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Are Rental Guarantee Programs a Smart Choice for Investors?

What are rental guarantee programs?

 

A rental guarantee program is a form of investor insurance that guarantees rental income on an investor’s property regardless of tenancy. The program typically guarantees a property for a term of about 1-3 years at a fixed rental rate.

From the guarantee provider’s perspective, they are hoping to make money on the spread between the rent guarantee they offer, say $2000 per month, and the expectation of market value, say $2100, leaving them $100 profit.

Rental guarantee programs have been a staple of European and Australian real estate for the last 20 years. As of 2015, roughly 60% of landlords in the U.K. were using rental guarantee programs. As a real estate practice, it’s still fairly new to Canada.

The precedent for rental guarantees in Canada is landlord insurance from companies such as Rentshield Protection. The paid membership provides landlords with coverage against lost rental income, payment of legal fees, and court costs in the case of tenant disputes. The annual membership fee is usually around $300. But landlord insurance is just that—insurance. It’s different than a rental guarantee program.

 

The benefit of rental guarantee programs for investors

 

The prime benefit of a rental guarantee for investors is that rental income is obtained regardless of tenancy. Whereas landlord insurance provides coverage if rent is mislaid, the rental guarantee pays the property owner each month.

In most cases, it is the responsibility of the guarantee provider to find and secure tenants for the property, leaving the work largely out of the investor’s hands. That’s why it will often be the building management company or the project developer that offer the rental guarantee program as part of the pre-construction sale package.

In 2015, Minto Group in Toronto introduced a rental guarantee program at a new development called Minto Westside. The guarantee secured rental income for 2 years at 6% of the condo’s purchase price, which equalled $2,000/month for a $400,000 condo. The program was created at Minto because investors were expressing concerns over rental market slowdowns by the time the development was completed. The rental guarantee comfortably alleviates those concerns.

 

How to know if a rental guarantee is a smart choice?

 

The decision to accept a rental guarantee program comes down to whether the guaranteed rental rate covers the costs of ownership. As an investor, you want the guaranteed rental income to be equal to or above the sum of your mortgage payment, condo maintenance fees, property taxes, homeowner’s insurance, and the potential cost of vacancy. It’s important to remember that each year there is the possibility that your condo will sit empty for some amount of time. You want to factor in the out-of-pocket cost of letting your condo sit empty and hiring a rental agent to fill it versus the peace of mind of guaranteed tenancy.

In general, the only reason to pass on a rental guarantee is if the market rental value exceeds the guaranteed rental rate by at least 10%. If you think that the market rental rate offers greater value than the peace of mind of guaranteed income, then you’re better off renting the property on your own.

But remember to consider rental demand. You want to invest in a neighbourhood with a low vacancy rate, so that when the rental guarantee expires you’re still invested in a high-demand location. As well, if the rental market value suddenly shoots up, you should be able to buy out of the contract at a reasonable cost.

As an example, one of our Condos.ca approved pre-construction opportunities, South Bay in Kingston, is offering a fixed rate 3-year rental guarantee program through a company called RentSure, Canada’s first rental guarantee provider. Owners who opt for the rental guarantee will receive direct rental income at approximately $2.40/sqft each month.

Above all, the greatest benefit is the peace of mind that comes with the guarantee of worry-free rental income.