Worthy or Unworthy

[Learner]

G'day All ,

I have a friend who has purchased an investment ppty from a marketing company which are offering 3 year guaranteed leases with an option of an additional 3 years from the day of settlement. After somewhat closer investigation into this i have discovered that the option is purely up to the company and not the individual and also have found out that there is no personal guarantee on the "guarantee" and that the prices on these prices are slightly inflated although are still attractive due to the rental guarantee, and as a first time investor this would provide some peace of mind.
Question: How can these marketing companies offer these guarantees???

And more pros and Cons to this type of scheme.

Thanks for all your help.

 

[Kristine..]

Learner

All options are at the discretion of the tenant.

The owner / landlord cannot compell a tenant to stay. If the tenant is not running a profitable business, why would they want to stay? If they are running a profitable business, they are safe from a landlord who wants them to leave.

The word 'guarantee' is a misnomer. The properties obviously must have individual titles and the tenant will have signed 50 individual leases with the vendor, and these leases can be assigned to the new owners. The owners therefore have the same rights under the law as any landlord has.

These commercial leases, however, make the 'deal' commercial and not residential with regard to organising finance. This may make organising finance a little slower and may require a higher deposit or some other collateral to be brought into the mix. However, the gain is usually worth the pain, and by the time tax depreciation, pre-paid expense, no vacancies, management or letting fees, pre-determined rental increases etc are taken into account, these deals usually stack up pretty well.

At the end of the lease plus option periods, should the tenant not continue, then the owners have prime property in a well run building (usually) in a crack location, that they can then live in or rent out as with any other property.

A lot of these deals have very well known and financially stable tenants, eg Stockland / Seville, Quest, Oakford etc

In fact, when I was selling serviced apartments in Melbourne CBD in what were usually very attractive and well positioned buildings, I found that the main grievance from prospective purchasers was that they couldn't live in the apartments until such time as the tenant had left.

This subject has been discussed at length in the past. Try searching 'Serviced Apartments' for other opinions and regarding deals in various states.

Cheers

Kristine

 

[Learner]

Thanks for your reply Kris.....

More to think about though,

The marketing company is the company resposible in attracting potential owners in purchasing these ppty's, then this marketing company is affiliated to another company which becomes the tenant through a Law Society lease agreement on the residential ppty (this is why it is a commercial lease arrangement because the landlord is a company). So then once the ppty settles the "tenant company" then has a responsibility to locate a tenant and then lease the ppty to them no matter however long. So then what basically happens is that the owner becomes the owner, the tenant company is the landlord and the tenant well....is the tenant .

I know this may sound a little confusing, although there might be some who have encountered or are familiar with this type of scenario.

Learner

 

[bundy1964]

Originally posted by Learner
Thanks for your reply Kris.....

More to think about though,

Hi

You lost me after the above statement

bundy

 

[mmerlin]

Originally posted by Learner
The marketing company is the company resposible in attracting potential owners in purchasing these ppty's, then this marketing company is affiliated to another company which becomes the tenant through a Law Society lease agreement on the residential ppty (this is why it is a commercial lease arrangement because the landlord is a company). So then once the ppty settles the "tenant company" then has a responsibility to locate a tenant and then lease the ppty to them no matter however long. So then what basically happens is that the owner becomes the owner, the tenant company is the landlord and the tenant well....is the tenant .

My interpretation of the above is
- you buy the property from the marketing company
- they then put you in contact with a second company
- the second company leases the property from you on a commercial basis
- this second company makes it's money finding residential tenants for the property (and leasing the property to them at a higher price, on a residential lease)

Sounds like an interesting kind of deal, since you get a stable income with the commercial lease from the second company.

 

[darryl]

Hi Learner

Having been burnt by a rental guarantee in the past. The tenants have to be watched very closely, as the landlord company may not take the same care in selecting a tenant as a regular PM.
These problem tenants do not become obvious until the rental guarantee runs out. In my case the tenant was 2 months behind in rent (I was paid in full due the guarantee) they had repaired something on the lounge floor leaving oil stains on new carpet, and were dealing drugs for the property (police were involved). I had to pay for the carpet replacement, as there was no bond to recover it from.
The property in question was interstate so I was unable to keep a close eye on it, thence was possibly a worse situation than if the property had been local.

I’m not saying don’t do it just watchout for some of the things that can go wrong and keep a close eye on the landlord company.
I hope it all works out better for your friend than it did for me.

Regards
Darryl

 

[mmerlin]

Originally posted by darryl
... problem tenants do not become obvious until the rental guarantee runs out

... I had to pay for the carpet replacement, as there was no bond to recover it from.

Hmm, Darryl's words of experience indicate a need for plenty of due diligence before entering into these kinds of agreements.

I hadn't considered what happens when the rental guarantee expires or the property is damaged.

 

[Tibor]

Just 2 points.

1. ANY rental guarantee is as good as the guarantor. If the guarantor goes under, there she goea the guarantee as well.

2. If a deal is good on its own, WHY does it need a rental guarantee.

Sorry, but I smell a rat.

Tibor

 

[Duane (Fitman)]

Firstly, the rental guarantee is only as good as the paper it is written on!... Do your due dilligence & find out through an independent valuer exactly what the ip's price should be & what it should rent for. More often than not your'e paying for 80-90% of the rental guarantee in the purchase price!.... eg... They say the purchase price is $500k with a rental guarantee fo $20k per year for five years....= $100k. If you look at the independent valuation of similar properties you should be able to buy the property for $400-420k.... Correct me if I'm wrong but theres no free lunch here. I have just settled on our latest off the plan commercial property with the same sort of deal... I had an independent valuation based on what we were looking at & negotiated a price even below market & had them give me the rental guarantee as well!... If the deal is not heavily in your favour then walk away.... its amazing what can happen before you get to the door! heheh.
Due dilligence will allow you to do the deal the way you want it done!...
Cheers,
Duane

 

[Learner]

Thanks for all the info forumites


Learner