Anyone considering buying investment property across Australia might wonder about the methods of renting the house, apartment, or building. In some cases, the property developer may offer a rental guarantee to help attract buyers by offering some stability in the face of difficulties 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.
Understanding the rental guarantees:
Before the pros and cons of a warranty program can be considered, it is important to first understand the basics of how warranty works.
Anyone planning to buy investment property in Australia must first understand what type of program they are considering. Australia has some rental guarantee options that will vary slightly in the way the program works.
The first option is the most common type that comes with new construction. The developer offers a certain percentage of the purchase price as a monthly guarantee on 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 interested investors to 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 generally associated with properties purchased through government loan options. This type of investment property does not require a newly built property so it is suited to other needs as well.
In most cases, the developer provides the rental guarantees in Australia. Government guarantees are less common for investors looking to secure their investment and have a certain 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 their needs and wants.
The most obvious benefit of the program is the fixed refund amount. Investors can expect to receive a fixed amount of rent each month based on the contract agreement entered into with the developer or the government program.
In many cases, the developer offers a fixed return based on the purchase price. For example, the developer may offer seven to 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 they will enter some income.
Another benefit for the investor is the lease. The developer who gives 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 a financial advantage by providing a fixed amount of money each month. It is safe and the investor does not have to worry about losing rent as a result of vacancies.
The property owner will never need to find out about rental management, hire a broker to rent the property, or try to avoid vacancies on the property. This is a clear advantage because it eliminates some of the main hassles of buying an investment property with the intention of renting it.
Disadvantages for the investor:
While a landlord has a few distinct advantages to accepting a rental guarantee, making an informed decision requires considering the disadvantages as well.
A major stumbling block of a rental guarantee is the low amount of the rent. By accepting a rent based on the purchase price, owners will not have the advantage of generating more income as the property value increases. The amount is established and will not change during the contract.
Another downside that could occur is the remaining tenure of the property after the deal is completed. If the property has current tenants at the time the warranty expires, it may not be possible to increase the rent, remove the current tenants, or take steps to improve the situation.
Tenants will have a lease that will allow them to stay in the property for a specified period of time and landlords will not be able to change tenants unless they break the lease first.
For many developer agreements, the property owner still has 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 lower your potential rental earnings.
Make an informed decision
Rental guarantees have benefits and dangers that can be attractive or distressing. Ultimately, Australian investment property owners will need to determine whether they are comfortable with the collateral or are willing to take the risks of finding tenants in person.