Beware of Guaranteed Rental Income Schemes
Guaranteed Rental Schemes have Always Failed
Unfortunately, many across India have invested in such schemes, only to get badly stuck few months or years down the line where they neither end up with the property nor the assured returns in hand.
“Assured rental income” schemes are very often short-lived and not a long term solution as explained below.
Some players in this field across India are assuring guaranteed returns of 8% to 10% per annum and while this sounds very exciting on paper, there is a lot of fine print that investors miss out.
Here are 8 reasons why you should NOT invest in such “guaranteed rental schemes” and instead, invest in much better alternatives – such as Starlit Suites high rental income serviced apartments – which are a lot more sustainable in the long run.
Builders charge you a Higher Price Upfront, which is then paid back to you as Guaranteed Rent!
This means builder is taking your own money upfront and then giving it back to you!
- You need to know for sure that the rental paid by builder is based on actual / real occupancy of the property – as if not, it is just another name for discount.
- If the builder is paying you guaranteed rent out of his own pocket, it clearly means that he has already increased the upfront price of the property and that excess money is being paid back to you as rental income – which means he is taking your own money upfront and then giving it back to you!
- For example, if a property costs Rs.5000/Sft normally, the exact same property will cost you Rs.6000 to 7000/Sft if purchased under guaranteed rental income scheme – and the excess of Rs.1000 to 2000/Sft is what is being given back to you as rental income!
- Also, you will have to pay 90% to 100% of unit cost as down-payment right in the beginning to qualify for such guaranteed rent, which makes it even more clear that builder is using that same money to pay you back!
- In this case, if builder is paying out of his own pocket – how long can this go on before it becomes unprofitable / unsustainable?
- And because you purchased the property at much higher rates than the market, it also becomes very difficult to find a buyer when you want to sell off such properties.
Therefore in all such cases, you are better off buying similar properties at a much lower cost and renting it out on your own as that way, you will earn a lot higher ROI in the long run than such assured rental properties!
Source of Cheap Funding for Builders
Builders use Assured Rental Schemes as a cheap way to finance construction.
- Banks nowadays charge a very high interest rate of around 18% to 24% and are also very hesitant to lend money to builders due to tighter norms and regulation.
- Cash-crunched builders are hence turning to “assured rentals” as an easy and much cheaper way of raising money as in this case, they pay guaranteed rental of just 9% to 12% – which is almost 50% cheaper than what banks would charge (i.e. 18% to 24%)!
- Also when offering an assured return scheme, the developer does not have to provide any collateral or security, which he would have to do if he approaches a bank or lending institution.
Therefore, such assured rental schemes are a cheaper way to raise money for builder rather than say, borrowing from banks and other lending institutions and hence this is another reason why you should be wary of such schemes.
Guaranteed Rents are NOT Guaranteed Forever!!
In all such schemes, rental income is guaranteed only for a few years or until completion, leaving you on your own post this period, most often with nasty consequences!
Guaranteed rental income schemes come in the following 4 flavours :
- Assured rental income for 2 / 3 / certain number of years
This is the most dangerous of all as irrespective of whether construction is complete / project is ready or not, your rental income will stop after a certain number of years, which means you are on your own after that and most likely, with a property that is not yet complete and hence cannot be rented out, even on your own as well!
- Assured rental income only upto Completion / Possession
You are paid guaranteed rent only upto completion and after that, it is upto you to find a tenant and earn whatever the market is paying, which is often 6% to 7% at best – if you manage to find a tenant in the first place! This is where a lot of investors struggle as renting out a small 200 to 500 sft shop space is notoriously difficult & time consuming and the worst thing is that even if your property is lying empty, you still need to pay maintenance charges every month!
- Assured rental income only upto Completion / Possession & First Lease Guarantee
You are paid guaranteed rental income only until completion and post that, builder will take responsibility to bring a tenant who will pay you rental income from then on – usually in the range of 6% to 8% at most. But even this is not a long term solution as in most cases, the first tenant signs only a 11 month lease and there is no guarantee if he will renew beyond that, which means once again, 1 year after completion, you are on your own, without any guaranteed income!
- Assured rental income only upto Completion / Possession & Lower Returns for few more years after completion
You are paid guaranteed rental income of 10% to 12% per annum only until completion and post that, a much lower rent of say 6% to 7% for 2 or 3 more years, post which you are left on your own to find a tenant. Even if you manage to rent it out on your own, you will not earn more than 6% to 8% at best and you will have to manage the tenant and property on your own which is a very cumbersome and time consuming process!
With an increasing number of retail spaces / malls shutting down due to poor occupancy and companies shifting from smaller to larger office spaces, the demand for small office or shop spaces (in the range of 100 to 1000 sft) is greatly reduced and is shrinking further and you are hence better off NOT investing in such risky properties these days.
And very clearly, you now know that such schemes give you guaranteed rental ONLY FOR A FEW YEARS post which, you have to manage and rent out the property on your own for just 6% to 8% ROI – which is not worth the tremendous time and energy involved in managing such property, atleast in our view!
Rentals depend on location and project specifications among other parameters. It is not possible to offer guarantees on rents at the marketing stage. You should decide purely based on facts and not assurances or guarantees.
Such exorbitant returns are not reasonable and these assured returns schemes are hence prone to failure in the long run, as can be seen from below links about similar projects which have failed repeatedly in the past.
