The Myth Of Real Estate Rental Guarantees

 

  1. A Marketing Fairy tale:
  2. The Reality is that you do not need a rental guarantee;especially for projects that are not completed:
  3. The False Legal Structure of GUARANTEED RENT:
  4. Top FOUR risk factors:
  5. If you still want to do it, how can you do it safely?
  6. The only legit rental guarantee:
  7. The market reputation of play makers of this game:
  8. Recommendations:
  9. Closing statement:

A Marketing Fairy tale:

We often see real estate developers, sellers or even agents promoting projects to investors with guaranteed rental income for a number of years. In reality, the rental guaranteed is provided in-exchange for inflated property prices. There are two prominent promotional faces for this myth:

  1. They promote very high percentages as a rental guarantee in order to hook clients and to generate interest from investors, such as “25% guaranteed rent”. However, once potential clients call them, they are informed it is 25% over 4 years or so, which is still a myth, but a smaller one. When these properties are advertised with a 25% rental guarantee, it is done to provide the impression of offering investors a 25% per year rental guarantee. There are those that are aware that any rental guarantee this high is not achievable but you would be surprised by the number of inexperienced investors that fall for these marketing traps.

  2. They promote a high percentage per year as guaranteed rent; let’s say for example 8% per year. In reality, they are aware 8% is unattainable when it comes to the actual rent, but when you factor in the occupancy rate, it becomes even more impossible to achieve. So why do they still offer it?

The Reality is that you do not need a rental guarantee, especially for projects that are not completed:

While much less common, buyers will also come across off plan projects that include rental guarantees as part of their advertising campaigns. Keep in mind that this is a rental guarantee for a property that is not yet ready. The market changes, and with it, so do rental prices and occupancy rates for certain areas.When your property has been handed over, it will be advertised to tenants who aware of the current market price and as a result, finding a tenant to pay above the market price, despite your agreement with the seller for a specified rental guarantee, will be next to impossible.Always read the small print!

Your best strategy to acquire an income generating asset therefore is to buy a ready property that is already occupied or will be easy to rent. You can check up to the minute market prices for sale and rent for the area you are interested to invest in at www.property-trends.com. All of the data here comes from the Dubai Land Department. At the end of the day, there are plenty of great deals when it comes to investing in ready properties and what you see is what you get. No surprises. No delays! If you don’t have the time to manage your property and find a tenant yourself, you can easily choose a professional property manager to do it on your behalf.

The False Legal Structure of GUARANTEED RENT:

The majority of real estate developers tend to create a third-party shell limited lability company or (SPV) to guarantee the rent. So, the developer or the real estate seller as a legal entity is not the actual guarantor; it is a third party that has no assets and no solvency power. If for any reason they decide not to pay you, there is not much you can do, even if you take them to court. It is a limited lability shell company that can announce bankruptcy tomorrow and the actual entity that sold you the rental guarantee will remain untouched.

In most cases rental guarantee arrangements are based on side agreements and are not part of the actual real estate sales and purchase agreement. Which is, for the lack of better words, legal fraud.

The Top FOUR risk factors:Double risk for OFF-PLAN projects:

  1. Real Estate Developers base the guaranteed rent on the completion date of your property. Which means, if the completion is delayed which is the case for almost every project, your rental income will be delayed and all the capital you invested to purchase the real estate will be frozen without generating any income.

  2. OVERLY PRICED PROPERTIES:
    Any real estate sold based on guaranteed rental income, is for sure an overly priced real estate unit. This is because the extra amount they pay per year as guaranteed rent is added to the price of the property. So forget about any potential capital appreciation, because in effect, you are buying a property valued at a much higher price than what it is actually worth. Even if the entire real estate market goes up by 10%, the price of your property will remain the same.

  3. GUARANTEED RENT IS NOT RECESSION PROOF:
    What is the point of a rental guarantee if you are paid during robust markets only? If that is the case, then you do not need the guarantee. Simply invest in a well-priced property and rent it in the free market. Never ever buy expensive apartments under the promise of guaranteed rental income. If they can rent it, then you can too. The market is open for all. Most guarantors default on rental payments during down markets.

  4. IF DEVELOPERS WERE ABLE TO SELL WITHOUT A RENTAL GUARANTEE, THEY WOULD NOT HAVE INTRODUCED THE RENTAL GUARANTEE:
    In most cases, rental guaranteed offers apply to selective units that did not sell well. In other words, the least attractive units in the project. Investors will have paid a premium for units that will be challenging to rent or re-sell.

If you still want to do it, how can you do it safely?

  1. Get a professional real estate lawyer to read the sales and purchase agreement and most importantly to qualify the legal and commercial legitimacy and solvency of the actual guarantor of the annual rental amount.

  2. Make sure that the actual guaranteed rental amount per year is inline with the actual rental market price for such a property.

  3. Conduct thorough research on the real estate seller; be it a real estate developer, a builder or an agent.

  4. Finally, ensure that the price of the property is not inflated. It has to be more or less inline with the market price.

The only legit rental guarantee:

  1. These can be found for primarily ready properties.

  2. The guarantor must have credibility, legitimacy and solvency power.

  3. Properties are rented to blue-chip companies on long term contracts are often the best rental guarantee investment you can find. They are recommended if that is your investment target.

  4. The annual guaranteed rental amount is reasonable and inline with the market price.

The market reputation of the play makers of this game:

They say the world is small, let along how small the market is. Sooner or later all play makers of this fraudulent game will sink. The good news is that it does not take a lot of research for new potential investors to learn about them.

Recommendations:

I strongly believe that advertising any off-plan projects based on guaranteed rental income needs to have a stamp of approval from the regulatory authority of the market to prevent impending fraudulent transactions and contracts. No real estate developer, seller or agent should be promoting guaranteed rental income without obtaining the prior approval from the regulatory authority.

Closing statement:

At fäm Properties, we believe that after hospitals that offer healthcare and schools that offer education, come real estate providers that offer homes and safe investments for all. For over a decade we take pride in the fact that we continue to live up to our social and business responsibilities by taking each and every real estate product through a very well designed qualifying process before promoting it to our clients. As a result,we have built a sound reputation that speaks volumes about our achievements in the market. 

To get the best straight real estate advice, email me on [email protected], follow me on Youtube Channel STRAIGHT TALK.



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