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The Pros and Cons of Rental Guarantees

You may or may not have encountered the promise of a "rental guarantee" as a property investor. The possibility of having a safety net in the form of a rental guarantee seems like a no-brainer when it comes to real estate investments. So, how do rental guarantees work and are they realistic? 

In this article, we answer a few key questions you should be asking to help you understand rental guarantees and what to be mindful of before signing on the dotted line.

How Do They Work?

Real estate agencies and property developers offer rental guarantees to provide investors with confidence in rental income when they buy an investment property. A rental guarantee is typically an agreement between an investor and the developer that ensures a set rental income over a specified period of time in the event that the property remains vacant after purchase. These agreements also generally require landlords to pay annual fees to facilitate the fixed return on investment and property management. 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 several benefits to having a rental guarantee on your real estate investment. These may consist of:

1. Income Stability

The ability to continue earning a steady monthly income as part of the purchase agreement provides buyers with a "safety net" if their home remains vacant. Minimising the stress of dealing with rental loss during periods of vacancy makes it simpler to manage and properly budget your finances.

2. Reliable Property Management 

Some agreements may cover the expense of maintaining the property for the agreed timeframe. Investors in this scenario don't need to worry about unforeseen costs for upkeep or repairs 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.

3. Access to interstate opportunities

Investors may have the freedom and peace of mind to explore investment opportunities beyond their local area and across state lines if management is negotiated into their rental guarantee. This can be an ideal solution for investors seeking the best return on their money, which they might not achieve by buying property in their city or state.

As with any agreement, there are advantages and disadvantages. The same is true of rental guarantees; while they can be beneficial and work in your favour, there are also some "cons" to take into account:

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Factors to consider

 

1. Higher Sale Price

The property may be sold at an inflated price as a way to help developers subsidise the rental guarantee if your property remains unoccupied or the market rent falls.

2. Less Management Control

If you agree to let the developer manage the property, you might have less control over choosing the management agency and the tenants who live in the property, while still having to pay the associated fees. Despite receiving consistent rent for the agreed timeframe, investors might not be entitled to keep rent increases that exceed the guaranteed rate.

3. Beyond the rental guarantee

All good things come to an end, and it can be challenging to readjust after the guarantee expires.  You'll need to be prepared to deal with tenants, property management, and potentially irregular monthly returns due to vacancies. For those wanting to sell their investment, it is important to keep in mind the fluctuating market prices.

 

Our advice?

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. 

Investors can benefit from rental guarantees, but it's crucial to comprehend the terms of the deal and be sure it will help you reach your financial objectives. Take the time to carefully read the contract and seek legal advice before finalising any agreements.

 

Need some expert advice when looking to buy a new or off-the-plan property?

 

Don't hesitate to contact our helpful team of property experts to chat about your options today. Call us on 1300 123 463.

 

Published on 29th of June 2022 by Anthony Lamb
Anthony Lamb
Anthony Lamb

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