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18
Mar 2014
By Brian Capp -   In Blog -   No Comment

Do not get sucked in by rental guarantees. Rental guarantees from owners (usually developers) should be fully researched before you buy.

At the present time a firm of developers is spruiking an auction of investment apartments. Nothing wrong with that. However make sure the rental guarantee is not the driver that gets you excited. Rather, the long term prospects of the asset should be the determining factor.

RESEARCH IS ESSENTIAL, into the rent and where to buy. (Capital gain)

Rental guarantees that are for 12 months are frequently offered at rates of return of 7% which are way above what might be expected in the ‘real’ marketplace.

Here is how they work. Apartment price of $520,000 with a guarantee of 7% means a gross return of $36,400 per year. The market rent for the apartment is more likely to be 4% which is the expectation of most investors, or $20,800 per year. The owner probably loads the price anyway to take into account the subsidy and at the end of 12 months the rent will be back to market. The tenant is most unlikely to pay the $36,400 but would be very likely to pay the $20,800.

The real DANGER is that a buyer bases his finance application on the “guarantee” figure and at the expiration of the 12 month lease will have a serious shortfall and possibly be unable to meet mortgage obligations. A forced sale may ensue.

We can help with the purchase and do the sums.

Brian Capp 0418 500 483 and Tim Hunt 0412 714 665

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