A client of mine recently raised a good point:
‘When you are looking at investment opportunities, and you come across a guaranteed rental income, why is the rental income so much higher than market rent AND why is the asking price usually much higher?!’
The guaranteed rental income in new build schemes aren’t part of my strategy and I’ve heard horror stories…
Battersea Power Station for one, where many investors bought off plan, flipped the right to buy on and then those that brought lost loads of money on the agreed purchase price because of a mix of Brexit / changes to Tax.
The result was that mortgage lenders would no longer lend as the agreed purchase price was way above market value and thus many investors defaulted on completing.
Similarly a number of student housing schemes in Liverpool had the same fate… do you remember Pinnacle Student Developments (Liverpool)?!
What seems to happen is that developers overpay on buying the land and then overpay on development costs. Which means to recoup their money they inflate the price of the properties they are selling.
However to make the deal look ‘good’ they offer guaranteed rents which give a ‘good’ yield. Whether the developer or management scheme can actually get those rents is a different story, but they pay the rent. Presumably because they can afford any top up as they’ve just received a high sales price which has given them a profit.
2-5 years later, when the guaranteed rent scheme is up. The developer can wash their hands of the building, increase the service charge and move onto another project. Potentially leaving the buyer with a property that isn’t worth what they paid for it AND getting a rental income of less than anticipated.
(This isn’t true of all schemes, but again, have you seen the horror stories?! You need to be tripling down on your due diligence if you are looking to invest in them)
I’ve set out to dig a little deeper into this schemes. This week I’ve invited Jake Knotman onto the podcast to investigate further. We discuss Why Developments Fail.
To listen on iTunes click HERE
To Listen on any other platform click HERE
Was this interesting to you? Do you have any other subjects that you would like me to discuss on the podcast?