Rental guarantees, good or bad? I suppose there are a number of things to have a look at in ensuring that before you accept a rental guarantee you have reviewed it as you have done with every other part of this process during your due diligence. The good side of rental guarantees is that it provides you with stability usually in the first year of the contract after the purchase. Therefore giving you some certainty on what your shortfall is and knowing whether you can afford it in that period of time.
The other side of rental guarantees is the hidden side where if the guarantee is provided by the developer rather than by a third party, have you paid too much to cover the cost of your rental guarantee. Therefore, the first point is certainty of your financial decisions and that’s something to talk about with your financial people like your broker, your accountant and your financial planner to work out your final out of pocket expenses on each of your purchases.
The second is if it’s a separate agency how strong is the rental guarantee. It is only as strong as long as the Agency remains in business. The cost can change if that agency falls over or does not honor the Agreement.
We’ve mentioned inflation of price and that is simply worked out, but if the rental guarantee was above market by a hundred dollars or being six percent instead of the standard 4.5%. Then 52 weeks in a year by a hundred is $5,200. The question you need to know, has the price of the property been inflated by that or a higher amount to cover the developer if he’s providing that rental guarantee himself. In doing that you should do your research on what is to be anticipated as an expected return for that particular unit or house in that particular area so you have a rough idea of what it should be.
Most companies when you’re doing the financials to get you out of pocket will use a very conservative amount that will ensure that your outline for your investment is well within your means should you only get the lower of the appraisal rather than the top amount.
A lot of companies will go with that higher amount which is an inflated price, and should situations change you can’t expect that after the guarantee finishes and so the investment doesn’t stand up on its own legs.
Fine print is also something to have a look in any guarantee. Some people provide the guarantee but then inflate the commission. Most commissions for a property manager are around the eight or nine percent, but the miscellaneous charges for things like statements, one of invoices, all of those paper trails can be extremely high and actually increase the agents take per month to a much higher rate above the eight or nine percent.
Another point to look at when you’re reviewing rental guarantees, will the rent provide you possibly of a positive cash flow but it is the capital growth potential of the product that you want to have a look at. So by giving a high rental you will actually have a week to week amount but that is also taxed. Capital growth on your investment is only taxed when the property is sold not if you choose to hold it.
Some companies will offer you landlord’s insurance as well. This is like any other insurance that you take out what are you cover for? Can you update it if you are required and do you have to stick to them? How are you actually going to go through the prices of making a claim? Check all those out before you sign up and take it because the old adage “If it looks too good to be true, it probably is.”
Finally, have a look at the company that’s doing it. Is this just a product that they’re going to have and then move on and do another development or is it a property manager who is looking to have you in the long term as a client and therefore provide the proper services that you really want as a landlord rather than as a tenant.
If you have any questions please don’t hesitate to be me a call on 0428 775 008