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March 2005
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 Liz
Hodgkinson on
Pitfalls of ‘guaranteed’ rental
Developers have come up with a cunning plan to woo buy-to-let
investors. They offer a guaranteed rental on newbuild and offplan
properties – whether or not they are actually rented out on
completion.
The developers agree to pay the buyer a proportion of the
purchase price of the property – typically 6% – for a certain length
of time, usually up to a year.
This kind of deal, which has become common on investment properties
abroad, sounds seductive enough, especially in a highly competitive
rental market. You buy the property, and you get a rental yield
thrown in.
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But is it all as good as it seems?
ARLA – the Association of Residential
Letting Agents – says no, and is strongly advising landlords to
proceed with extreme caution before signing up to such schemes.
ARLA President Robert Jordan says:
“The way we see it, these offers fall into the realm of speculation
rather than genuine buy-to let."
Buyers are banking on property prices
rising, rather than relying on rental yield.
“If a developer is offering a guaranteed
rental return, that is built into the selling price. But more than
that, you the buyer have no way of knowing whether that property is
going to rent out at 6% – or indeed at any price - on the open
market. Also, you cannot know whether the developer is actually
achieving that guaranteed rent. For all you know, the apartment may
not be let at all during the guaranteed rental period."
“A typical buy-to-let mortgage lasts
10 years. If you have a guaranteed rental for just one year, how do
you know what will happen for the next nine years?”
Their advice is: first seek objective
advice from local agents as to what the genuine rental market is
like in that area.
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Liz Hodgkinson is a prolific author
and journalist contributing to many publications. She
has written over 40 books on a wide variety of topics
and has a background in national newspapers. She now
falls into the 'later-life' age category and in
recent years has started writing for this 'older'
market, and contributes to Saga magazine, among
others.
Liz has two sons and four grandchildren. She is
divorced and now lives in London and on the
South Coast. She has written three books on property
matters and her interests include snooping round
other people's houses and viewing showhomes.
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A
landlord’s story
Anthony Lock, a full-time landlord for 15 years, with a seven-property
portfolio, says: “Recently, I have been offered a number of these
schemes, with rental yields coming in at between 6 and 7%.
“They sound very enticing, but my view is that unless you are
renting out a property yourself, you have no idea whether it is
actually attractive to tenants at that rent. Nearly every new
developer these days is offering some kind of discounted scheme, aimed
almost entirely at the buy-to-let investor.
“For me, the figures so far haven’t added up, as I would be paying
over the odds to get that guaranteed rent.” |
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Points to consider
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Many
schemes last only a few months, and the most is a year, after which
you are left to sink or swim on your own.
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The
landlord, not the developer, would be paying tax on that guaranteed
rent.
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Get
proper figures from agents. Never rely on what developers may be
offering.
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Suppose a
real bargain came up? You’d need to work out whether that 6% rental
gives you a profit, a loss, or whether it breaks even.
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If it
only breaks even, would you still lose money on the deal? Yes. There
are so many other costs to consider such as service charges, fees to
agents and possible void periods.
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Rental
guarantee schemes are specifically aimed at selling flats to
investors, so you may have 300 apartments all going to the buy-to-let
market rather than to owner occupiers. So you’d need to consider how
many people will be chasing tenants at the end of the guarantee
period, and most particularly, how many prospective tenants there are
to chase.
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If rents
are not rising, tenants may have a many desirable rental properties to
choose from.
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This
means that in areas of high competition, landlords will have to reduce
the rent to attract available tenants. Consequently, the market value
of the properties goes down, rather than up.
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laterlife interest
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