We’ve had a number of conversations recently, and one question that keeps coming up over the years is, “What’s the difference between a rental assurance and a rental guarantee?”
Last week we were discussing one of our developments in Manchester that comes with a two-year rental assurance, and the client said, “Okay, well tell me about this rental guarantee.” to which we replied “We’ve got to stop you there, it’s not a rental guarantee, it’s a rental assurance.” And the difference here is that a rental guarantee if it’s worded like that, would suggest legally that the developer or the management company have the amount of funds equal to the guarantee sat in a separate account ready to guarantee the returns in the event the property underperforms.
So what’s a rental guarantee?
So let’s say for example a two-year rental guarantee at 6%. This Means that the developer, or the management company, whoever it is, would have 6% of the purchase price set aside in a separate account for each year of the guarantee period. Why would anyone do that?!? The answer…they won’t! And if they did have that money there, where has it come from? They certainly haven’t taken it out of their profits…the most likely explanation is that the rental guarantee figure has been factored into the price and you are essentially overpaying for the apartment and just being repaid your own money over the next few years. This type of property DOES NOT get the TD seal of approval!
Then what actually is a rental assurance?
Rental assurance on the other hand, which is what DOES get the TD seal of approval, are properties that have a rental package in place that basically means the management company are so confident of delivering the returns at a certain level they are happy to cover any shortfall should that ever happen. They are essentially giving you their ‘assurance’ that if the property doesn’t perform as well as expected, they will be putting their hands in their own pocket. So the confidence is there.
So just to clarify, a rental assurance at 6% would mean that it’s a contractually binding agreement between yourself and the management company to say that they’re confident on achieving a 6% yield, however, if they don’t, they are committing to top that up to ensure that level.
The risk is on the Management company, not the investor?
Yes absolutely, however, this is a calculated risk and they should be confident they can achieve what they offer as an assurance. The advantage for the management company is that if (and usually when) the property over performs…they get to keep all of the extra rental income. This is why more and more developers and management companies are offering this – it keeps their buyers/landlords happy, but also gives companies themselves an ongoing income stream over the next 5-10+ years.
One example of a unique development with a long term rental assurance is our Hull City Centre apartments, that come with a 10-year rental assurance at 8.5%. The reason the management company is offering this is the same as before, they are confident of filling the development from day one, and even if they don’t, and they have if they have to wait for the development to reach ‘maturity’ (full occupancy at the income level they require), they know that they will make up for any shortfall many times over throughout the 10 year term, especially as rents increase during the period.
Long Term Assurance might not be for everyone
A long term rental assurance might not be for everybody. A lot of our investors say, “Well okay, will I not benefit from the increase in rents as they increase each year’…And the answer here is, “No, you won’t, don’t be greedy!” (Ok we don’t say the second part…). After all, it’s only fair that if the management company are taking all the risk if the property underperforms that they should benefit from any over performance of the property.
And don’t forget, you are still getting the security of owning the asset that is increasing in value, and not having to ever worry about void periods, plus you’re getting a nice stable income for up to 10 years.
Of course, if you DO want to benefit from the uplift in rental prices you can either opt for something without a rental assurance, or something with a shorter rental assurance, like for example one of our Manchester developments which comes with a two-year rental assurance and is also completed. So you have different options to choose from depending on the return you are looking to achieve. If you are interested in something with a long term assurance, you may want to have a look at our Hull development.
Can you leave a rental assurance contract?
Of course! Different management companies have different clauses for exiting the agreement, but usually, it will be 6-12 months. The reason for this is that they will need to serve notice to the occupants of the property. If you have a sudden change in circumstances and need to sell quickly, speak to the management company as soon as possible, and come and speak to us as the quickest way to sell the property when you have a rental assurance in place would be to sell to another investor.
What happens then if the management company go bust in this time?
The thing that causes any company to go ‘bust’ or be forced into liquidation is having creditors. In other words, having too much debt and being unable to service this debt. These management companies don’t take on any debt, and as such don’t have any creditors. The only thing that would force them to close is if the market completely collapsed and they were unable to achieve the returns on offer. In this situation you have a few options:
1. Renegotiate the terms of the agreement to a lower, more manageable rental return
2. Let the property out yourself or use another management company
3. Sell the property. Don’t forget, you still own an asset that you can sell and exit the investment altogether.
All that said, the management companies we work with are experienced property management and lettings companies who are not going to offer an unsustainable rental yield to new owners of the properties.
So there you have it. That question you’ve been constantly trying to figure out the answer to!
In our opinion, a Rental Assurance is always what you should be looking for. A Rental Guarantee…steer clear. If this article hasn’t helped, feel free to get in touch so we can try to explain, and if it has helped and you found it useful…you can also get in touch and let us know! Either way, we’d love to hear from you.
Get in Touch
To discuss how we can help you with your next buy-to-let investment, talk with us directly, you can call us on +44 (0) 2039507939 or send us an email at [email protected]. If this is your first time landing on Thirlmere Deacon Property Investments I encourage you to visit our homepage https://tdpropertyinvestment.com to read more about us and to see what we have on offer.
