Rental Guarantees Be Wary

« View all homes for rent

Submitted by Michelle on Mon, 06/07/2009 - 19:16

Vendors offering to guarantee the rental income from property purchased for investment purposes are usually associated with residential property. However, they are also offered for commercial and industrial property as well.
The word “guaranteed” can sometimes be misleading. The offer of a rental guarantee is only as good as the company giving the guarantee, its commitment to the offer, continued operation and having sufficient financial resources (including a positive cash flow) to fund rental shortfalls on behalf of property investors.

As an investor, if something does go wrong with the company offering the rental guarantee you do have legal rights to claim your promised money. However, you will have to line up alongside all the other creditors to receive your entitlements, if they are forthcoming.
Rental guarantees are attractive to property investors because they offer the promise of secure ongoing rental income from the investment property, even when the property is vacant, thereby reducing the risk of purchasing the property. The guaranteed rent enables the purchaser to service the loan used to buy the property in the first place.
The issues to be aware of and questions to ask vendors/ developers offering rental guarantees include:

Questions to Ask & Tips

  1. What happens to the guarantee when the company sells all the properties and moves on, or goes into liquidation?
  2. Who will be the company contact or manager of the rental guarantee scheme?
  3. How is the rental guarantee going to be financed?
  4. Is the rental guarantee amount fixed and for how long?
  5. Remember rental markets change over time and rents fluctuate in line with supply and demand.
  6. Ensure that the rental guarantee is not ‘built into’ the sale by comparing the sale price with similar properties being sold without rental guarantees.
  7. Has the rental guarantee been used to promote an ‘inflated’ investment rental return (yield) from the property that is not likely to be achieved?
  8. How long is the guarantee for and is it a ‘genuine’ offer? Are there any ‘catches’?
  9. Be mindful of market conditions in relation to the offer. For example, the rental market is currently very tight, with very low vacancies, in
  10. most capital cities and regional areas, so why would the developer need to offer rental guarantees?
  11. If fundamental property selection criteria are adhered to, such as location, price, quality, services and fit out, for example, then the rental guarantee shouldn’t be needed, especially if loaded into the purchase price.
  12. Is the guarantee void if the owner/investor refuses to accept a prospective tenant?
  13. Is the guarantee void if the owner/investor refuses to accept a rental below perceived market rent or the yield offered at the time of sale/ promotion?

Source: Inside Property Wealth™
(John Maher – Registered Valuer)