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I would imagine there will be a lot of small print around that "10% NET Guaranteed for 5 years" I've seen people post on PT about the issues they have had with these.
Lets assume though that there is no issue with getting that 10% net guaranteed for 5 years, in all likelihood you are buying something overpriced that after the five years are up is going to be hard to resell. So whilst it may be a good investment for the first five years, the subsequent five may well be a nightmare.
A few negatives I'm aware of:
1. Ground rent clauses in the lease - check these! I've just found clauses on a client's lease which state the ground rent will double every 10 years for the first 30 years of the lease. Then will increase in line with RPI every 10 years after that. Could make it difficult to sell the unit on.
2. Being so hands-off can be very appealing but that generally equates to the investors not monitoring the management of the building. Again, with a recent client's student units, we've found FRAs not actioned (resulting in Notices being issued by local authority last month), no service charge accounts, poor service standards with regards building repairs & maintenance, no attention to statutory inspections and certification - because no one challenged the management company.
3. In some cases, I've seen the guaranteed rent payments simply stop, management companies going bust (after making a good profit for the first 2 or 3 years), and the investor left with a poorly managed unit they can't rent out or sell. Your piece of paper may say you're entitled to 5 years guaranteed rental income, but if that ceases because the company goes bust, there's very little the investor can do.
There ARE positives too, but when so much responsibility is devolved to a managing agent, the investor is left wide open to risk. And as the leaseholder, as the Landlord of a tenanted unit, is still liable for the tenant's wellbeing, that's a big risk. Over the last 10 years or so, I've learned which developers/agents to steer clear of, and which ones do a sterling job!
Hope that helps!
All the best
Freelance Administrator for Property Investors / Entrepreneurs
Find me on LinkedIn: http://www.linkedin.com/in/heleneade/
There are a couple of historical threads that discuss these investments and I have read some recent but can't find the links. Here's the historcal ones:
Both companies mentioned in the 1st thread Middle England Developments Limited / Penlake Limited and their management company Penlake (Candia Management) Limited all now in Liquidation or Dissolved.
As Gam3 0ver has outlined above many of these companies offering such guarantees generally build them into the price and whilst you may get a fixed return for the 1st 5 Years (if they honor their promises, there are some horror stories where they haven't) after this time you'll see management costs soar and your yield shrink.
The biggest issue with these types of investment is your exit strategy, who will buy after 5 years? What will it be worth? I wouldn't expect any Capital Appreciation........some resale values sell for a quarter of their original purchase price.......What will your return be after the 5 year honeymoon period?
Most of these types of investment are Cash Only, UnMortgageable........Personally I would steer clear
Gated but well worth the subscription. From the FT:
This piqued my curiosity and I found this not behind a paywall:
Astonished at how much some investors have put into these schemes.
Disclaimer: I have no legal expertise nor am I a qualified advisor on any subject. A humble landlord using an open forum to exchange ideas and experiences.
I have friends who own a flat that they bought several years ago with guaranteed rent for the first few years. They pay so much to the management company in fees, ground rent, insurance etc that the rent does not cover the costs and the flat is worth less than they paid for it. Avoid.