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Rental Guarantees - Are they all they are cracked up to be?
By Iuris Tantum Consulting Group - Apr 2, 2007 - 7:07 PM
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So, do guaranteed rental schemes work, are they good value and most importantly, what guarantees the guarantee?
It goes without saying that owning a second property in Spain is attractive to many people, providing the perfect holiday home for you, your family and friends to enjoy perhaps before you retire to the relaxed lifestyle and warm climate that makes Spain so popular. While holiday homes are used for only a small proportion of the year they still require a significant financial commitment, so it makes sense to put the property to work in order to maximise any returns that it can provide. Perhaps the most common method of achieving this is by renting, either in the short term or for holiday lets.

Knowing that more clients are now looking towards properties for investment, it is not surprising that developers are marketing their properties with promises of guaranteed rental returns over a given period of time. These schemes look particularly attractive when the purchaser is also able to use the property several weeks of the year for holidays while still being assured of a minimum amount of rental income that helps to offset the purchase or maintenance costs or simply provides a regular income from the property.

So, do guaranteed rental schemes work, are they good value and most importantly, what guarantees the guarantee?

In most cases when you buy a property with a rental guarantee agreement, the developer undertakes to take over the management of the property for you, advertising to potential tenants, collecting the rent and maintaining the property are all included in the service. This agreement will be separate from your contract to purchase the property and the developer will get his income (and incentive) from the profit in selling you the property. However, great care must be taken to ensure that the scheme is not simply a skilful marketing promotion.

While there are genuine long term agreements offered by reputable companies, rental guarantee agreements that are for a relatively short term with unusually high yields for the area should be viewed with extreme caution. In these circumstances it may well be that the developer has simply added the total rent for the guaranteed period to the price you are paying for the property. Not only are you in effect paying your own rent from an increase in the purchase price this can also lead you into a false sense of security that this level of rental income will be maintained after the guaranteed period has ended. If it cannot, this can leave a significant shortfall in your budget especially if you are relying on this income to subsidise your mortgage repayments. As with any agreement, the devil is in the detail and the contract for the rental guarantee should be scrutinised by your own independent lawyers. Particular attention should be given to how the developer will meet their obligations if they should fail to let the property or worse, should they go out of business. You should find out whether the rental guarantee is underwritten by an insurance company or if there is a bank guarantee for it? If so, have you seen the policy document?

It is vital to know this information as a rental guarantee is nothing more than a contract between you and the developer. Should the developer or rental company fail to let the property or make the guaranteed payments for any reason, your only recourse will be to enforce the contract under civil through the courts, a procedure that can be time consuming and expensive. Even if successful, it is of little comfort if you were relying on the rental income during the time the legal process takes to reach its conclusion. In the worst case scenario the developer may even have gone out of business, leaving you without a remedy and large legal fees.

Issues that also need to be considered will include who is entitled to any funds in excess of the guaranteed amount? Who is responsible for any dilapidations to the property during the rental period? What conditions are there and is there an option for the agreement to be extended? Who is responsible for insurance while the property is let and how will the rent be paid to you? You should also consider how easy the property may be to sell and whether the rental guarantee agreement can be transferred to your purchaser.

A prudent purchaser relying on a rental guarantee should also conduct their own independent research into the development and the surrounding area to gain an idea of the level of demand for rental properties and the typical rents being asked (and achieved). The developer may be offering a guaranteed return of 8% while other properties are achieving only 3%, but this is of little comfort if once the guarantee ends this is the maximum that can be achieved.

Finally, if the property is to be subject to a mortgage you should ensure that the anticipated returns are not going to be diluted by a higher rate of interest that may be charged and that the mortgage company agrees to the letting of the property. As with all agreements and contracts, ensure that you take the advice of an independent legal advisor.


© 2007
Iuris Tantum Consulting Group
3 Princes Street
Mayfair, London
W1B 2LD
Tel: (44) 02074082021

Email: webenquiry110@itantumgroup.co.uk

www.itantumgroup.co.uk


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