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So what’s a rental guarantee?
So let’s say for example a two-year rental guarantee at 6%. This Means that the developer, or the management company, whoever it is, would have 6% of the purchase price set aside in a separate account for each year of the guarantee period. Why would anyone do that?!? The answer…they won’t! And if they did have that money there, where has it come from? They certainly haven’t taken it out of their profits…the most likely explanation is that the rental guarantee figure has been factored into the price and you are essentially overpaying for the apartment and just being repaid your own money over the next few years. This type of property DOES NOT get the TD seal of approval!
Then what actually is a rental assurance?
Rental assurance on the other hand, which is what DOES get the TD seal of approval, are properties that have a rental package in place that basically means the management company are so confident of delivering the returns at a certain level they are happy to cover any shortfall should that ever happen. They are essentially giving you their ‘assurance’ that if the property doesn’t perform as well as expected, they will be putting their hands in their own pocket. So the confidence is there.
So just to clarify, a rental assurance at 6% would mean that it’s a contractually binding agreement between yourself and the management company to say that they’re confident on achieving a 6% yield, however, if they don’t, they are committing to top that up to ensure that level.
The risk is on the Management company, not the investor?
Yes absolutely, however, this is a calculated risk and they should be confident they can achieve what they offer as an assurance. The advantage for the management company is that if (and usually when) the property over performs…they get to keep all of the extra rental income. This is why more and more developers and management companies are offering this – it keeps their buyers/landlords happy, but also gives companies themselves an ongoing income stream over the next 5-10+ years.
One example of a unique development with a long term rental assurance is our Hull City Centre apartments, that come with a 10-year rental assurance at 8.5%. The reason the management company is offering this is the same as before, they are confident of filling the development from day one, and even if they don’t, and they have if they have to wait for the development to reach ‘maturity’ (full occupancy at the income level they require), they know that they will make up for any shortfall many times over throughout the 10 year term, especially as rents increase during the period.