How to: Rent out an off the plan apartment

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Planning how to rent out an off the plan apartment is similar, if not the same, to other forms of property investment strategy, however some developers may offer a rental guarantee on the new purchase.

Developers generally offer a rental guarantee for the first year or two, however many property professionals warn against buying into a development that offers a rental guarantee.

iProperty Plan director Mark Armstrong says by accepting a guaranteed rent level, investors are insulated from market forces.

“As newer properties come on to the market and tenants have a wider choice of places to live, the market rent for a property could fall,” says Armstrong.

Market analyst Catherine Cashmore says the rental guarantee is always factored into the sale price of the apartment.

Cashmore says rental guarantees can be between 5% to 7%. If an investment has a gross return of 6% and the developer guarantees $300 a week rent, the purchase price would be $260,000.

But if the market rent is in fact $250 a week, the property is really worth $218,000, resulting in investors paying 19.2% over the market value.

“Once the guarantee expires, the unit’s yield will revert back to market forces,” says Cashmore.

Armstrong says once the guarantee expires, investors will need to have sufficient cashflow to hold the property during periods when the property is not tenanted.

Property 1 real estate agent Garth Rothwell says rental guarantees are good for overcoming fear of loss due to a vacancy period but in reality, all rents are guaranteed.

“I guarantee there will be people willing to rent a unit, it just comes down to how much rent they are willing to pay.

“Guarantees that are offered by the developer and are above market value are bound to fail, as proven in the past, as they are unsustainable over the medium to long term.

“Rent guarantees based on market value for a period of one to three years can be beneficial for investors to overcome the fear factor and help the investor with cash flow in the initial years of the purchase,” says Rothwell.

“Ultimately it comes down to how the rent guarantee is funded.”

Off the plan apartments can be advertised for rent prior to settlement but Rothwell says the investor will require the developer’s permission to advertise early, as the developer will have to authorise access to conduct inspections.

“If the unit is leased prior to settlement, the developer is entitled to the rent collected prior to the settlement date.

“If a guarantee is in place, the developer will already have this process in place,” says Rothwell.

For investors wanting to rent out their new apartment, Rothwell advises to price the unit at market value, not emotional value.

“Investors should be prepared to trade off $10 to $15 per week in rent to get a better tenant sooner, or alternatively a tenant with a small pet may pay more.

“The investor needs to identify the type of tenant they wish to attract, familiarise themselves with relevant facts regarding pets, body corporate rules and on site management,” says Rothwell.

Rothwell advises that a pre-purchase/settlement inspection is organised from a licensed building inspector and that a detailed initial inspection report is completed.

“Complete all guarantees for stoves, ovens, dishwashers and air conditioners and ensure a landlord’s insurance policy is in place to cover loss of rent due to malicious damage and a basic contents policy to cover any dispute about building or contents,” says Rothwell.

As with any property investment, research is the key to ensure the numbers add up and that all the correct measures are taken to safeguard investors and their property.

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