Student Investment Rental Guarantees – Short term sales pitch?
We get asked quite a lot about the rental guarantees that we have offered on our student room investments and our student pod investments over the duration of the last 18 months. The single major question that is repeated over and over is “Is the guarantee legitimate?”
There are a number of questions you should be asking when you are being offered any kind of investment and the structure or the basis of the rental guarantee will say much about the sales agent and the company offering the product. For example, we could sell an investment to you, with an additional ‘guarantee’ of 2 years rental income at 10% net of the purchase price, but what is this guarantee? Is it just a sales pitch to get you over the line or is there some legitimacy in what I have offered you? Will I be able to get some verified documentation to you upon request?
When these rental guarantees are being offered, there are two principal questions you need be asking:
1. Does the guarantee stack up i.e. Do the figures work?
2. What happens beyond the 2 or 3 year rental guarantee i.e. Does the market support the figures proposed?
If you can confidently satisfy yourself on the two questions above, then you will feel more secure on the investment and the long term rental gains can be realised. No one can predict what is going to happen in property in the next few years or beyond that, but if you are able to fully do your due diligence in the interim, at least you will have been able to control what you can control.
What are the reasons for offering rental guarantees on student investment?
Where do student rental guarantees come from and why do they exist? Rental guarantees are nothing new and have been in existence on projects in the UK and abroad for decades now, especially on the off-plan developments in Spain and Dubai which also came with other perks i.e. free furniture packs or usage of the apartment for two weeks of the year as a holiday home. However, student investments, especially in the form of private halls of residences and boutique student developments have necessitated such guarantees due the to nature of the investment and the relative recentness of such investments.
In our experience, a significant interest in rental guarantees is a key driver for investors from the Far East (Chinese property investors) and South East Asia (Malaysian investors and Singaporean investors) where such practice is common and provides assurance to investors who base themselves thousands of miles away from the property investment.
Even so, the major reason for the one, two or some very rare cases, five year rental guarantees is, quite frankly, a necessary part of the sales pitch. This isn’t to demean the product, but it must be said that such new products to the property investment market and alternative investment market will cause some anxiousness to investors. The developers must be very confident in offering such guarantees on their products and a way to project this is by offering contractual obligations to alleviate and allay concerns.
Insurance Backed Rent Guarantees – where’s the evidence?
As part of the sales pitch, developers and sales agents can offer insurance backed rental guarantees. Before parting with any cash, you should demand to see evidence of this and thoroughly check the wordings of the guarantee. I have purchased insurance to cover many things and as many individuals can attest to, insurance companies will wriggle and squirm out of obligations if they can as they really don’t like paying out! This is nothing new and this may not necessarily be a reflection the developer or the sales agent, but it will at least let you confirm whether the guarantee has any validity or not.
Research, research, research (and a bit of number crunching)
One of our sticking points when being offered developments to sell on is the unrealistic numbers that get put to us. We were once offered a project that had a 51 week tenancy in Liverpool at £125 per week. We’re not saying that achieving such figures over that length of contract is not achievable, but we did inform the developer that it is highly unlikely and unsustainable. How many of the 50 odd rooms would be able to keep up with that over a two or three year period? Very few if any. Does the market pay out £125 per week? Yes, it does at the very top end, but offering such guarantees is likely to lead to a disappointment and we believe in under promising and over performing. In short, you should make use of websites like Rightmove and Zoopla to check the current rental income in student areas to see if the numbers that are being thrown about are truly sustainable. Also, check with the University accommodation websites to see what length of contracts they offer. If they are offering very few developments at 51 week tenancies, then you can be quite sure that the demand isn’t there for such long tenancies.
Doing your due diligence on the actual agreement.
So the developer has offered you a guaranteed 9% net yield on your investment for two years. Great, that’s the first two years covered and you can forget about it for the next 24 months, right? Wrong. Have you asked the sales agent about void periods? Have you confirmed if the 9% net is absolute 9% net before taxes? Are there any other fees that need to be paid e.g. Property management fees, ground rents or service charges? Who pays for the furniture in the rooms? Do you need to provide the beds and mattresses? What about if a window breaks? Does the landlord cover this? What about if the desk or chair breaks? Does the developer cover this? Do you need to buy contents insurance if not? Will you even be able to get contents insurance i.e. is there a provider for this? What about if the shower head goes in the en-suite unit? Is this covered? Will you need to get your own maintenance guy to fix it?… And so on!
The list of questions above isn’t designed to scare you off, but this is the realism of being a landlord versus being an investor. If it truly is hands off, then you are edging more towards the investor side of it as opposed to being a landlord. With this approach, you can sit in your apartment in Malaysia or be a beach bum on the Balearic islands and have the investment fully managed.
Projecting beyond the 2 year rental guarantees
Two years have passed by, but what now? As mentioned earlier, nobody can predict what’s going to happen with the property market in the UK, but as long as you have done your due diligence and bought into areas where there is a genuine long term demand, then at least you have been able to control as much as you can control of the things that can be controlled (or legitimately assessed). As mentioned earlier though, the market testing and usage of property portals to assess market rates of student rentals will put you in good stead.
What about the developers? Have they stated will there be any other fees to pay or changes in payment structure beyond the two years? Will they continue to manage the development beyond the two years and who will be your point of contact? In short, is there a legitimate, reputably management company involved that have experience and a decent medium to long term reputation in the industry?
In summary, there are a number of factors to consider when being sold an investment with a fixed rental guarantee, but it is ultimately down to you, the investor, to do your full due diligence to see if the rents being offered are sustainable are legitimate and stack up in the current market.