Many property investment firms are offering guaranteed rental income, but is this real and is it sustainable?
If you were thinking of investing in Detroit real estate, you’ve probably run across a couple of firms that offer buyers this mysterious benefit called a “rent guarantee”.
*Please note, this is different from rent guarantee insurance*
What is this and is it even real?!
A rental guarantee or rent guarantee is a commitment made to a real estate investor buying property in the Detroit market. It mitigates any loss of rental income by guaranteeing an investor will receive a certain amount of months of rental income, no matter what.
This is usually offered by brokers or investment middlemen who want to allay the fears of investors who are thousands of miles away from their property.
It’s no doubt that the city of Detroit has had its share of bad publicity.
Some of this news has traveled all around the world, so when thinking of investing as an overseas buyer, there is a huge concern about safety and actually getting the rental income.
This is understandable. It’s a classic American urban area and some crime is bound to occur. To counter those fears, many investment companies have taken to offering overseas investors in the Detroit market a “rent guarantee.”
The “rent guarantee” usually states that for 1 to 2 years, the investor will always receive their rent from the investment property.
How is this even possible? Well, honestly, It’s not.
“Rent guarantees” make it seem as if the investment is absolutely “zero risk” and the income keeps coming in despite any normal market conditions. Here’s how it typically works:
- The investor is overcharged for a property by (don’t faint) $20,000 to $40,000!
If a rental property typically costs $45,000 in the Detroit market, an overseas investor may be charged $60,000 to $70,000. This price may be far less than what they would pay in their country for an investment property, but it’s far more than they need to pay in the US for real estate investment property. - The overage goes to take care of the profit for the investment broker AND a portion of that overage goes into an escrow account that will make rent payments to the investor whether or not the property is actually occupied.
However, if the escrow runs out and the property hasn’t been rented properly, the payments stop, the “rent guarantee” disappears…and sometimes the broker disappears with it.
Let’s be completely real here: there is always some element of risk involved with any investment.
We lessen the risk as much as we can, but there are always three possibilities whenever we’re making any type of investment — make a profit, lose money, or break even.
This exists in real estate investing as well. We can eliminate excessive evictions and payment delinquencies with rigorous screening.
We can eliminate prolonged vacancies with solid rehabs and by selecting properties in excellent neighborhoods.
However, we can never fully eliminate all risk.
Anyone offering to guarantee rental income is generally overcharging for Detroit rental properties or doesn’t intend to pay at all and is just looking for a quick score.
Very few firms can live up to the “rent guarantee” so it’s much better to eliminate any firms that are selling it as a primary benefit.
This is a business, we approach it as a business and we cut out as much risk as we can.
Have more questions about this? Give us a call at (248) 905-1531 or email: myrealestateteam1@gmail.com
Good Luck and Happy Investing!