Pros And Cons Of Owner Financing Of Real Estate Deal Advantages and Disadvantages of Rental Guarantees

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Advantages and Disadvantages of Rental Guarantees

Anyone considering buying an investment property across Australia may want to think about ways to rent out a house, apartment or building. In some cases, a property developer may offer a tenant guarantee to help attract buyers by providing a certain amount of stability against tenancy-related issues. Although the offer may seem like a good decision, buyers need to consider all the potential pros and cons of the program to make an educated decision.

Understanding Rental Guarantees:

Before it is possible to consider the pros and cons of a guarantee program, it is important to understand the basics of how a guarantee works.

Anyone planning to buy an investment property in Australia should first understand what type of program they are looking at. Australia has a few rental guarantee options that will vary slightly in how the program works.

The first option is the most common type that comes with new builds. The developer offers a fixed percentage of the purchase price as a monthly guarantee on the rental income. This type of guarantee is only available when the project is still in the hands of the developer and the seller determines that it will help attract investors interested in the property.

Others may qualify for Defense Housing Australia (DHA) rental properties. It is a government guarantee rather than a developer guarantee and usually relates to properties purchased through government loan options. This type of investment property does not require new construction property, so it fits other requirements as well.

In most cases, Australian rent guarantees are provided by the developer. Government guarantees are less common for investors who are looking to protect their investment and have a fixed amount coming in.

Benefits to investors:

Rental guarantees have many benefits to an investor and should be considered before determining if it is the best option for their needs and wants.

The most obvious benefit of the program is the fixed repayment amount. Investors can expect to receive a set rental amount each month based on a contractual agreement with the developer or government program.

In many cases, the developer offers a fixed refund based on the purchase price. For example, a developer may offer seven or eight percent of the purchase price as guaranteed rental income. This allows investors to calculate the amount they will receive and provides peace of mind that some income is coming.

Another benefit to investors is the lease agreement. The developer giving the guarantee is essentially signing a contract or lease on the property. If the developer does not agree to the rental income, the investor has options to get the money legally.

Rent guarantees provide financial security. Guaranteed rental income gives investors an edge in their finances by providing a set amount every month. It is safe and the investor does not have to worry about losing rent as a result of vacancies.

A property owner never needs to find rental management, hire a broker to rent the property or otherwise try to prevent vacancies in the property. This is a distinct advantage because it removes some of the major hurdles of buying an investment property with the intention of renting.

Disadvantages of investors:

While there are some distinct advantages to a property owner agreeing to a rental guarantee, the disadvantages also need to be looked at in order to make an educated decision.

A major problem with rent guarantees is low rent amounts. By agreeing to rent based on the purchase price, property owners will not have the benefit of generating additional income as property values ​​increase. The amount is set and will not change throughout the contract.

Another disadvantage may be the remaining tenant in the property after the completion of the contract. If there are current tenants in the property at the time the guarantee expires, it may not be possible to raise the rent, replace the current tenant or otherwise act to improve the situation.

Tenants will have a contract that allows them to stay in the property for a certain period of time and owners will not be able to change the rent unless they first break the contract.

For many contracts from the developer, the property owner is still required to pay maintenance charges and service charges on the house, apartment or property. This may or may not apply to government guarantees depending on the contract. Paying maintenance and service charges can cut into potential profits from rentals.

Make an informed decision

Rental guarantees have advantages and disadvantages that can be attractive or annoying. Ultimately, Australian investment property owners will need to determine whether they feel comfortable with a guarantee or are willing to take on the risks of renting individually.

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