
Get exclusive money-saving offers and guides
Straight to your inbox
Updated
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
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.
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 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.
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.
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 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.
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.
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
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.
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.
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.
After entering your details a mortgage broker from Aussie will call you. They will discuss your situation and help you find a suitable loan.
The Adviser’s number 1 placed mortgage broker 8 years running (2013-2020)
Do you have to tell your lender if you rent out a room and turn your mortgage into an investment loan?
SPONSORED: Saving enough for a house deposit while you're paying rent is challenging, but it can be done.
Finder experts explain how to claim home office expenses on your 2020 tax return, tips for new investors and how to get the most out of the EOFY sales in 2020.
Today on Pocket Money, Michael Yardney joins us to help us understand how to research, finance and manage your property investing strategy with the long term in mind.
Experts have encouraged those hunting for good value for their property dollar to look at Brisbane and Melbourne according to Finder. Only one in eight experts and economists say they would buy in Sydney.
On this episode of the Pocket Money podcast, you'll learn how to purchase your first home like a pro with property expert Michael Yardney.
Do you have enough to retire? Here's how to calculate the amount of money you'll need to fund your retirement, plus tips to help you get there.
Are you still renting but have been thinking about buying? Find out what you'll need to know in the great debate of renting vs buying.
If you've got the cash flow and you've paid your mortgage down, investing in property can be a wise move.
Rent.com.au helps renters and landlord with their property needs, from listings and inspections to bond payments, utilities and property management.