Why you should avoid guaranteed rental returns

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With plenty of development projects coming to fruition and many cranes dotting the Brisbane skyline, it’s not hard to see that our city has experienced a construction boom. With so many purchase options available, many developers are offering incentives such as rental guarantees to enhance their projects in the eyes of investors.

So what is a rental guarantee?

A guaranteed rental return offers the investor a set return for a period of time, such as a 6% yield over 2 years.  This can be alluring, particularly in a saturated rental market where finding a long-term tenant is difficult.

As with anything, if it sounds too good to be true it usually is.

While many investors view the guarantee as a safe way to achieve their financial benchmarks, the agreement isn’t as concrete as it may seem. Rental guarantees are often a sign the market is over supplied with developer using it as a marketing technique to persuade buyers.

As with any cover, these agreements come with a premium price tag – one that is factored in the purchase price. Secondly, it’s vital to understand a rental guarantee will eventually end. Once the guarantee ends, the investor is forced to rent out the apartment at market value. A figure often significantly less than the initial return. For example, the rental guarantee may have been $500 per week, however if market value is only $400 that equates to a $5,200 drop in income per annum after the guarantee expires. Investing is a numbers game, a huge discrepancy in returns will affect your finances if you have not planned for it.

Andrew Trim, Managing Director of Johnson Real Estate Group, says that a solid investment should stack up on current market rent. “The numbers on a good investment property will work with current market rent. It will bring in a reliable and constant cash flow without relying on a guarantee. The guarantee should just be a bonus.” he explains.

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Why you should avoid guaranteed rental returns