Rental assurance periods - as good as they seem?

To many investors, being assured of their rental income is pivotal to their investment strategy—many are enamoured with this way of investing, since annual returns are guaranteed for a set period of time by the developer, whether the investment property sits tenanted or not. But what do assurance periods actually mean for the future of your investment?

Rental assurance periods - as good as they seem?

As the name suggests, a buy-to-let property’s rental assurance period is the time in which rent is guaranteed by the developer, even if the property is untenanted. Normally rents are assured for the first year of investment, but assurance periods can stretch as long as five or ten years depending on the preference of the property’s developer.

Naturally, investors generally favour properties that offer assurance periods because it can be seen as a ‘safe’ investment—that, even when the property is untenanted, it will still be generating income. For investors, void periods are detrimental to one’s investment strategy so must be avoided at all costs, which is why assurance periods are a solution to a very real problem in property investment.

However, rental assurances are not all as positive as they first seem. Savvy investors will know that assurance periods will stifle any hopes of rental growth, as rents are fixed for the duration of the guaranteed period. Rents are therefore capped—whilst you are still gaining the rents and yields that were advertised by the developer, there is no room for rental growth during this time.

Furthermore, capital appreciation and rental growth on properties in popular areas can potentially be huge, especially if your property investment was off-plan and thus purchased significantly below market value, so in effect rental assurances are capping the potential growth of your investment—even more so if you are tied into a long rental assurance period of 5 years and over.

In addition, whether you support assurance periods or not, the truth remains that these guarantees are not a long-term solution, even if you have a long rental assurance in place—as soon as you are out of your assured period, you run the risk of void periods immediately after the termination of your guarantee, which can then begin to negatively affect your investment strategy.

Therefore, on paper rental assurance periods seem like a must-have element when selecting an investment property, but the reality of assured rents is far from the fairy-tale it first appears. Whilst it cannot be argued that you will get the rents that the developer has advertised and for a fixed amount of time—which is inherently a positive in the initial stages of your investment lifecycle—it also somewhat hinders your investment in that rents are fixed throughout the guaranteed period and cannot be altered.

Therefore, the best way to have rental assurance without being capped on present and future rental growth is by obtaining the relevant landlord insurance. This means that you will be covered if your rental property remains untenanted for a set amount of time, but your rents are not fixed so they can be increased at any time.

It has to be said that rental assurances can be good for reassuring nervous investors, but as long as you choose the right investment opportunity in an area of growth that has high demand from tenants, your rental income will be assured as standard—the demand from tenants in the area should be enough to guarantee both immediate rental income from an ongoing tenancy, and the potential for rental growth in the future.

If you have chosen the right investment in the right location, your rental income should be guaranteed for life, not just for one, two or ten years.

Quarterly Report vertical - April 2019

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