GRR, Dream Come True or Too Good to Be True?
What is "Guaranteed Rental Returnsâ€? A Guaranteed Rental Return, or better known as GRR, is a future rental income that is guaranteed by the developer or management company to the property purchaser for a contracted period after the purchase agreement is signed. In simpler terms, it's an auto rental when you own a property. Sounds too good to be true, you might say?
GRR needs to be considered amongst many other factors that determine whether an investment is of good value or not. This will consider the buyer's objectives and investment timeline, which varies from individual to individual.
Robert Gavin, CEO of Property Horizon gave three points to refer to when considering buying a property with GRR. Source: PropertyGuru.com.sg
1. The investor should be cautious if there are no paper promise or an actual contract to protect the buyer should the income not be generated.
2. The investor should study the current market of their chosen property and monitor to see if the income figure is realistic and achievable.
3. To ensure that the developer does not inflate the property price, the investor should ensure that the developer has the ability to manage the property adequately for the income to be generated.
#1. How long and how much?
This is undoubtedly the most important question. A normal GRR package can run from 5 to 10 over years. Of course, some people say that the longer the better! Why go through the trouble of looking for a tenant if it's already provided? However, there are also those who prefer a shorter period. But why would someone choose a shorter period if a longer guarantee is offered? The answer is the rental amount.
In Malaysia, most GRR package comes with between 6% to 7% returns. It is very rare to find something lower than this range. This amount is calculated on a yearly basis on the price of the property (usually net price).
#2. Does The Rental Amount Change With Time?
This is another important item to consider when taking up a GRR package. As time goes by, the rental may increase as well. This is due to rising cost of living, inflation, economy, to name a few. In any normal circumstances, rentals will increase over time. However, there are a lot of GRR that promises a long period of guaranteed rental with no change in rental amount. This is not good as it prevents the owner from increasing their rental yield with time.
It is best to find a package that either changes the rental return amount with time, or a shorter guaranteed rental period so that the owner can increase the rental following the current market rate.
#3. How Can They Guarantee Your Rental?
Most properties that offer GRR usually has a very strong advantage in rental rates in order to offer their buyers the package. Typically, these properties are located next to an educational institution, where the rental is easy and almost guaranteed. However, a GRR is sometimes not so guaranteed after all. In 2000, a developer had enticed buyers of a GRR scheme of between 8% to 10% for 15 years. The property was to be rented out to students studying in a higher learning institution nearby. However, 6 years later, the investors received a letter from the property management company which stated that the GRR scheme would be terminated two months from then. It turns out that the students had been provided with hostels and in the end, renting out the units was almost impossible. The value of the apartments has since plummeted by almost half. Make sure you do your own research about the potential of the area to see whether or not it is feasible to safeguard yourself from any unexpected future pitfalls that might occur. Quite often, though, properties near popular landmarks (that generate a high number of tourists) may offer the package as they will have no problems getting tenants. Such a property is definitely ideal for investment.
#4. Who Guarantees It and How Safe?
A GRR package will usually be done via a tenancy agreement or a leaseback agreement with the management company. Be sure you read up on the management company background and see if they have the proper experience in handling your property.
There are also rare cases where the company will take an extra step and set up an insurance protection for the rental or an external independent trustee company to handle the rental money. This is not common and is definitely an added advantage.
#5. What Happens After The Guaranteed Rental Package Ends?
This is a good question and unfortunately, an answer is not always provided for the company providing the GRR package. This is mainly due to the fact that most businesses understand that the future is not guaranteed.
A few options exist. The common ones are:
â€¢ The GRR agreement is renewed when nearing the expiry period.
â€¢ A new tenancy agreement is arranged on a yearly basis.
â€¢ The management arranges a profit sharing agreement with the owner.
â€¢ The property is passed back to the owner and it is up to the owner to manage.
However, keep in mind that for the GRR to exist in the first place, that area is usually a good rental area, making it easier to rent or sell the property in the near future. If the initial GRR agreement is for 5 years or more, that is more than enough time to handle the property.
#6. Why Are They Offering It In The First Place?
Another burning question and there are usually 2 main reasons for this:
1. As a marketing selling point to attract buyers; and/or
2. To earn an ongoing profit.
Just like the owner, the developer can earn in two ways, either sell or rent the property. Offering GRR gives the property an added advantage to potential buyers. Renting it out will incur additional costs (management fees, etc.) but the profit earned is more ongoing. Developers usually will choose to offer the GRR if they think that the property has a high potential for rental profit.
With selling it on GRR, the developer will be able to reduce their costs and earn an initial profit through the sale and then increase their ongoing profit via the rental of the sold property.
#7. What Running Cost Is Not Covered by The Package?
As with all properties, be sure to double check what the running costs are that still needs to be paid. Usually, the maintenance and sinking fund is still borne by the owner even under GRR.
At the end of the day, it is your due diligence to ensure that the package offered is worthwhile or not. There is no perfect package or investment, there is only the best package and investment according to the needs and wants of the buyer.
Bottom line is, before plunging into any investment with GRR, you need to ask yourself these 3 important questions:
1. If the GRR wasn't part of the deal, would you still buy the property?
2. Is the GRR offered realistic to existing rentals of similar properties within the same area?
3. Is the property selling price fairly the same to other similar properties within the same area?
If your answers to the questions are NO, chances are you could be better off looking elsewhere.
Till then, invest safely and wisely.