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Investors cautioned about rent guarantees

15 September 2014 Stefanie Garber

When a developer offers buyers guaranteed rental income, it may indicate the local market is weak, a buyer’s agent has warned.

Julie Cumming from Hatch Property said these arrangements, where the developer promises secured rental income for a period post-purchase, can be appealing to many investors.

“It's nice to know that from day one you're not going to have any problems with vacancies. That gets you through the first period,” she told Residential Property Manager's sister publication, Smart Property Investment.

However, she warned such incentives may be a bid to cover up weak rental demand in the area.

“You have to look at the bigger picture to see if that's going to be a false indicator of the market going forward,” she said.

In addition, she believes such projects are often sold at elevated prices.

“Often the buyer pays for it,” she said.

Nonetheless, Ms Cumming suggested in some circumstances these arrangements can signal the strength of the market.

“Sometimes it's a reflection of the confidence of the developer that getting a tenant is not going to be a problem because they're going to have to pay if you don't have a tenant,” she said.

She encouraged investors to carefully investigate any such arrangements and do independent research on local rental conditions.

“You look at the fundamental demographic indicators,” she said.

Investors cautioned about rent guarantees
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