The Rent Guarantee That Wasn't

Income property investors should not allow themselves to become too enamored of a rent guarantee offered by a property developer. As Jason Hartman reminds us, housing is a volatile market and one thing that isn’t guaranteed is that the developer will stay in business. For that particular promise to be worth more than the paper it’s written on, an investor needs to make sure he or she knows the market.

But how can companies offer a rent guarantee in the first place? There are certainly a variety of business models but let’s try this one on for size. One entity serves as the construction company, another acts as the marketing company, and a third offers the rent guarantee. There’s probably a property management company thrown in there too.

The trick is that, though organized as separate corporations, all are owned by a single individual or group of individuals. The ownership group makes their money when you buy the property, which keeps the construction and marketing company solvent. If the market is good, it’s no problem servicing the rent guarantee, but when the economy heads south, you can bet that the rent guarantee entity will go bankrupt rather than continuing to pay your “guaranteed” rent.

At that point, your golden rent guarantee is worth exactly what we said before - the paper it’s printed on and nothing else.

The only real rent protection available for a landlord is to make darn sure he or she does their due diligence and buys a property in a market where the deal makes financial sense the day they sign on the dotted line. You’ve got to know the true, legitimate free market amount that property will rent for. If there is a noticeable disparity between the rent guarantee being offered and your best estimate of the actual rent supported by the area, well, we’d suggest that relying on the developer’s word might not be a good idea.

Sure, it’s a great deal as long as the developer stays in business, but when he goes under, you’ve got nothing. (Image: Flickr | aka Jens Rost)

The JasonHartman.com Team
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