Many developers offer a guaranteed rent period when an investor purchases a buy-to-let property. This is usually offered when you buy a property off-plan and before any tenants are in place.
So, what is a guaranteed rent?
A guaranteed rent is usually a guaranteed net return on a buy-to-let property that has been agreed on during the buying process. Paid monthly, it is ordinarily a percentage of the property purchase price and is paid for a pre-agreed period of time. An an example: If you’re offered a 7% guaranteed rent on a buy-to-let priced at £120,000 you would receive a net payment of £600.00 per calendar month.
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And what are the benefits of a guaranteed rent?
A guaranteed rent period on an off-plan development carried a range of benefits for the investor, such as:
- When a development is initially advertised to let, it often saturates the market (especially for larger projects). This means it may take slightly longer to let. A guaranteed rent period will ensure an income regardless of this uncertainty.
- It is a net payment, so costs such as service charge, maintenance and agent’s fees don’t have to be considered.
- There are no unexpected costs coming your way.
- If a build runs over the contracted longstop date(the date by which a developer needs to have finished the property, otherwise you can retract your offer to buy), it is likely that the developer will have to start paying your guaranteed rent payments.
Buy-to-let still seen as an attractive investment
But there must be a catch, right?
I wouldn’t necessarily call it a catch, but as with any investment, a couple of things should be kept in mind, such as:
- The developer isn’t likely to offer guaranteed rent payments unless they were making enough money to cover all associated costs, and then some! Don’t get tied into a guaranteed rent for more than 12 months, or at least consider that you could be losing rental income!
- If you have invested in an upcoming area, it is likely that rent prices are on the rise. If you agree to a guaranteed rent for more than 12 months, do the payments reflect a rise in price in year two or three?
- Ask to see how much your property has actually made in rent in year one, how long it took to rent out and maintenance costs. Consider these alongside other associated costs (service charge, agents fees etc.) if the investor is offering the option of further guaranteed rent. Get hold of the facts before making a decision.
In conclusion, yes, a guaranteed rent is beneficial for an investor for the first 12 months, offering security and regular payments at the time that the property may take longer to let, but probably not for any longer unless it reflects the market.