Buying off-the-plan risk#2: To rent or not to rent?

By in Buying

So, you are about to sign a contract for an off-the-plan investment property. You’ve found the perfect rental property! Or, so you think.

How well do you know the market?

If your dream is to rent out a city apartment, think carefully. Across Australia, vacancy rates for inner-city apartments have risen, with Perth currently leading the pack at around 7%.  Perhaps, an off-the-plan investment property in the suburbs is more appealing? High vacancy rates for rental properties are not restricted to inner-city apartments.

Perth is experiencing high rental vacancy rates

With the end of the mining boom and a reduction in population growth, rental vacancy rates are tipped to increase further, making it an ideal market for tenants, but not such good for investors. With new properties flooding the market all the time, renters have  choice in quality, location and price of their desired property. Some developers, landlords and real estate agents are attracting prospective tenants with ‘sweeteners’, in the form of free iPads, a week’s free rent and free internet connection.

Light at the end of the tunnel?

Over 400 property industry professionals packed the recent Urban Development Institute of Australia (WA Division) Market Predictions Luncheon to hear from representatives of the finance and development sectors on where the property market is headed in 2016. The Association reported that “while the panel acknowledged the tougher times that the WA economy and property market has experienced during 2015, the overall outlook for 2016 and beyond was relatively optimistic”.  Read more.

But I have a ‘rental guarantee clause’!

“So what?”, you might say. “My developer has included a ‘rental guarantee’ clause in my off-the-plan contract.  I have a guaranteed rental income for a set period of time, at a set rent rate.”

The only guarantees in life are death and taxes!

As attractive as a ‘guarantee clause’ may sound, buyers need to be aware that:

  • the cost for this clause has been factored into the purchase price of the property;
  • the rental charges may be above market levels, and unsustainable after the rental period expires; and
  • the guarantee is only as good as its maker, and depends on the ongoing financial viability of the developer.

Not sure where all of this leaves you?

Seek advice

If you are considering investing in an off-the-plan project, you should carry out extensive research and seek input from  legal and financial experts who are not involved in the scheme.

As your independent settlement lawyers, contact us to book a 60-minute consultation ($385) to review your draft contract.

Stay tuned for: Buying off-the-plan risk #3: what’s it really worth?




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