Rental Returns, buy-to-let, leasebacks, buy-to-let, cash back,
own-for-free - you may have been tempted by these catch words, but how
good are these deals in real term and will there be any rental demand
once the guaranteed period is over?
There are many developments to woo investors with guaranteed rental returns and equally many investors have found to their dismay that the returns are not what they have envisaged.
rental returns (GRR) plans which have become increasingly common,
judging from the press advertisements may sound enticing to investors
who do not want the trouble of managing their own investments. You buy
the property, and you get the rental returns thrown in with some
additional perks like free stays.
Developers would agree to pay buyers
rentals ranging from 8% to 12% per annum or a proportion of the
purchase price for a certain length of time
While GRR could be very attractive,
investors need to know that the scheme is not as simple as it seems,
much like advertisements that appeal to our desire to lose weight
quickly, get rich fast or strike the lottery.
Generally, GRR are best for the laidback
investors. Some people will value the 'simplicity' of the deal. However
there are issues that buyers have to be aware of and comfortable with
before entering into such agreements.
a developer is offering GRR, the buyer has no way of knowing whether
that property is going to achieve the promised in the open market. The
developer may not be able to get the guaranteed rent or the property
may not be let out at all during the guaranteed period. Guarantees are
often used to market properties that otherwise would not sell and many
investors are shocked by the resulting drop in income when the
developer is unable to continue with the scheme or worst fail to
complete the project.
In addition to this, it is often the case
that investors end up footing the rental bill themselves, when
developers inflate the price of the property to cover the guaranteed
rent. This can provide a further shock when the investors try to sell
the property and realise that it is not worth as much as they
originally paid for it.
* A typical mortgage lasts 20 years. If
you have a guaranteed rental for just three years, what will happen for
the next 17 years? You are left to sink or swim on your own.
* A typical table of returns will show
potential buyers a surplus income. A potential investor has to take
into account the cost of maintaining the property, the taxes that come
with being a property owner, the cost of maintaining the mortgage and
all other fees related to acquiring the property.
Illustration: A typical GRR scheme's table of 'returns' may look like this:
|Loan Period||30 years
|Interest on Loan||6.25%
|Gross Rental Return @ 8%||RM2,133.33
|Surplus to Buyer||RM360.06
|Total Surplus Per Year||RM4,320.72
most GRR scheme, you will need to buy a furniture package with the
apartment and commit yourself to the management charges and sinking
fund of the building, on top of the regulatory quit rent &
assessment tax. These will often take a substantial bite out of any
rental money left each month.
* GRR are specifically aimed at selling
units to investors, so you may see a situation of 500 apartments all
going to the rental market rather than owner-occupiers at the end of
the scheme. You will 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. In areas of high competition,
landlords will have to reduce the rent to attract available tenants.
Consequently, the market value of the properties will go down rather
than up. If you decide to sell, you will also be limited to buyers who
will also be mainly investors. Sellers will also find themselves
competing with developers who are offering higher rental returns with
* Overpricing - When supply is more than
demand, developers always look for ways to avoid having to reduce
prices. While GRR may offer attractive secure returns, it will be a
false economy in the long run if the buyer ends up overpaying for the
* A guarantee is only as good as company
who underwrites it. Even if the GRR seem reasonable and are offered
with honourable intentions, investors need to be sure that the
developer would be able to sustain the returns if the rental or sales
market were to take a turn for the worse. If developers were to default
on the payments due to buyers, these buyers will likely default on
their respective loan repayments, thereby setting off a chain of events
with dire consequences.
* Terms and conditions in GRR agreements
are not regulated by law. As such, the inexperienced investors may not
understand that the fine prints are often written in the guarantors'
favour. Example of such clauses: "Provided always and it is hereby
agreed between the contracting parties hereto that the Developer
reserves its right to terminate the GRR agreement for any reason
whatsoever by giving TWO (2) MONTHS written notice to the Purchaser
wherein such a case the Developer's obligation to pay the guaranteed
return to the Purchaser shall cease from the date of such termination.
Such notice is deemed to have been received within three (3) days from
the date of the letter".
investor should check the small prints for any hidden clauses that
enable the developer to avoid paying the guaranteed rent and it is
always a good idea to seek expert advice.
rental market is volatile, depending on current competition and market
conditions. People investing in these schemes are not just buying
properties that they hope will increase in value in time, but also
using 'other people's' money (from rentals) to pay for the purchase. It
is, however, a cyclical market, and one is subject to the laws of
supply and demand as in any other sector of the economy.
Guaranteed rents offers should be checked
carefully against the local market and competition. A simple survey
within the location will give an investor a fair idea of the state of
the local market. If market prices are lower than the proposed rent,
incentives and discounts being offered to woo the buyers, then this are
issues to be considered. If guarantees of rentals are higher than the
existing market rate, then a rent decline after the end of the
guarantee is likely. It is a classic case of caveat emptor - rental
guarantees can sometimes guarantee investors nothing but heartache.