The Rental Guarantee – A Profitable Deal Or a Trap
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Are you a victim of ‘Rental Guarantee’? Though a great form of investment, and even looks worth investing but it might be just another trap of a marketer.
WHAT IS A RENTAL GUARANTEE?
Rental Guarantee is an agreement between the seller and the buyer that either of them or an associated company will rent the property for a period of time. For instance, a subdivision constructor who sold-off the model home to an investor and has then rented it back as a sales center. Duration of such rental agreements ranges from 3 months to 3 years. A single unit or a batch of them is usually involved in lease agreement.
RED FLAG #1
The lease back process involving multiple units poses as a pecuniary liability to the seller. So why would a seller offer this? A reasonable explanation to go for the signing in for this agreement is that the seller looks forward to making a large indefinite amount of money from the sales of the units and the leaseback therefore looks like just a small risk that comes with the hope of getting a bunch of investors with the profits of buys.
More often such agreements can be found relating to a property of high price. Intent behind such agreements is to display the property with a convincingly higher price tag than its normal value that would fetch the seller a more profitable deal. For this Red Flag, you should undertake considerations on “assessed market value” to confirm the degree of incredulity of the property.
Red Flag #2
A lease-backed property can be a significant financial enterprise for a builder/developer especially when it involves multiple units. For instance, the builder offers 50 units in a complex at the rate of $1,000 per unit, for 24 months. The total liability related to it will be:
50 Units *$1,000 * 24 = $1.2 Million
The plan of action that lies behind the sell-off of these multiple units in most of the cases is of using these units as rentals. But whether their plan will come into action or not depends a lot on you. Well if it doesn’t, good luck on acquiring all your planned lease payments.
Red Flag #3
Are the leasebacks always of same range? Yet another “gimmick” used is of showing-off a leaseback of a higher amount when compared with the current market rents just make the property look pricey. Have a look at the Red Flag #2 and you are always required to plan on stopping referring to those leaseback payments, and concentrate on your research done on the current market rent values. Nevertheless, one should always be optimistic, there may be cases in which the lease back amount matches up with the current market rents. The only doubt you will be left off with then would be about the precise price list of the market rents for that area.
Conclusion
I did not write this article with intent of being of harm to anyone’s business, genuine Rental Guarantees still exist in the market. Nevertheless, check you’re 3 Red Flags when you hear about the next property offer with rental guarantee.
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