I have been noticing quite a few builders and marketing companies selling rental guarantees move of late, however I think they are not selling them or disclosing them correctly …
For example I saw a property being sold for $455k with a rental guarantee for $520.00 per week or 6 percent but is this correct … lets see if you can work out the true return then I will tell you the name of the sprooker …
OK i'll help a little to kick you along
Taxable income
OutgoingsD … beware of rental guarantees unless they come from the companies financial adviser with his/her fin.services licience number attached.
If you charge $27,040 more for the property than it cost to build a developer can guarantee $520 a week for 12 months.
How long is the guarantee for and what does the rent go down to at the end of this time period ?
$27300 for 6%Not sure where negative 'D' is trying to go with this one, but here is another angle on rental guarantees that may be worth considering.
From my observations, the biggest problem with buying of the plan or in large Developments is the fact that the market gets temporarily flooded with rentals for a period of time and as most investors have borrowed cost plus on interest only it does not take long for the gloss to wash off the investment plan, especially if the property remains untenanted for a period of time. As an example of this statement let me say that in South Brisbane in 2007 there were 7 apartment buildings comprising approx 500 two bedroom units that settled within a six month window. Obviously not all of these units were investment properties but lets assume that 60% were (300units). This creates an abnormal Supply/Demand ratio and rental values are forced down as anxious Investors take what ever is offered in order to get some money to meet the Interest only payments. As a side issue it also reflects on the property value as a percentage of investors panic and decide to bail out only to find that they can not get what they paid for the unit and in some cases suffer a loss and walk away from property investment disillusioned.
Because of this phenomenon, I believe that it is highly responsible of a Development company to offer a rental guarantee. What are they really giving apart from peace of mind? Lets assume that the unit that D mentions at $455,000 would rent for $420/wk on a normal market and the guarantee is $520/wk then the Developer is really only giving $100/wk or $5,200 per year (perhaps a little more if the unit is rented for less than $420/wk). As the first two years of any unit purchase are the most costly, it makes sense to me to have the guarantee in place for a two year period even if the buying price is loaded by $10,000 to cover the Developers risk..
I see your point D.
Personally when I determine yield it is AFTER all costs, not prior. However, this is not restricted to the rental guarentors, I think the magority of %yields being promoted by REAs in their listings are expressed simply as per annum rent/purchase price*100. It is up to the buyer to evaluate the rest.
MIck
I think it is completely a JOKE with rental guarantee. It is a clever propaganda from big developer trying to lure the 'mum-and- dad' investor into it. What happen after 1 or 2 years?? The rental price will back to 'market' value and interest rates are keep going up!!!!. If you buy a lemon, it is still a lemon no matter how many sweets your add on
If the property itself is so valuable, it DOES NOT need rental guarantee… people are fighting to rent for it
cheersDonald
Mick, you are correct, it is safer for Agents to quote a gross rate of return than a net rate of return as the net rate will vary depending upon tax rate and if we started quoting highest marginal rate net returns, I'm sure some nitpicker would pull us up on this issue as well.
Most intelligent Investors will calculate their own rate of return.
and Donald, You can lead a horse to water but you can't make him drink.
What we saw locally, Parramatta 20 storey apartments, was the rental guarantee being a top up.
Say guarantee was 20K pa rent, they got tennants for 3 years at 12.5K-15K. pa then topped up the difference, Cost them worst case scenario $22,500 for a BIG THREE YEAR GUARANTEE !!!!!, and let them sell around 60K to 80K over market, as most investors found out.
My absolute favourite was a crowd that had a phenomonal 12 mth rental guarantee around Gladesville on a development, around 12% return. Came complete with Tarago. Rented them out to tourists, at then end of rental guarantee, the Taragos were on their last legs and return dropped through the floor, so did the resale value.
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