Article by Davina Deluao
As a property investor, you may or may not have come across the offer of a ‘rental guarantee’. When it comes to property investments, the option of having a safety net in the form of a rental guarantee seems like a no-brainer. So, how do rental guarantees work and are they too good to be true? This article works towards answering a few key questions you should be asking about rental guarantees and what to be mindful of before signing on the dotted line.
Rental guarantees are a strategy applied by real estate companies and property developers to offer investors peace of mind around rental income when purchasing an investment property. A rental guarantee is usually an agreement between an investor and the developer guaranteeing a set rental income over an agreed period of time should the property remain vacant once purchased. These agreements generally also require landlords to pay certain annual fees to facilitate the fixed return on investment and the management of the property. The agreements vary, so it’s important to read the fine print of the contract to understand exactly what you’re entitled to with the guarantee.
There are certain advantages that come with having a rental guarantee on your property investment. These may include:
Buyers with a rental guarantee in place have a ‘safety net’ if their property remains vacant, as they’re still able to continue to acquire a steady monthly income as part of the purchase arrangement. This makes it easier to manage and properly budget your finances while avoiding the stress of dealing with rental loss during periods of vacancy.
Some agreements may include repair and maintenance costs of the property for the agreed time frame. In this case, investors don’t have to worry about unforeseen outlays for repairs or maintenance to the property. This can be extremely helpful especially for mum and dad investors who may not have the time to manage a property and have tight budgets to manage.
If management is included in the rental guarantee (which can be negotiated), it can give investors the freedom and peace of mind to consider investing in property beyond their local area in other cities and states. Perfect for investors looking for the best return on investment, which they may not get investing in property in their home state or country.
As with any deal where there are pros, there are also cons. And so it is with rental guarantees, while they can be beneficial and can work in your favour, there are also some ‘cons’ to consider:
The property may be sold at an inflated price as a way to help developers subsidise the rental guarantee if your property remains vacant or the market rent falls.
If you agree to have the developer manage the property, you may have less of a say regarding the specific managing agent that’s chosen and the selection of tenants into the property while still paying the associated fees. Although investors receive consistent rent for the agreed duration, they may not be entitled to keep rent increases that go above the guaranteed rate.
All good things come to an end and it can be difficult to readjust once the guarantee ends. Dealing with tenants, property management and potentially inconsistent monthly return due to vacancy is a reality you’ll have to be ready for. For those interested in selling their investment, there may be quite a difference between the amount you purchased the property for and the current market’s selling price.
As with any big-ticket investment, do your research. Surround yourself with a good team of professionals who understand the market, have independent research on market sale prices and rents, and don’t just rely on information provided by the developer. Rental guarantees can be beneficial to investors, but it’s important to understand the agreement and to make sure it’s going to benefit you and your financial goals. Before finalising any settlements, take the time to carefully read through the contract and seek out professional advice.
Don’t hesitate to get in touch with our friendly team of property experts to chat about your options today.
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