Is Guaranteed Rent a Good Idea?

Many developers offer a guaranteed rent period when an investor purchases a buy-to-rent property. This is usually proposed when the property is purchased off-plan and isn’t tenanted.

What is a guaranteed rent?

A guaranteed rent is usually a pre-agreed, guaranteed net return on a buy-to-let property. Paid monthly, it is ordinarily a percentage of the property purchase price and is paid for a pre-agreed period of time. E.g. A 7% guaranteed rent on a property with a value of £120k would result in a net payment of £600.00 per calendar month.

Benefits of a Guaranteed Rent

A guaranteed rent period on an off-plan development is, on the whole, is beneficial for the investor:

- When a development is initially advertised to let, it often saturates the market (Especially for larger projects) meaning that the apartments may take slightly longer to let. A guaranteed rent period ensures an income during this uncertain time
- It is a net payment, so costs such as service charge, maintenance and agent’s fees don’t have to be considered, saving time and effort for the investor
- No unexpected costs
- If a build runs over the contracted longstop date, it is likely that the developer will have to start paying your guaranteed rent payments

What’s the catch?

Although there isn’t necessarily a catch, there are some points to bear in mind:

- The developer isn’t likely to offer guaranteed rent payments unless they were making enough money to cover all associated costs, and then some! Don’t get tied into a guaranteed rent for more than 12 months without considering that you could be losing rental income!
- If you have invested in an upcoming area, it is likely that rent prices are steadily rising. If you agree to a guaranteed rent for more than 12 months, do the payments reflect a rise in price in year two or three? Unlikely! Its another reason to question the length of the initial guaranteed rent period
- Ask to see how much your property has actually made in rent in year one, how long it took to rent out and maintenance costs. Consider these alongside other associated costs (Service charge, agents fees etc.) if the investor is offering the option of further guaranteed rent. Get hold of the facts before making a decision

In conclusion, yes, a guaranteed rent is beneficial for an investor for the first 12 months, offering security and regular payments at the time that the property may take longer to let. However, when taking a guaranteed rent for longer than 12 months, rental income could be lost.

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