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.
And what are the benefits of a guaranteed rent?
A guaranteed rent period on an off-plan development carries 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.
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! So make sure you check all the facts and the offer works for you!
- If you have invested in an upcoming area, it is likely that rent prices are on the rise. So make sure the guaranteed rent works alongside this.
- 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 developer 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 as it offers security and regular payments at the time that the property may take longer to let, but you should also consider the timeframe you feel comfortable with to receive set rental payments.
