Martin Hawes: Beware rental guarantees

You'll need at least a 10 per cent net return on apartments. Photo / Chris Skelton

At present, houses make poor investments; however, apartments are even worse. That's why developers and promoters of apartment blocks use some slick marketing to sell units.

One technique is the offer of guaranteed returns. I notice advertisements offering apartments for sale with returns guaranteed for two or three years at 6 per cent.

This is a fairly obvious marketing technique, but it does seem to work.

I guess some people are hoping that by the time two or three years are up, the apartment will be getting sufficient rent to make that sort of return.

For some, no doubt, the guarantee period will also make their financing easier.

However, if a property needs a rental guarantee, it is unlikely to stack up properly and you probably don't want a bar of it.

Rental guarantees come out of the developer's marketing budget. To me they are a sign of low confidence in the property's ability to generate income - a desperation to sell.

Such guarantees are only as good as the developer granting them, plenty of whom go broke, and two years comes around quickly enough. As an investor you need to be assessing the quality of the property in the long term and not be swayed by a promise in the short term.

In any event, I do not think that most apartments make good long-term investments. It may be that some apartment markets have fallen so far that they are finally getting a bit of a bounce, like the fabled dead cat. However, most apartments will not see good long-term growth.

This is because, first, in the past two property booms, it has been the land that has risen most in value. The trouble with apartments is that you have only a very small financial interest in the land.

Second, it is easy for developers to quickly increase the supply of apartments. This is not as true with upmarket units in top locations but is certainly true of the more average stuff.

Both of these factors are in addition to the usual difficulties that people find with apartments - high maintenance and body corporate costs and a general lack of control.

You should be demanding significantly higher yields for apartments than for houses. Although a net rental return of 7 per cent may be sufficient to warrant buying a house, I want to see at least a 10 per cent net return before buying an apartment.

And, of course, those figures are well away from any guarantee that a developer might offer.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.wealthcoaches.net