Rent Guarantees and Off-The-Plan Purchases

Here are a couple of incentives, that look great on paper, but you do have to know what you are doing. These are offered by developers to get you buying.

Rent Guarantee

A rent guarantee is just what it says. The property developer will guarantee a certain rent rate for a period of time - often 2 years. This seems like a fantastic idea if you are a little worried about the deal. But beware, you are paying for it in the long run.

If a developer wants to sell a property for $500,000 and the market will not tolerate that price, a developer may throw in a rent guarantee to get the property off their books and in your hands. What it essentially means is: you will buy the property for $500k but for 2 years the rental income is guaranteed at say $600 p/w (even though the rental market will only be paying $500 p/w tops). 

So who is paying the difference? The developer is paying you the difference for the first 2 years. (The developer will ensure that the deal is structured so that no matter what, they will come out ahead, even if they are paying you $10k over the 2 years.)

But then the other shoe drops. At the end of the 2 year period, the investor puts their rental back on the open market and finds that they can only get $500 p/w for it, and so the numbers don't look as good as what they did 2 years ago.

Off-The-Plan Purchases

The idea here is you buy a property based on a blueprints and artist impressions of what the property will look like when completed. By buying early you get a good price and sell (or rent out) when it's completed and make a lot of money. At least that's the theory.

However, it doesn't always work out that way.

Financing for off-the-plan properties tend to cause headaches, as banks are pretty nervous about granting approvals, and pre-approvals for a home loan are nonexistent. This means that when the project is completed a lot of vendors need to sell NOW! This creates more issues with a potentially large number of vendors wanting to sell at the same time.

So if you are considering an off-the-plan purchase, look around at similar developments that were completed a few years earlier, and see how the investors fared.

These options are not bad options, you just have understand the mechanics and what it means for your situation. Are there other developer incentives that you think people need to look out for?