Real Estate

Advantages and disadvantages of rental guarantees

Anyone considering buying an investment property across Australia might be wondering about the methods of renting out the house, apartment or building. In some cases, the property developer may offer a rental guarantee to help attract buyers by offering some security against the pitfalls associated with finding a tenant. While the offer may seem like a good decision, buyers should consider all of the program’s potential pitfalls and benefits to make an informed decision.

Understanding Rental Guarantees:

Before it is possible to consider the advantages and disadvantages of a guarantee program, it is important to first understand the basics of how the guarantee works.

Anyone planning to buy an investment property in Australia must first understand what type of program they are considering. Australia has a few rental guarantee options that will vary slightly in how the program works.

The first option is the most common type that comes with new builds. The developer offers a certain percentage of the purchase price as a monthly guarantee on the rental income. This type of collateral is only available when the project is still in the hands of the developer and the seller determines that it will help attract investors interested in the property.

Others may be eligible for a Defense Housing Australia (DHA) rental property. This is a government guarantee rather than a developer guarantee and is usually associated with properties purchased through government loan options. This type of investment property does not require a new build property, so it suits other needs as well.

In most cases, Australia rental guarantees are provided by the developer. Government guarantees are less common for investors looking to secure their investment and have a set amount of money coming in.

Advantages for the Investor:

Rental guarantees have numerous benefits for an investor and these should be considered before determining if it is the best option for your needs and wants.

The most obvious advantage of the program is the fixed return amount. Investors can expect to receive a fixed rental amount each month depending on the contract agreement made with the developer or government program.

In many cases, the developer provides a fixed return based on the purchase price. For example, the developer might offer seven or eight percent of the purchase price as guaranteed rental income. This allows investors to calculate the amount they will receive and gives them the peace of mind that some income will be earned.

Another benefit for the investor is the lease agreement. The developer giving a guarantee is essentially signing a contract or a lease for the property. If the developer does not provide the agreed rental income, the investor has options to legally receive the money.

Rental guarantees offer financial security. Having a guaranteed rental income gives investors an advantage in their finances by providing a set amount of money each month. It is safe and the investor does not need to worry about losing income as a result of vacancies.

The property owner will never have to figure out rental management, hire a broker to rent the property, or try to prevent the property from going vacant. This is a clear advantage because it removes some of the major hassles of buying an investment property with the intention of renting.

Disadvantages for the investor:

While there are some clear advantages to accepting a rental guarantee for a property owner, making an informed decision also requires considering the disadvantages.

A major pitfall of a rental guarantee is the low amount of rent. By accepting a rent based on the purchase price, owners will not have the advantage of generating more income as the value of the property increases. The amount is fixed and will not change throughout the agreement.

Another downside that could occur is the remaining ownership of the property after the deal is complete. If the property has current tenants at the time the guarantee expires, it may not be possible to raise the rent, remove current tenants, or take steps to improve the situation.

Tenants will have a contract that allows them to stay in the property for a set amount of time, and landlords will not be able to change tenancy unless they break the contract first.

For many developer agreements, the property owner must still pay maintenance fees and service charges for the house, apartment, or property. This may or may not apply to government guarantees, depending on the contract. Paying maintenance and service fees can reduce potential rental earnings.

Make an informed decision

Rental guarantees have advantages and disadvantages that can be attractive or agonizing. Ultimately, investment property owners in Australia will need to determine whether they are comfortable with collateral or willing to take the risk of finding tenants in person.

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