A rental guarantee is when a vendor or developer guarantees a certain rental income for a set period. Sounds good, right? But not always.
The problem with these is that the price of the rental guarantee is often built into the purchase price. So, in effect, you may be paying for the guaranteed rent yourself via an inflated purchase price.
The guaranteed rent may also be at above-market rates to make it sound more enticing. However, when the contract is up, you’ll be left with a lower rental return – or maybe no rent at all.
Meanwhile, lenders may use the market rent, rather than the guaranteed rent, when assessing your eligibility for a loan.
To avoid falling into a rental guarantee pitfall, it’s important to do your own research thoroughly – don’t just take the vendor’s word for it.
I have a little bit of experience with this, as a few years ago I bought a carpark block in a new estate, whereby the guaranteed rental was set at 7% (above the market rate) for 3 years. The developer was going to bitumen the block of land I bought and make it a carpark for their sales office in the new estate. And after the three years, the bitumen was ripped up and it became a dirt block again, with no rental income being received, which made it unaffordable for me to keep. So I had to sell the block but the sale price was no more than I had originally paid for it. Hence the rental guaranteed dollar amount was factored into the original purchase price.
A lack of knowledge was an expensive lesson for me.
Using professionals can help circumvent you from making the same mistakes so I encourage all of you to discuss your investment choices and strategy with your chosen finance professional before it becomes too late or reach out to me or one of the IM Team on 08 6222 7909 or support@inspired money.com.au if you are not currently working with a finance professional.
This article was written by Darrel Roberts, Head of Mortgage Lending Services at Inspired Money with over 30 years of experience in mortgage lending and accounting he is an expert in his field.
