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Guaranteed Rental Returns – Should you avoid?

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When looking around the market for your next investment opportunity you probably would of come across ‘Rent Guarantee’ or ‘Guaranteed rental return for x amount of years.’

Sound great right a no brainer simply purchase a property and don’t worry about the process of securing a tenant and earn income from day one. Surely there must be a catch and there is, these products do have some consequences that could affect you moving forward and understanding these would probably make you think twice. We pride ourselves in being forward thinking and do our research so we can pass on the latest strategies to you.

 

Why we wouldn’t recommend these options:

 

  1. Inflated pricing – In order to make this viable as an offer from a developer they need to recoup the funds some way post completion. What tends to happen is the purchase price is usually inflated to factor these costs in. Building these costs into the original purchase price means you’re actually paying for the comfort of having a rental guarantee.

 

  1. Investor Led – This term is relatively new to the market and understanding it would make the difference to a great or painful investment. Investor led basically means the LENDERS/BANKS will red flag a development and not lend on the project at all. Lenders like to reduce their risk and if they deem a project not to have a good mix of homeowner and buy to let investors on board they won’t consider it. Adding the term guaranteed rent to a project lenders will refuse to even consider it. For a long term strategy when it comes to resale you would only have the option to sell to a cash only investor which limits your options.

 

  1. Is it really Guaranteed? – In short NO, Although it may be in the contract or rider these are not legally binding. Meaning if the developer struggles to rent the property then payments to cease leaving you out of pocket.

 

  1. Confidence in the project – You have to think if a developer is offering rental guarantees then surely they don’t believe in the success of the project to be naturally entered into the market.

 

  1. Could I earn more? – Majority of the time yes, having a rental guarantee offers a comfort you will be achieving X% return, However if you were to rent the property the conventional way then your returns are usually higher.

 

So when you hear the term Guaranteed returns etc sounds great but there are a lot underlying factors which can cause issues later down the line. The only time we would recommend a guaranteed option would be if your investment strategy is over 10 years. We do a lot of homework on the developments/developers we choose to sell and don’t just represent anyone. The key thing is to really understand the type of investment you are looking for, we are here to help and guide you through to making a successful investment.

 

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