Investing in properties can be exciting and lucrative. Like all investments, however, there is a fair amount of risk involved. One way to mitigate your risks is to find properties that have a rental guarantee.
A rental guarantee provides you with assurance that you'll have rental income even if your home is without occupants at times, meaning you won't miss out on any rental payments while you're the owner of the property. You may also even be able to recoup some of your fees associated with property management companies depending on what agreement you sign.
A government guarantee from an organisation such as Defence Housing Australia (DHA) is also quite valuable. A lease agreement from DHA will see you net market value rent. Each year the property will be re-evaluated by an independent reviewer so you're not losing out. The DHA will also carry out inspections, management and reporting.
Government agreements from organisations like DHA also sometimes offer to pay bills on your behalf and deduct the expenses from your rent, eliminating some of the extra legwork you have to do as a landlord.
Why would you want a Rental Guarantee?
Investors like to look at properties that provide a rental guarantee because they are a safe option. These types of properties are unique because you receive a certain number of rental payments over a determined length of time. This is a good investment option when paired with a robust home loan, but profits can be limited by a lack of tenants. This is where a rental guarantee comes in handy.
What types of properties have Rental Guarantees?
There are many different types of properties that have rental guarantees. They work through the type of loan you get. Here are some options you can find:
- Rentals through the Department of Housing or Housing Commission;
- Rentals through DHA;
- Units where the developer has agreed to provide a guarantee to investors.
What are you able to borrow?
The amount that you're able to borrow from for this type of property varies from lender to lender and will take into account the property value.
As with a regular property, the following applies:
- Even if you only have 5% down you can still be eligible to buy a property;
- If you have a profession where it is hard to prove your income, you may still be eligible but you will only be able to borrow up to 80% of what the property is worth;
- If you want to be eligible for discounts, be sure to shop around because there are some lenders that offer these.
Some pros and cons
Obtaining a loan for a property with a rental guarantee isn't particularly more difficult than a regular home loan. As mentioned above, a key aspect in this situation will be the valuation.
Comparison of standard variable rate home loans
If you are looking at rental guarantee properties, then it is worthwhile comparing your options. The loans below will give a good indication of rates and fees
Apart from that, there are other factors to consider with rental agreements themselves.
- Guaranteed rental income for the life of the investment
- Some agreements will take care of management for you
- Some agreements will repair your property once the agreement ends
- In some cases you may not have a choice who your tenant is
- If you buy the property directly from the Government organisation, as is possible with DHA, you may overpay and the property may not be in location where good capital gains can be made
- The management fees can be quite expensive. DHA charges a flat rate of 16.5% per year for freestanding houses, compared to 7 - 10 percent in most states around Australia for regular property managers
Defence Housing Australia (DHA)
A popular rental agreement example is that offered by the aforementioned DHA.
If you buy a property through the DHA, you're agreeing to lease it back to the organisation for a certain amount of time. When you decide to do this then you will not be saddled with the worries of finding a tenant for your property. Your rental income is guaranteed by the government of Australia.
Standard loan terms range from three to six years, although DHA has the right to be able to reduce or lengthen this, although there are limitations to how many times they can do this.
When the agreement terminates DHA will even work to ensure the property is still in good standing order, including paying for a professional clean and even repainting or new carpets when the agreement is of a sufficient length. As mentioned, this service is 'free', but will see you pay a much higher management fee each year.
A rental agreement can be a good way to guarantee an income on your property. As with any investment strategy, examine both the pros and cons and seek independent advice before you sign or agree to anything.