Just Who is Paying Your Mortgage?

Article Date : 27 June 2006

Rental guarantees sound like just the thing – choose your property investment and the developer guarantees to see to it that you receive a rental income for anything from two to five years. So, simply sit back and watch your investment grow, while your tenants pay the rent and cover your mortgage repayments. Does this sound too good to be true? Rental guarantee schemes have increased in popularity over the past few years as developers continue to create new incentives to attract buyers and on paper they look very good. The developer undertakes to find you tenants and guarantees all payments while all you need to do is hand over the keys for the specified number of years. This is essentially what happens, however, you will need to consider the price you pay for this privilege and bear in mind the following factors: - The developers will have to recoup the cost of their generous offer, namely by including it in your purchase price. Typically many will offer you a gross rental guarantee of say, 5% while the purchase price is quietly raised by 15%, more than covering the guaranteed rental. Therefore you will essentially be paid back with your own money. - Many developers are not interested in obtaining a maximum rental value for your property as they have already more than recouped their money with the sale. You, the owner, might find that when the guarantee period ends, you are stuck with the existing low rental payments which are difficult to increase, while some developers don’t bother renting units out at all. - At the end of the rental guarantee period, you may find that your property is one of many in a glut of properties newly up for rental. Yours may take time to rent or be difficult to shift. - If you are confident you can rent the property out yourself and you have calculated the value of the rental guarantee offer, you may need to ask for this as a discount on the purchase price. However, not all developers are the same and it would be unfair to brand them all as guilty of a scam. In fact, there are many genuine companies who work ethically, serving to enhance investor confidence and continue to provide an excellent product. Look out for the good signs when picking your property. A company offering a good guaranteed rental agreement will: - Not overprice your property by huge percentages to more than cover your rental guarantee. However you will need to bear in mind they will not be giving anything away either. Take, for example, Royal Peninsula’s new development at Medina Elvira, near Granada, Spain. The company policy here is to price all units accurately and openly, so there is no room for discounts. The flip side is that investors are clear about what they are getting for their money; there are no hidden extras and prices remain low. - As is also the case at Royal Peninsula, the guaranteed rental agreement is made on the basis of signed contracts with national and international tour operators. Travel agencies pre-book blocks of the year and supply bank guarantees. - Keep your property permanently occupied with genuine rentals, usually linked with tour operators and holiday lets within a good niche market that will continue to feed your investment. Avoid The Pitfalls The best advice for all investors is to make seven simple checks to be sure your developer is offering a genuine deal: 1. Add up the items making up the price of the terms offered in the guarantee offer, including legal fees, stamp duty and deduct this from the asking prices. This will give you the actual price of the property, which you can then compare with other similar options. This can become a clever bargaining tool. 2. Study the rental market in the area and work out if your property stands a good chance of rental. On what basis are the developers guaranteeing to rent out your property and will you be able to do so when the guaranteed rental period is over? 3. What is the infrastructure like around your property? Will it be adequate for the rental market proposed? 4. Make sure your property is located within an established, or preferably an up-and-coming area which is becoming popular. In this way your property will be commercially viable and a good investment. It must be continually in demand as a holiday home to fetch a fair price. 5. Is the developer obliging you to accept their furniture pack as part of the deal? If so, how much is this really costing you and is it a fair price? 6. Be aware that gross guarantees do not include costs such as service charges, management fees and ground rent, while net guarantees do. 7. Add up the total income from the rental guarantee and make the comparison with a comparable property without a guaranteed rental agreement. If the price difference is greater than the net guarantee, then ask for a discount. So the name of the game is be vigilant and don’t allow a salesman to talk you into a deal that is not worth the paper it is written on. Propertyshowrooms.com has already done all the groundwork for all its investors. With a clear conscience, they will recommend only carefully vetted developments offering genuine rental and investment potential.

Just Who is Paying Your Mortgage?

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