Beware of Guaranteed Return Product
One of the most talked about investment products in the spectrum is Guaranteed Return Property.
Guaranteed return products have got themselves a very bad name over the years. The premise is that the developer will itself, or in alliance with a management company, offer to pay back a certain percentage of the value of the property, usually from 3 to 5%, each year over a certain period. This gives the investor the knowledge that they will have income to cover expenses and loan repayments.
Properly done, guaranteed return property is actually a good idea, even though it will rarely pay down a mortgage unless it is quite a small one, but it has been badly abused over the years. The biggest problem, particularly for product sold with short term guarantees of up to three years, is that the money your receive in your rental guarantee has very often simply been added to the price of the property. It is then given back to you over the period and you pay tax on it. Not the best use of capital you could envisage.
To carry out a good guaranteed return transaction involves a property in a desirable area, a well run management company and a constant supply of high quality tenants. For the purchaser, knowledge of the value of property in the area and the actual achievable rent is essential prior to purchase. You will have to let your property in this market once the guaranteed return period has expired. If there is a limited rental pool and you have simply being receiving your own money as rental, you will have a very poor investment.
Guaranteed return product is fine if you want your property to provide some income to pay down expenses, it would typically not be considered a true investment product though.
