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Condo Rental Guarantees – Good or Bad?

From time to time, a condo developer will want to incentivize a condo investor to feel comfortable that their condo investment will generate revenues right from the get-go. One way to do this, is to offer a rental guarantee. Basically, the developer commits to the buyer of a condo unit that he or she will receive x dollars per month in rental income. There are various ways for this guarantee to be structured, including:

  • The developer pays the buyer/owner directly, a fixed monthly amount.
  • The tenant pays the buyer/owner directly, but the developer tops up that amount if it falls short of the guaranteed revenue amount.

Most of the time, in order to manage and control the rental process and to ensure that sufficient effort is being made to obtain an acceptable rental rate, the developer will also include free property management for the duration of the condo rental guarantee. Since this property management is often outsourced, there is the opportunity for hands off investors to retain the same property management company’s services, after the end of the rental guarantee.

Here are some things to look into or watch out for:

  • Make sure that you have a lawyer who specializes in Real Estate, review your Purchase Agreement, including all schedules and of course the document in which the developer commits to guarantee the rental income.
  • Find out which entity is guaranteeing the rental. If it is a brand new corporation, set up just for that purpose, you need to consider how much can you rely that corporation. It is preferable to see the developer use its parent corporation for the guarantee. If they are not, it’s advisable to  have your Real Estate lawyer find a creative way to backstop the guarantee so that there are some assets behind it.
  • Find out if property management is included in the rental guarantee. If it is not, you may be required to use the developer’s chosen property management firm, at rates which you may not find competitive.
  • Watch out for various fees or charges written into the rental guarantee document.
  • Have someone other than the developer (a quality Real Estate Broker is best equipped) look into whether the guaranteed rental rates are realistic, too high, or too low.
  • If you are not an investor, or you don’t need or want a rental guarantee, then try to negotiate the price of the condo down. Logically, if the developer doesn’t need to budget to pay you rent, if it is not able to find sufficient tenants, then it should be able to lower the purchase price of the unit for you.

Below are pros and cons of this type of condo rental guarantee.

Pros:

  • You don’t have to worry about finding a tenant, or how much he or she will pay, for the first one, two or three years of you owning your investment condo unit (different developers offer different rental guarantee terms, depending on the project).
  • Financing the purchase of your unit may be easier with a rental guarantee in place.
  • This is about as turnkey as Real Estate investing gets.

Cons:

  • If the developer promises a rental amount which is higher than what the market will really bear, then you may inadvertently pay more for your condo than you should, since you might base your decision on the developer-promised revenue, than on reality.
  • Some buyers get very comfortable with the developer and property manager taking care of everything, and are not prepared to take over at the end of the rental guarantee term. This sometimes leads to buyers agreeing to pay higher than normal property management fees, so as to not have to worry about their investment.
  • You may or may not have a say in which tenant the developer will put in your unit. Due to residential tenancy laws in Ontario, tenants are not necessarily easy to get rid of.

At the end of the day, a condo rental guarantee can be a great way to help you invest in Real Estate. Your job is to educate yourself and align yourself with a Real Estate team which will promote and defend your interests.

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