{"id":10642,"date":"2017-03-06T07:00:32","date_gmt":"2017-03-05T20:00:32","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=10642"},"modified":"2017-03-06T07:00:32","modified_gmt":"2017-03-05T20:00:32","slug":"rental-guarantees-be-careful-damian-collins","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/rental-guarantees-be-careful-damian-collins\/","title":{"rendered":"Rental guarantees – be careful – Damian Collins"},"content":{"rendered":"

The risk or otherwise of relying on rental guarantees is something that we get asked quite often.\u00a0 I seek Damian Collins<\/b> opinion on that.
\nTranscripts:<\/strong>
\nKevin<\/b>:\u00a0 Ask any wise investor and they will tell you that if it sounds too good to be true, then it probably is. Now, this can apply to rental guarantees. Let\u2019s find out what they are, first of all, how you should be a little bit wary of them, and what you should be aware of before you start to get involved with rental guarantees.
\nJoining me is Damian Collins from Momentum Wealth. They are buyers agents in Western Australia. Damian, firstly, tell me what a rental guarantee is and why you think we should be cautious of them.
\nDamian<\/b>:\u00a0 Kevin, a rental guarantee is usually provided by developers, whether that be residential property, sometimes serviced apartments, or hotel operators. What they\u2019re providing to the investor is a guarantee of the rental return over a period of time. Sometimes they range from one year, sometimes even up to three, four, or five years.
\nWhat it effectively does is it means that the investor gets a certain level of return over that period, so they\u2019re not subject to the vagaries of the market going up and down. It sounds good in theory, but obviously, there are reasons why the developers offer it.
\nKevin<\/b>:\u00a0 Why do they offer them?
\nDamian<\/b>:\u00a0 Well, it\u2019s to give their investors certainty. Nervous investors \u2013 particularly first-time investors \u2013 in the market think, \u201cWell, what do I do if my tenant leaves? What happens if something goes wrong? What happens if the rents drop?\u201d All those things, they provide them with that certainty of the rental return.
\nBut, of course, nothing is for free. Any developer offering those sorts of rental returns has factored that into their sales price, so as a buyer of one of those properties you\u2019re going to be paying for, that rental guarantee is going to be loaded into the sales price.
\nAlso, importantly, I think what we often see is that the rental guarantees are not necessarily reflective of the market. When you come to getting a loan for the property, you often find that the valuers and the banks will only take the actual income based on the real market value, not what you\u2019re getting offered as a guarantee.
\nImportantly, you have to understand that when that guarantee period runs out, you\u2019re going to go back to the market levels. I\u2019ve seen them offered at 6 and 7% returns on properties where the real market value is probably closer to 4.5 to 5%. Investors get lulled into a false sense of security thinking they\u2019re going to get that rent forever, but the reality is that it\u2019s over market, and you\u2019re paying for it. One day, you\u2019re going to have to pay the price when it comes back to normal market terms.
\nKevin<\/b>:\u00a0 Damian, is it drawing a long bow to say that you could apply that to all properties that offer rental guarantees?
\nDamian<\/b>:\u00a0 Look, definitely. Nothing is free in this world. Anyone offering a guarantee is either struggling to sell it and they need to offer some extra incentive for people to buy it, hence, it might be overpriced, or alternatively, some other developer offering it, they have their profit margin they need to make. If they are going to pay 1 or 2% extra rental return for a couple of years, you can guarantee that there could be 4 or 6% in extra cost out of their pocket. They\u2019ve put that in the price, as well.
\nThere\u2019s certainly nothing for free in this world, and one way or the other, you\u2019re going to pay for a rental guarantee.
\nKevin<\/b>:\u00a0 If I were to see a property that seemed to be fairly reasonable on the surface in terms of its price and that rental guarantee looked fairly good, how should I proceed to make sure that I\u2019m not going to get trapped?
\nDamian<\/b>:\u00a0 The first thing I would be asking, Kevin, is why are they offering the guarantee? If the property was that good and stacked up on its own, why are they offering the guarantee? What\u2019s the purpose behind it? What am I missing here? What\u2019s hidden?
\nI\u2019d certainly be doing my own thorough market research on what is the proper and fair value for that property without any rental guarantee. At the same time, I\u2019d be looking at also what is the fair rental market without this inducement of the rental guarantee. Do your numbers based on that.
\nThe guarantee is a nice little additional bonus, but most people do get lulled in that false sense of security and end up paying too much for it because of that security. Do your homework, find out what\u2019s the real market value of the property, what\u2019s the real market value of the rent, and if the numbers still stack up, well, it\u2019s worth having a look at. But in my experience, the vast majority of them, that guarantee is loaded into the price.
\nKevin<\/b>:\u00a0 We\u2019re talking here about rental guarantees, of course, but could you draw the same conclusion from a property where they may offer you a Mercedes Benz with every unit that you buy or an overseas holiday? Could you draw the same conclusion from those?
\nDamian<\/b>:\u00a0 Definitely, Kevin. Again, there are two reasons why. People offering a Mercedes or offering overseas holidays, it\u2019s simply one or two things. It\u2019s that they can\u2019t sell them at the price they want and they need to load that in, so it\u2019s over priced for the real market value and they\u2019re using those as additional incentives. It\u2019s either that, or they\u2019re really just looking for other ways to maintain that price.
\nNothing is for free. Developers factor that into their project. Holidays, Mercedes, anything over and above or just to buying a normal property on fair market terms and conditions, at the end of the day, the buyer is usually paying for one way or the other.
\nKevin<\/b>:\u00a0 Good advice there from Damian Collins from Momentum Wealth. They\u2019re buyers agents in WA. Damian, thanks for your time.
\nDamian<\/b>:\u00a0 Pleasure, Kevin.
\n <\/p>\n","protected":false},"excerpt":{"rendered":"

The risk or otherwise of relying on rental guarantees is something that we get asked quite often.\u00a0 I seek Damian Collins opinion on that. Transcripts: Kevin:\u00a0 Ask any wise investor and they will tell you that if it sounds too good to be true, then…<\/p>\n","protected":false},"author":176692471,"featured_media":10643,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[32,7,34,10,11,13,36,25],"tags":[101],"class_list":["post-10642","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buying-a-property-topic","category-case-studies","category-finance-topic","category-kevin-turner-sponsored-channels","category-kevin-update","category-latest-story","category-property-investment-topic","category-sponsored-channels","tag-podcast"],"yoast_head":"\nRental guarantees - be careful - Damian Collins - Realty Talk<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/channels.realty.com.au\/realtytalk\/rental-guarantees-be-careful-damian-collins\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Rental guarantees - be careful - Damian Collins - Realty Talk\" \/>\n<meta property=\"og:description\" content=\"The risk or otherwise of relying on rental guarantees is something that we get asked quite often.\u00a0 I seek Damian Collins opinion on that. 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