Rental Guarantees Create Losses For Property Investors

Published:

Zaki Ameer Dream Design Property

As our property downturn finally starts to turn around, investors are being enticed by “rental guarantee” sales packages.  

IBISWorld predicts that the super competitive Multi-Unit Apartment and Townhouse construction industry is set to decrease by 0.4% per year from 2020 -2025 due to oversupply, decreased foreign investment and lower vacancy rates.  

With $49 billion revenue generated in 2018/19, this slight decline will increase competition and encourage more clever marketing by developers.  

31.5% of Australia’s mortgage market is made up of residential investors, so developers have plenty of prospects to target in this growing industry.  

The market is predominantly made up of large muilti-storey apartment complexes (56.8%), townhouses and semi-detached terrace houses (25.2%) concentrated in the inner-city suburbs and tourist areas of the Eastern states.  

Who offers rental guarantees?

Defense Housing Australia (DHA) guarantee rent for lease terms of up to 12 years.  As they are government regulated, these are a fairly safe option for conservative investors looking for a set and forget solution.  DHA completely manage the property (13-16.5% of rent). Their management service includes general property management, annual rent reviews, repairs, maintenance and renovations between tenants.

Benefits of rental guarantees.

  • Less stress – don’t need to worry about managing the property or finding tenants 

  • Better cash flow   

Rental Guarantee – the best way for developers to sell property above market value in weak or oversupplied markets. 

Downsizing baby boomers are increasing investment property demand and may be an easy target for this type of marketing.  

How do developers hoodwink naïve investors? 

The developer’s apartments have a market value of $350 000.  

To justify a higher sale price $400 000 and attract investors they can offer a rental guarantee of $380 per week.  

This delivers a yield of 4.94% to the investor (who could be paying less than 3% interest on their mortgage at the current rates). 

The developer then rents the apartment out for the market rent of $300 per week.  

According to the market rates, the yield is only 3.9% (which was inflated to 4.94% with the rent guarantee).

This tricky tactic has just netted the developer a tidy $41 680 profit (as they only need to take the rental difference of $8320 off the selling profit of $50 000).  This would not have been possible if they sold the property at market rates. 

After the two-year guarantee period finishes, the investor is slammed with a quick capital loss of $50 000 and decreased rental returns.  

Buyer Beware – Do your homework before purchasing a rent guaranteed property

  • Make sure you read and understand the rental guarantee terms before signing any sales contract.  

  • Don’t be scared to negotiate with a developer or get help from investment property specialists like the team at Dream Design Property.   

  • Research similar properties in the area to ensure you are paying market value and receiving the market rent (and getting the correct return on your investment) 

  • Check independent property management costs and inclusions in the area and compare with what you are being offered.  Ensure you understand any additional property management costs. Hidden costs can include advertising, landlord insurance, tenant screening, lease renewal/transfer fees, tribunal attendance and preparation and administration.

  • The property manager is working for the developer, not you.  Find out how much input and access to the property you will get.  You may end up with undesirable tenants if the developer is keen to offset costs. 

 

Statistics and industry data sourced from IBISWorld Industry Reports 

 
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