Take rental guarantees with a grain of salt: Tips for buying off the plan

It is a good idea to treat rental guarantees with suspicion and do the numbers several times to be sure they really stack up.

Buyers’ agent Catherine Cashmore warns against buying into a development that is offering a rental guarantee because “it is always factored into the sales price, and once the guarantee expires, the unit’s yield will revert back to market forces”.

Cashmore says current rental guarantees are in the order of 5% to 7%. If an investment has a gross return of 6% and the developer guarantees $300 a week rent that would put the purchase price at $260,000.

But if the market rent is in fact $250 a week, the property is really worth $218,000. This would have you paying 19.2% over the market value. The developer only has to pay $5,200 in total over two years to guarantee the $300 a week rent and the company would pocket $42,000 – or $36,800 net – on the sale price.

For great tips on buying off the plan, download Property Observer’s free ebook – 14 tips for buying off the plan: The 2013 guide for investors and owner-occupiers.