For some property investors it can look like the ideal solution; a rent guarantee scheme that will protect investors when a tenant fails to pay the rent, but it can leave investors out of pocket and stuck with a tenant that does not pay the rent.
Traditionally these schemes have been used by public housing associations, but more recently private landlords all over Southeast Asia and around the world have been signing up to the schemes in the belief that their rental income will be guaranteed.
Under a guaranteed rent arrangement, generally the landlord is required to sign over the property to a company or letting agent for a specified period of time in return for a guaranteed monthly income. The agent then sublets the property and manages the tenancy. Rent guarantee firms make their money on the difference between the rent they pay the landlord and the rent they receive from the subtenant. Most schemes promise to cover any void periods and maintenance costs.
Mish Liyanage, Managing Director of The Mistoria Group, explained that things can go wrong if the rent guarantee firms do not have the financial resources to back up the guarantee.
He said: “There are many firms out there offering guarantee rent schemes, many of them very small companies or sole traders. The risk to landlords and investors lies in the financial security of the rent guarantee provider. If they get into financial difficulty or go bankrupt, the landlord many not be able to recoup any monies paid to the scheme.
“Landlords and investors who are considering using a rent guarantee scheme should read the contract very carefully. The only way they can really protect themselves is by having a commercial lease between the landlord and the company and an assured short-hold tenancy agreement (AST) for tenants.”
While guarantees can and do provide reassurance for nervous investors, experienced and knowledgeable buyers will know that purchasing a decent property in a good location will never need any kind of guarantee. It will rent regardless.
If you are considering buying a property with any kind of rental guarantee, do your due diligence about the company providing the guarantee. Your guarantee is only as strong as the company offering it.
Andrew Batt, International Group Editor of PropertyGuru Group, wrote this story. To contact him about this or other stories email andrew@propertyguru.com.
