I started educating people on how to start their investment journey in 2013. I have since advised over 3,000 students on the needs to be careful and to shy away from any developments that offer guaranteed rental returns (GRR).
Why, you may ask? Well, the reason for this is that GRR is often used to sell over-priced properties. Most of the time, the price you are paying already includes "the guaranteed rental portion", and the story goes like this:
Imagine property X's fair value is RM400,000 but Developer B sells property X in a la-la-land location for RM800,000 instead.
Now, Developer B knows that if he sells it out rightly at RM800,000, no one would bat an eyelash at it because once potential buyers do their studies, they would realise that the market value for Property X is only RM400,000.
Therefore, GRR is used as an illusion to make us think that Property X is valued at RM800,000. How is that done? Developer B would introduce the buyers to a guaranteed rental return of 7% for 200 years.
Since it's hard to find properties that can breakeven, the idea of getting a 7% return on a property sounds damn good! Developer B would also guarantee that you, as a home owner, would not need to do anything but to sit back, relax and collect the fantastic cashflow. Sounds good, right?
By now, the number of buyers would have increased and these hungry investors are thinking of grabbing more units. Developer B takes that opportunity to say that there are only 3 units left and if you don't grab it, the politicians will sapu it for themselves. Of course, at this rate, the buyers will say "F U politician, these are all mine!â€
Life seems like a bed of roses for them signing their Sales and Purchase Agreement (SPA). They will then go on to say, "Take that Faizul. I don't need to attend any investment classes to get a 7% return and a positive cashflow. I'm an effing genius! I, too, can start teaching and sharing on my investment journey tomorrow.â€
It all looks promising for the first six months after Property X is completed. Happy buyers, happy life. But what comes after was beyond their expectation. Payment starts to become irregular, calls start pouring into the rental office and all Ms Admin can say is, "Sorry Sir, we will get your payment to you as soon as possible. We are waiting for our boss to sign the cheques.â€
After nine months of waiting, the only thing the buyers can do, is wait even more than they have already been waiting. There is still no sign of the guaranteed rental payment made to the buyers. Much to the buyers' surprise, Ms Admin has now resigned from her position due to constant nagging from the fuming buyers.
Lo and behold, the moment you have been dreading. Developer B, who has guaranteed your rental for 200 years, is forced into liquidation due to the lack of funds. The owners take back their units from Developer B and desperately tries to rent it out themselves to cover up what they've lost. Rental offers come in, at RM1,500 a month which is the market rate for the la-la-land location. But, the buyers' loans and maintenance fees are above RM4,000 a month. Shocker!
So instead of getting a positive cashflow, you now have to fork out an additional RM2,500 a month to let someone stay in your unit. You begin to question your choices and tell everyone you know that property investment is a scam, Faizul is no one to teach you about property investment and it's all the government's fault.
Well, the truth is, you just bought a white elephant that wears a lipstick. It was a doomed plan from Day 1, and you probably already know it too.
Guys, the only time you should consider GRR is when you are buying a property at fair market price and as a BONUS, it has GRR. That way, even if the GRR collapses, you can still rent out at a fair value instead of bleeding few thousands every month. Most GRRs ends up in failure - just study any resort/holiday based properties in Sabah, Melaka, Port Dickson, to name a few.
I pity those who bet their retirement funds on GRRs based developments. They end up losing all their life savings.
So, the next time you see anything with GRR that sells way above the market values for similar completed properties nearby, please RFF (Run-Fast-Fast). I've been saying this to my students since 2013, and I hope you will benefit from this article.
Off the record, I'm predicting more of this will surface in the next 24 months. So don't be a victim of bad GRRs. Study the development well and make wise choices.