Investment - Beware of guaranteed rents
23/05/2007 By National House Buyers Association
Published in Iproperty Magazine
Guaranteed Rental Returns, buy-to-let,
leasebacks, buy-to-let, cash back, own-for-free - you may have been tempted
by these catch words, but how good are these deals in real term and will
there be any rental demand once the guaranteed period is over?
There are many developments to woo investors with guaranteed rental
returns and equally many investors have found to their dismay that the
returns are not what they have envisaged.
Guaranteed rental returns (GRR) plans which have become increasingly
common, judging from the press advertisements may sound enticing to
investors who do not want the trouble of managing their own investments. You
buy the property, and you get the rental returns thrown in with some
additional perks like free stays.
Developers would agree to pay buyers rentals ranging from 8% to 12% per
annum or a proportion of the purchase price for a certain length of time
While GRR could be very attractive, investors need to know that the
scheme is not as simple as it seems, much like advertisements that appeal to
our desire to lose weight quickly, get rich fast or strike the lottery.
Generally, GRR are best for the laidback investors. Some people will
value the 'simplicity' of the deal. However there are issues that buyers
have to be aware of and comfortable with before entering into such
If a developer is offering GRR, the buyer has no way of knowing whether
that property is going to achieve the promised in the open market. The
developer may not be able to get the guaranteed rent or the property may not
be let out at all during the guaranteed period. Guarantees are often used to
market properties that otherwise would not sell and many investors are
shocked by the resulting drop in income when the developer is unable to
continue with the scheme or worst fail to complete the project.
In addition to this, it is often the case that investors end up footing
the rental bill themselves, when developers inflate the price of the
property to cover the guaranteed rent. This can provide a further shock when
the investors try to sell the property and realise that it is not worth as
much as they originally paid for it.
* A typical mortgage lasts 20 years. If you have a guaranteed rental for
just three years, what will happen for the next 17 years? You are left to
sink or swim on your own.
* A typical table of returns will show potential buyers a surplus income.
A potential investor has to take into account the cost of maintaining the
property, the taxes that come with being a property owner, the cost of
maintaining the mortgage and all other fees related to acquiring the
Illustration: A typical GRR scheme's table of 'returns' may look