What is a Rental Guarantee? Are Rental Garantees Ever Worwhile?
If you are interested in investing in serviced accommodation you can contact Paul Winder and his team by filling out the form on this page.
Paul Winder is an investment consultant with Residential Estates, who provides investment advice and property investment sales throughout the UK. You can see his company’s website here.
A rental guarantee can take many forms. It might be an insurance product, it might be tied to the value of the property, it might be something offered by a letting agent. The truth is, some rental guarantees are worth having, but most are not so you need to know exactly what you are signing up for.
Rob: Hi, it’s Rob from Property Investments UK. In today’s video we’re going to be looking at how rental guarantees can work with investment properties – specifically serviced accommodation – and how strong are they?
What should you look for when it comes to rental guarantees?
Now the beauty of property investments is there are loads of different options, loads of different strategies you can kind of consider.
There’s everything from a straightforward vanilla buy-to-let, all the way through to even a hotel investment or care home. There are HMOs and there is serviced accommodation.
Some of those models come with rental guarantees but there’s some misconception about what guarantees offer, what they cover, and also who’s actually paying for them?
Is it insurance product? Is it the developer that’s guaranteeing it? Or, is it the letting agent that’s underwriting that guarantee?
There are very different reasons as to why some of them are valuable and some of them aren’t.
Paul, you guys [Residential Estates] obviously – because you have a lettings background – you look at guarantees from a slightly different perspective than say, a developer.
Paul: Yeah.
Rob: We’ve looked at sites before, developments, like those we can see behind us now, where a resale agent might be selling it and saying,
“Here’s a one bedroom property. You can buy it and the developer will underwrite a guarantee for the next three years.”
That’s great. But sometimes that guarantee is included because, when you’re buying the property, you’re already paying a slight premium and have ultimately already covered that risk.
Paul: Yeah.
Rob: So, that’s when it’s a developer that is selling a property. A letting agent will approach things differently.
You guys [Residential Estates] will be looking at the rental guarantee differently because you’re underwriting the guarantee. So you’re only going to do that on a property that you know is going to let.
Paul: That’s the idea, yeah.
I mean obviously, there are lots of products. Whether it’s a buy to let with a rental guarantee or, the purpose-built, student offer rental guarantees that are available now.
A lot of the misconception around this is that it is priced into it. People ask themselves, what are they [the agent] making out of it? How can they do this? Etcetera. And most importantly, how is it guaranteed?
I suppose in theory some of those points are correct, it can be. And you’ve also got to make sure that the rental guarantee justifies that.
And also you need to make sure that that the rental guarantee is a true reflection of the rental returns you’re going to get when that guarantee runs out.
Because the last thing you want is to be – on say, a student buy-to-let – getting 10 or 6% only to find out that once the guarantee runs out you’re only going to be getting 5 or 6%.
So you need to do your research and due diligence.
Rob: So they market a headline figure and say “we’ll give you a guaranteed rent of 7%“, but then the local market doesn’t actually sustain that level of rental yield.
Paul: No, absolutely. It’s good for the time being.
And if for any reason anything happens to the developer or the management company then you will lose your guarantee – Because the rental guarantee is with them.
I suppose fundamentally that would be the same, but what we base it on is that the price is the price as it was.
Rob: Yeah.
Paul: The price is not included in the guarantee.
The guarantee’s not mentioned anywhere in the lease or in the contracts – anything to do with purchasing your property.
Rob: You get to consider the guarantee as an asset on its own.
Paul: Yes.
Rob: Do those figures work? Does that price of the property work?
Paul: That is the price as it was, yeah.
Rob: Does the local market rental work? And you decide on that.
Paul: Yeah, there’s not an 18% on top of the purchase price because we’re having to incorporate some rental guarantees.
Rob: Yeah.
Paul: We base our rental guarantees on our experience. We base it on what we can achieve and what we have previously done in that area. We base it on what we’re told we can achieve.
We will then put in, certainly not over exuberant but a fair rental guarantee, and say,
“Right, we know what we expect, based on occupancy levels that we’ve already seen.”
Or…
“We can achieve X% on this property, based on 70% occupancy.”
It is the case we want to make a little bit out of it, obviously.
We can pay these bills and we can offer that rental guarantee of 6%, and that will come from ourselves directly, every month.
It’s based on knowledge and it’s based on our expectations formed what we understand we can achieve and what our prices out suppliers need, et cetera.
Our guarantees have nothing to do with the price of the property.
It’s based on what we expect from the rental return.
What we offer is very different. It’s based on facts, not on guesswork or some piece of paper.
Rob: Yeah. And I think that’s important because if you’re trying to analyse that deal…
Sometimes you can look at property deals and try and compare apples to apples, and the guarantee might swing it in one way or another.
But, If you don’t know where that guarantee’s coming from and how it’s underwritten, whether it’s the developer, whether it’s an insurance product, or it’s with the letting agent, then you might form some misconception as to what that deal really looks like.
Paul: Every relationship we enter we want to be a long-term relationship.
I suppose if we wanted to go down the route of flowering it up.
I suppose we could say, “Right we’ll give you 8% rental guarantee and look after everything.”
Then it would look like an incredible deal. But there is no point in us offering 8%, paying all costs and not making it work.
Because that’s no good for anyone at the end of the day.
So, what we do, we’ll say it will always be above [that the investor’s ROI will always be higher than the normal market rate].
That’s one thing we will guarantee – That if you went on a normal AST and you got the normal market rate, after your costs – What we guarantee is that, with us, you will receive more.
It might not be by a great deal but it will be above that.
That takes away the risk of void periods out of the equation. It takes all the hassle out of it for you. It takes everything out.
You are literally getting a guarantee for doing nothing.
We base it on the knowledge that we have and the experience that we have. This is one of the reasons why everyone can’t do it.
Because we do it in the revenue share and like I say it is risk/reward, but we also know what works.
Rob: Yeah, and I think a developer can’t do it because they don’t necessarily have the systems in place to …
Paul: To do it.
Rob: Back up that guarantee.
Paul: Or they’re not willing.
Rob: They can offer a guarantee based on the price and maybe sell it at a slight premium, but if it’s coming from the letting agent, then the guarantee will be based on what the rental market is physically going to do rather than on the price of the property.
Paul: Yeah, with a letting agent – if a developer gave a normal guarantee, it’s like I said before, they’ll probably give you 75% of what they know they can achieve.
Paul: That will cover themselves. Let’s say you could achieve a 5% net with a flat. After all costs. They will probably give four.
Rob: So, you’re below market rent.
Paul: As a rental guarantee, yeah, below market rent. But, it’s guaranteed through the service model because we charge the higher rates, the higher weekly, monthly rates.
We’re usually a percent above.
Rob: Yeah.
Paul: It’s win/win for everyone.
Rob: Brilliant. That’s why guarantees are common when it comes to property investments.
It depends on the strategy and development you’re looking at.
You will get some rental guarantees offered with products.
It might be from the developer, it might be from an insurance product, or it might be from the letting agent.
It’s just a case of trying to understand the context, who’s offering it, what is the reality? How strong is that guarantee? Is it backed up?
Also as Paul was saying, when that rental ends what is the local market actually like?
Will it sustain that type of rental, tenant profile, rental income, all that kind of good stuff?
There’s a couple of things to consider there, but hopefully, it should give you some background as to how rental guarantees work.
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