Avoid apartment developments that offer rental guarantees

By |
More and more apartment developers in Sydney, Melbourne, Brisbane, and other major cities are offering rental guarantees to lure in buyers. But investors should avoid rental guarantees like the plague as they often disguise a weak market or an oversupply of units, states a new report from hotspotting.com.au.

A typical sales pitch offers investors a guaranteed rental income for a year, three years, or longer. While these returns might appear attractive, they’re actually a trap as developers use this ruse to keep flooding the market with over-priced units.

Investors eyeing apartments in Brisbane and Melbourne, in particular, need to be extra careful. As reported by Cameron Kusher, head of research at CoreLogic RP Data, “Brisbane is set to see the biggest uplift in total unit stock followed by Melbourne and clearly in more immature unit markets this carries a risk.”

Kusher highlighted inner-city locations in Melbourne and Brisbane as carrying the most risk from an oversupply of units. If projected stock is completed over the next 24 months, unit stock in Brisbane Inner will increase by 33.6%, 33.3% in Inner-North, and 32.5% in Holland Park-Yeronga.

How the trap is set
Developers offer rental guarantees when they’re struggling to sell apartments at the prices they want.

For example, a developer has a block of 100 units and he needs to sell them for $350,000. However, prices are falling in an over-supplied market and the true value of the blocks has fallen to $300,000.

As the market is oversaturated, the rental market will only pay $300 a week. Moreover, at a sale price of $350,000, the gross return for investors is only 4.5%. They won’t buy at these numbers and will look elsewhere.

By offering rental guarantees, developers can trick investors into making an unwise investment. The developer prices each unit at $350,000 and offers to guarantee rent of $400 per week for two years. This provides a return of 6%, which looks great to investors.

Investors see two years of income security and a great rate of return. Once the investor commits, the developer puts in tenants paying $300 per week (the true market rate) and secretly pays the $100 shortfall to the investor.

Over the two-year period, the developer pays $100 per week to make up for the renters’ shortfall. However, the developer has been paid $350,000 for a unit that’s worth only $300,000. In a development of 100 units, he makes an extra $4m by selling units for more than they’re worth.

Once the two-year agreement expires, the investor now has to find tenants on the open market. Unfortunately, because the rental market remains oversaturated, the weekly rental stays at $300.

The investor’s return falls from 6% to 4.5%, and the yearly income drops from $21,000 to less than $16,000.

Additionally, the value of the unit has fallen because income has dropped. If the investor decides to sell, he’s competing with developers selling units with the same deceptive rental guarantees.

The unit is now worth only $260,000 on the open market and the value of the investment has crashed by $90,000.

To avoid such financial disasters, the smart investor will look elsewhere.  


Related stories:
Property Managers Should Be On Their Guard Against Email Fraud
Investors Get Duped: Tax Fraud Scam On Rise

 

With interest rates at their lowest for more than 50 years, there are some great rates available. The best thing to do is to compare rates from all the lenders. Let us help take the leg work out of doing this - Compare Home Loans now

Top Suburbs : st peters , coolbellup , nightcliff , coburg north , hebersham

go back

Get help with your investment property



Do you need help finding the right loan for your investment?


When investing in property, it is important to make sure that you not only have the lowest available rate that you can get, but also have the correct loan features for your needs.

Just fill in a few details below and we'll then arrange for a local Aussie Mortgage Broker to contact you and work out what features or types of loans are right for your needs. We'll even help with the paperwork. Plus an appointment is free.

How soon would you like a mortgage?
What is your Annual Household Income i $
Do you currently own any Investment Properties?
Do you own your own residence?
How much equity do you have in all your current properties?
First Name
Last Name
Where do you live?
What number can we reach you on?
E-mail address
We value your privacy and treat all your information seriously - you can check out our privacy policy here