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The pros and cons of guaranteed rent

Why a rental guarantee might not be as reliable as it seems.

Updated

Fact checked

Guaranteed rent schemes

Most everyone knows the old adage that if something seems too good to be true, it probably is. So what does this mean for property investors? When investment properties offer perks like guaranteed rent, should investors jump on the opportunity, or is it too good to be true?

While there are some cases in which the claim of guaranteed rental income might be trustworthy, in most cases it should raise a red flag.

Who offers guaranteed rental returns?

There are a few situations in which investors might find themselves being enticed with the promise of guaranteed rental returns. Some are much more reliable than others.


Defence Force housing

Defence Housing Australia (DHA) is a government-backed enterprise that has a unique platform for property investors. Investors buy houses either built or acquired by DHA and then lease the properties back to DHA for a set period of time (generally three or six years). During this time, the investor receives guaranteed market rent and DHA undertakes all property management and maintenance.

Is the rent actually guaranteed?

In this case, the guarantee of market rent is a reliable one. Because DHA is backed by the government, you can be certain your rental income isn’t going to evaporate over the term of the lease.

What’s the catch?

There are some definite downsides to DHA properties. Firstly, DHA charges fees for the upkeep and management of its properties. These fees, at 16.5%, are generally much higher than those of a private property management company.

DHA properties also have serious drawbacks when it comes time to sell. Investors are limited to DHA-owned homes, which are located within the proximity of Defence Force bases across Australia. The location of these properties can significantly limit the potential buyer pool.


Serviced apartments

Serviced apartments are usually used by business travellers and tourists as a short- or long-term accommodation option, often as an alternative to a traditional hotel. Investors can purchase serviced apartments and lease them back to the operator, who then takes care of tenancy and property management.

Is the rent actually guaranteed?

This largely depends on the operator. The attractive feature of serviced apartments is that they often offer guaranteed rental income above the rental yield that investors would be likely to see from traditional properties. But this guarantee is only as good as the operator. While large serviced apartment companies are reliable, should an investor buy from a small operator and find that it’s mismanaged, the guaranteed rent could quickly evaporate.

What’s the catch?

A well-managed serviced apartment can generate strong rental returns and a reliable stream of regular income. However, the downside appears when it comes time to sell. Serviced apartments usually don’t see strong capital gains and the buyer market for serviced apartments is quite narrow.

Read more about the pros and cons of serviced apartments


Off-the-plan properties

Developers of off-the-plan properties will sometimes entice buyers with a period of guaranteed rental income. They will promise potential buyers a certain rental return for a period of two years or so, at which point the guarantee expires.

Is the rent actually guaranteed?

This is the scenario in which investors should be particularly wary. The rent is guaranteed, for a certain period. After the guarantee expires, investors may find it very difficult to find tenants willing to pay the amount that will generate the returns they’ve become accustomed to. This is because of the way these rental guarantees are often structured, which amounts to a bit of smoke and mirrors on the part of the developer.

What’s the catch?

The way that developers often structure rental guarantees means that the rental income investors are receiving isn’t actually in line with the market. They do this by inflating the purchase price of the property and then using part of the profit to make up the shortfall between the market rent the property actually generates and the amount they’ve promised to investors. For instance, if they’ve promised an investor a guaranteed $600 a week in rent but can only find tenants for the property at $400 a week, the developer will use the inflated purchase price to help make up the additional $200 a week for the term of the rental guarantee.

The real catch comes when the guarantee expires. Investors are unlikely to be able to find tenants willing to pay the inflated rental amount that they were getting from the developer and could end up seeing their rental income fall by several hundred dollars a week. At the same time, having paid a highly inflated purchase price to get the rental guarantee in the first place, when it comes time to sell they may find the property valued lower than the price they originally paid for it. Developer rental guarantees tend to actually be too good to be true.

