Investing in property can be one of the most lucrative, and secure investments you can make. Getting an acceptable return on your investment is dependent upon buying the right property, at the right price, and ensuring a consistent rental income with no vacancies.
Regular rental income combined with the appreciation of a bricks-and-mortar asset is a compelling proposition for any would-be property investor. But what’s the truth about rent guarantees, especially in terms of long-term property investment success?
First, rent guarantees are offered by the seller (usually the developer of the property) and promise a certain level of rent for a set period of time. They are extremely popular, especially with new investors who may be uncertain about making their first foray into the property investment market.
With guaranteed rental income at a set rate, they can be certain of achieving an acceptable yield in the first few years of their investment. While there is no doubt that a rent guarantee offers financial security, this security can come at a price.
When a developer builds a new home, they need to achieve a certain selling price in order to break even or turn a profit. If current market values are lower than this figure, the developer has two options. The first is to drop the price or second, add value to the property to make it more attractive. One way to do this is by adding a rent guarantee. However, in order to finance a rent guarantee, the seller needs to find the funds to do so. Where do these funds come from? The purchaser of course!
Adding a rental guarantee often costs the developer relatively little. After all, they are only subsidising the difference between any rent received from the tenant, and what they pay you. However, the benefits to the investor of a guaranteed yield at; say 7% for three years over a yield of 4.5% are often perceived to be worth the inflation of the initial purchase.
The challenge is that a rent guarantee may come with strings attached. Therefore, beware of the developer using an inflated purchase price to subsidise the lower rent achieved by the property.
Typically, when the guarantee period ends so will the honeymoon. The chances are you will not be able to get the rent you need on the open market so your yield could fall back to the true market levels. Meanwhile, selling may not be an option due to the inflated price you paid for the property in the first place.
So, what is the recipe for long-term investment success? As an investor it’s important to understand the key principles of property investing, and you must look beyond the first few years’ rental income. This involves thorough research, choosing wisely, and not getting caught up in all the hype.
Today’s property investor is definitely spoilt for choice. There are thousands of potential properties on offer, and in many cases these are advertised boasting assured capital growth and/or guaranteed rent returns. But what is the truth?
Be sure to contact us today to learn more.