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Advantages and Disadvantages of Rental Guarantees
Anyone who is considering buying an investment property across Australia may 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 stability against the pitfalls associated with finding a tenant. While the offer may seem like a good decision, buyers should consider all the potential pitfalls and benefits of the program to make an informed decision.
Understand rental guarantees:
Before it is possible to consider the advantages and disadvantages of a warranty program, it is important to first understand the basics of how warranty works.
Anyone planning to buy an investment property in Australia should first understand what type of program they are looking at. 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 guarantee is only available when the project is still in the hands of the developer and the seller determines that it will help attract investors who are 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 also suits other needs.
In most cases, Australian 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.
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 set rental amount each month based on the contractual agreement made with the developer or government program.
In many cases, the developer offers a fixed return based on the purchase price. For example, the developer may offer seven or eight percent of the purchase price as guaranteed rental income. This allows investors to calculate the amount they will receive and provides peace of mind that some income is coming.
Another benefit for the investor is the lease. The developer giving a guarantee is essentially signing a contract or 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 edge in their finances by providing a set amount of money each month. It is safe and the investor does not have to worry about losing the rent as a result of vacancies.
The landlord will never have to figure out rent management, hire a broker to rent the property, or try to avoid vacancies in the property. This is a clear advantage because it removes some of the major problems of buying an investment property with the intention of renting out.
Disadvantages for the investor:
While there are a few distinct advantages for a landlord to accept a rental guarantee, making an educated decision also requires looking at the downsides.
One of the main drawbacks of a rental guarantee is the low rental amount. By accepting a rental based on the purchase price, owners will not have the advantage of earning more income as the property increases in value. The amount is fixed and will not change throughout the agreement.
Another downside that can occur is rent remaining on the property after the lease is completed. If the property has current tenants at the time the warranty 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 their tenancy unless they break the contract first.
For many developer agreements, the owner is still required to 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 profits.
Make an informed decision
Rental guarantees have advantages and pitfalls that can be either attractive or distressing. Ultimately, Australian investment property owners will need to determine whether they are comfortable with collateral or whether they are willing to take the risk of finding tenants themselves.
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