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As the old saying goes, if it sounds too good to be true it probably is. If you come across a property marketed with a rental guarantee, tread carefully according to Damian Collins who outlines why he is wary of properties offering ‘the deal of a lifetime’.

 
Transcripts:
Damian Collins
Kevin:  Ask any wise investor and they will tell you that if it sounds too good to be true, then it probably is. Now, this can apply to rental guarantees. Let’s find out what they are, first of all, how you should be a little bit wary of them, and what you should be aware of before you start to get involved with rental guarantees.

Joining me is Damian Collins from Momentum Wealth. They are buyers agents in Western Australia. Damian, firstly, tell me what a rental guarantee is and why you think we should be cautious of them.

Damian:  Kevin, a rental guarantee is usually provided by developers, whether that be residential property, sometimes serviced apartments, or hotel operators. What they’re providing to the investor is a guarantee of the rental return over a period of time. Sometimes they range from one year, sometimes even up to three, four, or five years.

What it effectively does is it means that the investor gets a certain level of return over that period, so they’re not subject to the vagaries of the market going up and down. It sounds good in theory, but obviously, there are reasons why the developers offer it.

Kevin:  Why do they offer them?

Damian:  Well, it’s to give their investors certainty. Nervous investors – particularly first-time investors – in the market think, “Well, what do I do if my tenant leaves? What happens if something goes wrong? What happens if the rents drop?” All those things, they provide them with that certainty of the rental return.

But, of course, nothing is for free. Any developer offering those sorts of rental returns has factored that into their sales price, so as a buyer of one of those properties you’re going to be paying for, that rental guarantee is going to be loaded into the sales price.

Also, importantly, I think what we often see is that the rental guarantees are not necessarily reflective of the market. When you come to getting a loan for the property, you often find that the valuers and the banks will only take the actual income based on the real market value, not what you’re getting offered as a guarantee.

Importantly, you have to understand that when that guarantee period runs out, you’re going to go back to the market levels. I’ve seen them offered at 6 and 7% returns on properties where the real market value is probably closer to 4.5 to 5%. Investors get lulled into a false sense of security thinking they’re going to get that rent forever, but the reality is that it’s over market, and you’re paying for it. One day, you’re going to have to pay the price when it comes back to normal market terms.

Kevin:  Damian, is it drawing a long bow to say that you could apply that to all properties that offer rental guarantees?

Damian:  Look, definitely. Nothing is free in this world. Anyone offering a guarantee is either struggling to sell it and they need to offer some extra incentive for people to buy it, hence, it might be overpriced, o