Rental Guarantees : Marketing Fog or Real Value?


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Article by: Mike Dunkerley Published: 01/05/2008

Open any property magazine or newspaper and there will be adverts offering incentives to buy overseas property from a particular developer or on a specific development. One incentive that has become very popular both on UK property and overseas property is the Rental Guarantee.

Rental Guarantees have several issues that have to be looked at carefully.

Firstly rental guarantees tend to be time limited to between two and five years.

Secondly rental guarantees tend to be set at attractively high rates for this limited time-span.

Consider the following scenario. You are considering buying a property in Spain for 100,000 euro and a Spanish euro mortgage is available at 5% (5,000 euro p.a.). The developer selling you the property is offering a two year rental guarantee of 7% (7,000 euro p.a.). It looks as if you are virtually getting the property for free with future capital gain thrown in for good measure. You sign on the dotted line and the property is yours.

If you are relying on rental income because otherwise you can't afford the property, or you are an investor and the property has to pay its way, then the critical issue is what happens when the guaranteed rental period expires? If you can continue to rent out the property yourself for 7,000 euros then you have indeed got a self financing bargain.

However, if you have to put your property in the hands of an agency and pay them and if you have to pay local tax on the income the arithmetic starts to tighten up and you may find that you now have to subsidise the mortgage a little. Nevertheless the situation may not be too bad because the rent is still making a contribution to the mortgage. The real danger is if the 7% rental guarantee was way too optimistic in the first place, the market is flooded with property and the best you can get is say 3,000 euro or 3%. After deducting fees and tax you could find yourself paying all of a mortgage that you could not really afford in the first place.

Thirdly rental guarantees do have to be paid for by someone. Is the developer really giving away some of his profit or is it a clever marketing strategy? Is the developer trying to maintain a too high level of headline prices for the development when competition means that you could buy the same type of property from another local developer for just 86,000 euro without the rental guarantees. This lower purchase price would mean that the mortgage interest would be 700 euros less per year.

In our every day lives most of us are careful how we spend our money. However, when it comes to the dream of a place in the sun we can sometimes leave our critical faculties at home when we board the aeroplane on that subsidised and carefully choreographed inspection trip. We may find the perfect holiday home or we may find a financial black hole. If you need rental guarantees check them out carefully.

Author: Mike Dunkerley, Regional Director, The Global Property Group Limited.

The Global Property Group can help overseas property buyers identify genuine opportunities for property investment.

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Telephone: +44 1457 833 083




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