What are Guaranteed Rent Programs and How Do They Work?

3 min read
Brenton Hayden Read More

Join BiggerPockets (for free!) and get access to real estate investing tips, market updates, and exclusive email content.

Sign in Already a member?

To a new investor putting together a business plan, “guaranteed rent” may sound like the best idea since sliced bread.  However, like many things in life, it’s name doesn’t tell the whole story.  Before signing up for guaranteed rent plan, be sure you understand how these programs actually work and decide if it is best for you.

It’s Not Rent Guarantee Insurance

“Guaranteed rent” insurance is very different than “guaranteed rental programs.”   Guaranteed rent insurance is actually a form of insurance where, for a relatively small annual fee, landlords can protect themselves against loss of rent. It was first developed in the UK and now is available through carriers backed by Lloyds of London, AON,  and other underwriters. Guaranteed rent insurance generally doesn’t cover the first month that the property is vacant.  This is commonly the “deductible” per se. It is also usually a condition of such policies that a landlord ensures that their tenants are professionally credit-checked before handing over the keys.

Guaranteed rent insurance is often sold with landlords insurance, which covers a property owner from financial losses connected with rental properties. The policy covers the building, accidental property damage caused by the tenant, also with the option of insuring any contents that belong to the landlord that are inside the rental property.

What is a Guaranteed Rent Program?

Guarantee rent programs are actually more than just insurance.  In many ways, they are an alternative to professional property management with some fine print that may surprise owners.

Under these plans, the landlord signs over the property to a leasing agent for a specified period of time—sometimes as long as five years—in return for a fixed monthly income for a fixed term regardless of whether or not the property is occupied.  The guaranteed amount is usually less than what the landlord would realize if the property were rented for 12 months.  It is then up to the agent to let the property at the highest rent they can and any profits they make after what they have paid to the landlord are theirs to keep, in return for taking on the risk of keeping the property rented.

Some programs also require the investor use their real estate broker when buying the property, even if investor prefers another,  thus the guaranteed rental program receives the commission from the transaction to help offset their own risk in guaranteeing the rent. So, although these programs provide peace of mind, it’s unlikely that you will be getting the property’s full earning potential. But with mitigated and reduced risk, goes reward obviously. Those who are risk adverse may see one of these solutions as very valuable and offer great peace of mind.

Even though the guaranteed rental program is performing some of the tasks of a professional management company, including the costs of maintenance on the property (which is factored into the programs revenues in the form of a lower guaranteed pay-out), the landlord may still have some obligations.

Before Using a Guaranteed Rent Program, Do Your Homework

Before signing up to a program, do your research and find out about the provider, as well as the details of the program, making sure there are no extra charges automatically deducted from the guaranteed income. You must know in advance the kind of tenants the provider is planning to place in your property.

Be careful about where the company may be getting its tenants and ask what measures they are taking to ensure that those tenants are being adequately checked.

Compare the terms from the company providing the guarantee, and assess how they stack up with the costs and services of a traditional management company:

 

Terms

 

Guaranteed Rent Program

 

No Program

 

Costs

 

You receive less than the maximum rental revenues which are reduced to pay for management and the risk take.

 

If you use a management company, most charge ten percent of rental income.

 

Management

 

 

You must use their management company.

 

You pick the management company of your choice or not use one.

 

 

Brokerage

 

 

Some require that you use their real estate broker, who receives the commission.

 

You may use the broker of your choice.

 

Term

 

 

One to five year fixed payments.

 

No fixed payments

 

In deciding whether to go with a guaranteed rental program, calculate the amount of revenue you will forego by managing the property yourself.  Today, forecasts for single family rental demand is very strong, largely due to the difficulties that potential home buyers are having getting financing, a situation which shows no sign of changing.  Going with a program in the current economy simply to protect you from a vacancy makes little sense in most markets. Ask local investors and check on rent estimator sites to see what fair market rent you could achieve on the open market. If there is too big a difference, think again. However, never underestimate the power of good property management, and guaranteed rent. Some like less risk, even if less reward, some like to gamble and go for broke…

BP users, do you have any experience using these programs? Leave your comments below!

Photo: LongLostCousin