Why you should avoid guaranteed rental returns


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