A rental guarantee on your new investment property, usually given by the developer or for a certain period of time) can sound very attractive. Guarantees are usually used quite liberally in a housing market that is heading towards oversupply and is not looking too attractive to the property investor based on the specific market’s own merits. For example, now in 2017, the inner-city Melbourne apartment market and in Brisbane rental guarantees are the norm on new investment units, because finding tenants is getting tougher and rentals are on the way down.
Rental guarantees usually have strings attached. The cost of the guarantee can be factored into the purchase price, the old adage, and “There is no such thing as a free lunch!”. In effect property investment buyer is paying the developer upfront for the rent he will repay you over the next few years. Not all guarantees are like this.
A “no vacancy” guarantee is a more genuine assistance sometimes offered by good developers. In this case, the developer is recognising that it may significantly affect the cash flow of prospective property investment buyers if their new investment property lies vacant for a number of weeks, (which can be common in larger new developments as the mangers seek a very large number of new tenants over a short period of time). To avoid this, the developer will offer to pay (usually at current market value) the rent until such times as the first tenant is found or for a period up to (usually) around 12 weeks. It appears to be a more ‘honest’ way of assisting investors in that they are not being offered an inflated amount of rental which has already been added to the purchase price, but are being given a more genuine ‘assistance’ with any possible cash flow issues at the time of purchase.
So, in summary; If you come across a property marketed with a rental guarantee, tread carefully. Guarantees were traditionally associated with government supplied housing, such as Defence Force Housing, they are becoming more commonplace in private developments offering guaranteed yields of 6% or 7% for up to three years. These yields are usually quite unattainable in the real market.
The guaranteed rental is usually already factored into the initial purchase price of the property which, in some but not all cases may over-value the property. When the guarantee period is over, the rent you can realistically achieve will often be far less.
No vacancy guarantees are usually a better and more accurate option and are often provided as a more genuine commitment from the developer to assist the buyer overcome any initial cash flow problems which may occur if it takes slightly longer than anticipated to find a first tenant.
