesn’t seem like it would have much effect on the rental market in Singapore.
Three months is still too long a period for short-term home rentals such as Airbnb to be viable, so landlords probably shouldn’t hold their breath for tapping the lucrative home-rental market anytime soon.
Instead, they should prepare themselves to deal with some negative consequences that could arise from the change.
It’s Not Easy To Find The Right Tenants
To understand why the decision to reduce the minimum rental period will impact landlords, let’s first understand the challenges involved in renting out your property.
To the uninitiated, renting out your rooms may seem like an easy affair. All landlords have to do is set a rental price, look for someone willing and able to pay it, then sit back and profit, right?
Eh, not quite.
For starters, being able to pay the rent isn’t the only thing a landlord looks for. You also want to make sure that your potential tenant is a decent person, and won’t be bringing problems - legal or otherwise - to your home.
Even if the person looking to rent your room isn’t an Italian drug lord on the lam, you want to make sure that they don’t have any bad habits that could cause frustrations to you or your neighbours.
Renters have their own needs too. Most won’t want to stay too far away from their place of work. They also want to feel at ease when at home, have individual preferences for noise and privacy, and might prefer being able to use the kitchen and other shared spaces.
All these mean that it could sometimes take several tries before the right match between landlord and tenant is found.
And now that the minimum rental period has been reduced, landlords looking to rent out their private homes could face 3 headaches.
More Income Disruptions
With every change of tenant, landlords suffer a disruption to their income. Most landlords ask for the first and last month’s rent to be paid upfront. When a tenant decides to move out, their last month’s stay is rent free.
This means landlords have to go without rental income every time their tenant ups and leaves. Sure, they have already collected that month’s rental in the beginning but that money may have already gone towards maintenance works and replacement of household equipment.
Under the old rule, landlords would encounter this problem once or twice a year. However, now that stay periods are as short as 3 months, landlords would be facing such disruptions more frequently.
It is rare for landlords to be able to line up outgoing and incoming tenants perfectly for a seamless transition.
Instead, it is much more common for landlords to experience vacant periods that could last for weeks or months while they try to find the right tenant.
With the minimum rental period now reduced to 3 months, landlords who don’t have a steady stream of renters lined up will see their units being left vacant more often.
And as vacant rooms don’t earn rent, more vacancies means less income for landlords.
The most insidious effect of reducing the minimum rental period is that rents will be driven down.
Now that renters are free to exit every 3 months, they will feel more inclined to shop around for different properties, hoping to get a lower rental. At the same time, landlords may start offering lower rents to avoid some of the problems discussed above.
The more this happens, the more renters will encouraged to switch properties, instead of committing to longer leases. And the more renters adopt a short-term mindset, the more pressure landlords will face to lower their rents.
This will result in a lowering of rents across the board, to the detriment of Singaporeans who rely on rental income for their livelihoods.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimise happiness and enjoyment in his life.