A Warning Against Guaranteed Rental Property (Ep53)
So you’ve found a property which has guaranteed rental income. It sounds too good to be true. Is it?
A guaranteed rental property isn’t always the great offer it appears to be. Sometimes having a guarantee of consistent rental income doesn’t mean that rental income is actually going to come your way.
These guaranteed rental properties can offer guaranteed rent for the next twelve months or two years. But are they legitimate? What are the risks that we need to think about?
Benefits of guaranteed rental properties
Firstly, let’s look at the benefits of going with a guaranteed rental property.
1. Stress Less
There’s the obvious benefit of having less stress. You can rest easy knowing that the rent is coming. You also don’t have to worry about vacancies or about whether your property is going to be rented or not.
The second benefit is lending. In some circumstances a lender may look more favourably on a property with a guaranteed rental income and may treat that as full income. Therefore they will help you service your mortgage.
3. Cash Flow
A further benefit is that a consistent cash flow from your rental income eliminates the need to worry about vacancy rates or issues with tenants. That is something that can help you manage your cash flow in the future.
Who offers rental guarantees?
What are the different organisations or companies that offer these rental guarantees?
Firstly there’s Defence Housing Australia which offers rental guarantees when you purchase a defence housing property. This is run by the government and is fairly legitimate.
However purchasing through a builder or developer that is offering guaranteed rental returns is a red flag for me. Because why would a developer offer to guarantee rental returns to you?
Why would a developer offer guaranteed rental returns?
The developer is going to have to pay money out of their own pocket if you can’t rent out your property. This money has to come from somewhere and I don’t think they’re doing it out of the goodness of their heart.
They will often bump up the price of the property in order to cover that guaranteed rental income, or they may simply offer a guaranteed rental income to sell the property at a higher price or to sell the property if it’s not selling.
Fake “guaranteed rental income”
Some people have purchased new builds or off-the-plan with a guaranteed rental income only to discover that the agreement was temporary. They received only one or two months rental income before the money dried.
Then no one was willing to pay that rate for that property when they tried to re-lease it. They had to lease it below what they thought.
They couldn’t sell the property because they had bought at too high a price. They were in a very sticky situation.
Be very careful when you’re looking at guaranteed rental properties. They may sound great on paper but that doesn’t necessarily mean that that money is going to flow once you become the owner of the property.
Remember the risks
You need to consider the risks. Look at the fact that the rental income might not come through. Look at the fact that you might be getting lower rents than is consistent with the area.
If you’re securing for a few years and rents go up you might not get that increased rental income. Or because you’re settling for a guarantee you might be settling below market rates for your rents. This could negatively affect your return on investment.
The property might be overpriced because they need to buffer in and create a margin in case the property becomes vacant and they have to pay money to you. You could be paying that money up front just to purchase the property anyway.
Consider all of these things if you’re thinking about purchasing a property that has a guaranteed rental income. Just because it says it’s guaranteed doesn’t necessarily mean it’s guaranteed.
Always speak to a professional and look through your contract very closely. Figure out how you can claim your money back if they don’t pay.