Rental Guarantee – Easy Money or a Scam?

‘Rental guarantee’ sounds almost too good to be true! Buy to let investors dread the insecurity of wondering what, if any, rental return they are going to make on an annual basis. But, with rental guarantee, this is no longer an issue. You might well ask – what’s the catch?

Lack of understanding

It seems like an obvious choice for investors wanting security of rental income, for a set period of time; however, very few people actually take full advantage of these rental guarantee schemes. Understanding exactly what these schemes entail and just what is expected from the owner are the main reasons that many of the schemes are under-utilised. Investors are wary of these types of financial offerings and as such will sometimes steer clear through lack of knowledge rather than lack of desire. Don’t let this be you! Make sure you understand the facts and that you are able to make the most out of these schemes.

Rental guarantee is something that is seen largely as available for foreign properties, with France being one of the main leaders in this area, although other countries are now joining in on the action. Further, most regions witnessing a large number of new build properties, now offer at least limited choices when it comes to rental guarantee.

The theory behind rental guarantee

The theory behind rental guarantee is very simple; you purchase a property from a developer or agency that then enters into an agreement with you to provide a certain percentage of the purchase price in rental, for a certain length of time. As these are individually negotiated, contracts issues such as the length of term and percentage received should be dealt with on a case by case basis and as they are fundamental to the whole contract are, therefore, unlikely to be overlooked. It is the other incidental issues that may end up giving investors a sting in the tail.

For example, a recent development at Falcon Wharf in London had a range of properties priced between £320,000 and £850,000. There was a rental guarantee option on the 124 apartments; however, very few of the buyers actually decided to go for this option. Hamptons, who were dealing with this sale stated: ‘The developer was offering a gross rental guarantee of 7 per cent of the purchase price; in other words it did not include things like service charges, so buyers decided to negotiate reductions on the asking price’. Therefore, anyone opting for the rental guarantee would have ended up actually paying more for the flat, in the first place, a situation that is often true with these types of schemes.

It is also worth paying particular attention to what is and is not included in the rental payment. If you are offered 7 percent gross, you may find that you will still have to pay service and maintenance charges, thus reducing your income substantially.

Things to look out for

Another issue to bear in mind is that the developer will simply look to rent your apartment out so that it covers their own costs, during the guarantee period. When this period comes to an end, you as the owner will then potentially be left with a tenancy that is substantially lower than what you could achieve on the open market. Similarly, if other identical apartments in your block are still being let by the developer at a lower rate, it will become very difficult to compete and attract tenants if you are charging a higher rate.

This problem is all too common and Brendan Roberts, an experienced estate agent, warns: ‘A developer is not motivated to maximise rents in the same way that an owner is, since he just wants to cover his costs and move on to the next property, so the owner might find that when the rental guarantee period ends and he comes to try and rent the property he’s stuck with an existing rent which is low and might be difficult to increase’.

Guaranteed rental schemes really can work and offer the stability that investors are often keen to secure. However, there are potential pitfalls and anyone looking to enter into this sort of agreement should look to the future and ask themselves carefully what they intend to do after the guaranteed rental period ends.

For more information on guaranteed rental, try these sites:

www.propertyfrontiers.com
www.turkeyrealestatedirect.co.uk
www.rla.org.uk

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