StoryLine By CondoNow
Rental guarantees are becoming one of the more popular incentives offered by new condo builders in the GTA. New Condo Investors in turn are gaining peace of mind from the financial safety net that can accompany this type of new condo construction promotion.
How Does a Rental Guarantee Work?
While there are many variances between agreements in most rental guarantees, also known as leaseback agreements, the contracts will usually include a guaranteed rental dollar amount per unit per month, which then spans over a 1 to 2 year term. The amount of rent is pre-determined by the developer using expected rental appreciation rates for that specific area.
An example of a current rental guarantee in downtown Toronto:
Rent is guaranteed at 6% of your purchase price on a monthly basis. You receive the rental payments monthly and your condo is professionally managed for the duration of the contact.
E.G. Condo purchase price: $400,000 x 0.06 equals $24,000; Divided by 12 gives you 2,000 in rental income per month.
What if the Rental Market undergoes Significant changes?
Typically the rental guarantee contracts have a clause allowing you to opt out and rent out your own unit directly.
What are the benefits?
The most up front benefits of having a rental guarantee in place are that your unit will be occupied and you will receive rent payments, for a set term. The side benefit to this is that it makes the process of obtaining a mortgage on the property a little easier.
Things to look for in a rental guarantee contract
The devil is in the details. As with any contract or program there are always pros and cons. It’s a great idea to shop around and become familiar with different offerings. Minimally the guaranteed rental rate should cover your monthly overhead. It also should be at or above the current market rate. Make sure you check the date for when the rental income commences. Ideally you want it to begin from the time you take possession of the condo (Pre-registration). Some rental guarantees may begin the date your mortgage kicks in (registration) and you officially own the property. This could create a small gap where you new condo sits empty and you do not have any rental income.
