July 20, 2024


Designing done right

Advantages and Disadvantages of Rental Guarantees

4 min read

Anyone who is considering an investment property purchase throughout Australia might wonder about methods of renting out the house, apartment or building. In some cases, the developer of the property might offer a rental guarantee to help draw in buyers by offering a certain amount of stability against pitfalls relating to finding a tenant. Though the offer might sound like a good decision, buyers need to consider all of the potential pitfalls and benefits of the program to make an educated decision.

Understanding Rental Guarantees:

Before it is possible to consider the advantages and disadvantages of a guarantee program, it is important to understand the basics of how the guarantee works first.

Anyone who is planning to buy an investment property in Australia must first understand which type of program they are looking at. Australia has a few 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 constructions. 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 draw in investors who are interested in the property.

Others might be eligible for a Defence Housing Australia (DHA) rental property. This is a government guarantee rather than a developer guarantee and is usually associated with properties purchased through government loan options. This type of investment property does not require a new construction property, so it fits other needs as well.

In most cases, Australia rental guarantees are provided by the developer. The government guarantees are less common for investors who are looking to secure their investment and have a set amount of money coming in.

Advantages to the Investor:

Rental guarantees have numerous benefits to an investor and these should be considered before determining if it is the best option for their needs and wants.

The most obvious advantage of the program is the fixed return amount. Investors can expect to receive a set rental amount each month based on the contract agreement made with the developer or the government program.

In many cases, the developer provides a fixed return based on the purchase price. For example, the developer might offer seven or eight percent of the purchase price as a guaranteed rental income. This allows investors to calculate the amount they will receive and provides peace of mind that some income is going to come in.

Another benefit to the investor is the lease agreement. The developer who gives a guarantee is essentially signing a contract or a lease on the property. If the developer does not provide the agreed upon rental income, the investor has options to legally receive the money.

Rental guarantees offer financial security. Having a guaranteed rental income gives investors an edge on their finances by providing a set amount of money each month. It is secure and the investor does not need to worry about losing rent as a result of vacancies.

The property owner will never need to figure out rental management, hire a broker to rent out the property or otherwise try to prevent vacancies in the property. This is a distinct advantage because it removes some of the major hassles of buying an investment property with the intention to rent.

Disadvantages to the Investor:

While the property owner has some distinct advantages of agreeing to a rental guarantee, making an educated decision requires looking at the disadvantages as well.

One major pitfall of a rental guarantee is the low rental amount. By agreeing to a rent based on the purchase price, property owners will not have the advantage of bringing in more income as the property value increases. The amount is set and will not change throughout the agreement.

Another disadvantage that might occur is the remaining tenancy on the property after the agreement is complete. If the property has current tenants at the time the guarantee expires, it might not be possible to raise the rent, remove the current tenants or otherwise take action to improve the situation.

The tenants will have a contract that allows them to stay in the property for a set amount of time and owners will not be able to change tenancy unless they break the contract first.

For many agreements from the developer, the property owner is still required to pay the maintenance fees and service charges on the home, apartment or property. This might or might not apply to government guarantees, depending on the contract. Paying the maintenance and service fees can cut back on the potential profits from the rent.

Make an informed decision

Rental guarantees do have benefits and pitfalls that can become appealing or distressing. Ultimately, Australia investment property owners will need to determine whether they feel comfortable with the guarantee or are willing to take the risks of finding tenants personally.

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