Avoid Apartment Developments That Offer Rental Guarantees

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. brisbane city urban apartment tower live skyscraper melbourne off the plan cbd market

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.key house

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.   property

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


Subscribe & don’t miss a single episode of Michael Yardney’s podcast

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

Need help listening to Michael Yardney’s podcast from your phone or tablet?

We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.


Prefer to subscribe via email?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.

Your Investment Property Magazine


Your Investment Property Magazine is the intelligent property owner’s choice when it comes to learning about Australia’s property market. Your Investment Property Magazine

'Avoid Apartment Developments That Offer Rental Guarantees' have no comments

Be the first to comment this post!

Would you like to share your thoughts?

Your email address will not be published.


Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...