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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
UBank UHomeLoan Variable Rate - Discount Offer for Investor Variable P&I Rate
2.89%
2.89%
$0
$0 p.a.
80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
Athena Liberate Home Loan - 70% to 80% LVR Investor, P&I
2.94%
2.87%
$0
$0 p.a.
80%
A competitive investor variable rate that falls as you build equity. This rate takes effect from 30 September for new and existing customers. You can get this rate if you apply today.
homeloans.com.au Low Rate Home Loan with Offset - LVR 60% to 80% (Investment, P&I)
2.69%
2.71%
$0
$0 p.a.
80%
This investment loan keeps fees low, has a sharp interest rate and comes with a 100% offset account. This loan is not available for construction.
Newcastle Permanent Building Society Fixed Rate Home Loan - 1 Year Fixed (Owner Occupier, P&I)
2.49%
4.12%
$595
$0 p.a.
90%
$2,000 refinance cashback
Investors can take advantage of a short term fixed rate with no ongoing fees. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
CUA Fixed Rate Home Loan - 3 Year Fixed (Investor, P&I)
2.69%
4.44%
$600
$0 p.a.
90%
Available with a 10% deposit
Competitive rates for fixed for 3 years with redraw facility. Available with a 10% deposit.
UBank UHomeLoan - 1 Year Fixed Rate (Investor, P&I)
2.29%
2.84%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
Athena Evaporate Home Loan - 60% to 70% LVR  Investor, P&I
2.89%
2.83%
$0
$0 p.a.
70%
This rate takes effect from 30 September for new and existing customers. You can get this rate if you apply today.
ME Flexible Home Loan With Member Package - LVR ≤80% $400k up to $699,999 (Investor, P&I)
3.13%
3.57%
$0
$395 p.a.
80%
Package loan for investors making principal-and-interest repayments. Low fees and 20% deposit required.
Pepper Money Essential Prime Full Doc Home Loan - LVR >75% up to 80%
3.09%
3.29%
$599
$10 monthly ($120 p.a.)
80%
This is a competitive, flexible variable rate suitable for borrowers with a good credit history. Borrow up to 80%.
Athena Celebrate Home Loan - 60% LVR  Investor, P&I
2.79%
2.79%
$0
$0 p.a.
60%
Investors with large deposits can get this low variable rate. This rate takes effect from 30 September for new and existing customers. You can get this rate if you apply today.
IMB Fixed Rate Home Loan - 3 Years Fixed (LVR ≤90% Investor, P&I, NSW and ACT borrowers only)
2.64%
3.56%
$449
$6 monthly ($72 p.a.)
90%
NSW and ACT customers only. A 3 years fixed rate investor which allows extra repayments to be made.
UBank UHomeLoan - 3 Year Fixed Rate (Investor, P&I)
2.29%
2.74%
$395
$0 p.a.
80%
Pay no ongoing fees on this investment loan fixed for 3 years.
ING Orange Advantage Loan - $150k to $500k (LVR ≤ 80% Investor, P&I)
3.24%
3.57%
$0
$299 p.a.
80%
Investors can enjoy a 100% offset account, a redraw facility and flexible repayments.
UBank UHomeLoan Variable Rate - Investor Extra Offer Investor Interest Only
3.29%
3.16%
$0
$0 p.a.
80%
Pay interest only repayments with this special offer for investors.
ME Basic Home Loan - LVR ≤ 80% (Investor, P&I)
3.28%
3.30%
$0
$0 p.a.
80%
A no frills home loan for investors.
Athena Variable Home Loan - Investor, IO (*now 3.09%, drops to 3.04% on 30 Sep)
3.04%
2.93%
$0
$0 p.a.
80%
A competitive interest-only investor rate with no application or ongoing fees. Requires a 20% deposit. This rate will drop to 3.04% p.a on 30 September 2020 for new and existing customers. You can get this rate if you apply today.
UBank UHomeLoan - 1 Year Fixed Rate (Investor, IO)
2.44%
2.85%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
Pepper Money Essential Prime Alt Doc Home Loan - LVR up to 55%
3.85%
4.04%
$599
$10 monthly ($120 p.a.)
55%
A competitive rate home loan with an offset facility for self-employed borrowers.
ME Flexible Home Loan Fixed - 1 Year Fixed Rate (Investor, P&I)
3.04%
4.90%
$0
$0 p.a.
80%
Lock in the rate on your investment loan with one year. Requires a 20% deposit.
UBank UHomeLoan - 5 Year Fixed Rate (Investor, P&I)
2.74%
2.83%
$395
$0 p.a.
80%
Lock in a 5 year fixed rate on your investment loan and pay no ongoing fees.
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