- No such Thing as Assured Returns – Livemint
Click here to read the article
- The Logical Buyer’s blog: Beware of assured returns schemes in real estate
Click here to read the article
- There are numerous complaints around non-payment of assured returns on http://www.complaintboard.in/ – an online consumer forum.
NO Legal Recourse
What if the Post Dated Cheques Bounce?!
An even bigger risk than the ones mentioned above is the fact that if the developer fails to give you the assured return, there is not much you can do.
Typically, the builder will give you post dated cheques for 24-36 months, as the case may be.
Incase the cheque bounces, there is little you can do.
You can of course take legal recourse, but this will be a very lengthy, cumbersome and time consuming process, aside from being expensive.
Builders are known to have muscle power and legal team to handle and prolong such cases and hence you have to be prepared for prolonged mental harassment.
These kinds of schemes are NOT governed by any regulators and therefore, the risk of losing your money in such projects is even higher.
Some builder’s provide a bank guarantee, but what you will be surprised to know is that Bank Guarantees need to be renewed on a yearly basis and hence there is no guarantee how long the Bank Guarantee will be in effect and there is no way for you to know either!
Banks are free to revoke the guarantee unconditionally, anytime they have a problem with the builder or project!
And the worst is that if you have taken a loan to make full payment, please remember the loan agreement is between you and the bank – and the bank does not care if the builder is making you regular payments or not, you still have to make regular EMI payments!
Brothers Irfan and Yusuf Pathan may have been hard-hitting cricketers in their prime but seem to have now found themselves on a sticky wicket because of a property investment they made a few years ago. They have now filed cases in the Delhi High Court after failing to get the assured returns mounting to over Rs.2 crores.
There are 100s of cases of such assured schemes where post dated cheques have bounced and even after 7 to 8 years, investors have neither received property nor the assured returns.
Failed assured return scheme gives nothing but paperwork to the buyers!
You may also take an Income Tax Hit
NO Tax Benefits when you earn “Assured Rental”
Income from “assured rental schemes” offered by developers are considered income under the head “income from other sources” or “interest income” – which means you cannot claim any tax benefits and this is completely taxable as per the slab you fall into.
You cannot claim the standard deduction of 30% on such income – which you can if you earn regular rental income from both commercial as well as residential property.
In addition, you are also losing out on a massive Rs.3,50,000 that can be set-off against your taxable income every year – upto Rs.2 lakhs under Section 24 and upto Rs.1.5 lakhs under section 80C.
Hence such assured rental schemes are one of the worst investments in terms of tax savings as they DO NOT give you any benefit whatsoever and infact will also get taxed at the highest possible slab!
Dangers of “Shared Ownership”
You only own an Undivided Share of Space which is Difficult to Resell
While in some cases, you do get a segregated portion or an entire unit, in most cases, you are only given an “undivided share of a given floor” which essentially means that you own “virtual space” or some share of a floor that is jointly owner by you and other investors in the tower (you will also never know who the other investors are).
Your share is NOT demarcated or separated in anyway; you just get papers to prove your ownership of a particular number of sft.
You are NOT allowed to choose your purchased area and it will be allotted randomly – since entire property is a common amenity and cannot be divided into parts from which you can choose.
Because an area is shared by multiple people and an individual doesn’t exactly know which part of the property he / she owns, this makes it difficult to sell as the new buyer will always be uncomfortable in buying a space which he cannot “see” clearly, since its only a share of space.
There could be legal problems in asserting ownership rights since your area is not properly demarcated.
No Control over tenants and renting : Once the guaranteed rental period is over and when the time comes to replace / find tenant on your own, you have to get the consent of all other investors to rent it out and in such cases, it becomes very difficult to do so as you may want to rent out the floor at a particular rate or to a particular tenant, which the others may not agree to – in which case you are stuck.
This is another reason why you should avoid such properties or investments in guaranteed rental income schemes – always invest only on those where you are given complete ownership of a segregated / standalone / clearly demarcated unit.
Your Net Income is Much Lower than what is Guaranteed
In almost all cases, you are charged a maintenance fee or rental management fee, which is deducted from the rental income paid to you, which means our final / net income is lesser than what is promised in the beginnning!
In some cases, the builder may claim that tennant will bear the maintenance fee but this is open to interpretation and many a time, you will end up with some deduction or the other, resulting in a lower net income that what is showcased.
Always take this into consideration and read the fine print carefully to understand what is finally getting paid to you.
In our case, our most sought after rental income generating serviced apartment invest – Starlit Suites – has no such deductions as you get what is shown on the offer document (click here to read more).
Fixed Returns with NO Escalation
All assured rental schemes offer you a fixed return that does NOT increase with time.
Considering the average inflation of India at 5% to 6%, the real return from these assured rental schemes ends up being much lower as value of rupee declines every year.
In comparison, the rental income from our most sought after rental income generating serviced apartment invest – Starlit Suites (click here to read more) – keeps increasing every year to almost double in 15 years time – thus ensuring consistent and high return even after accounting for inflation.
Therefore, always look for assets that give an increasing ROI every year as this is the only way you can beat inflation and enjoy high ROI.
No Such Thing as Assured Returns!
Therefore, when you consider all the above, it will be very clear to you as to why you should avoid such assured returns schemes and instead, invest your hard earned money in a lot more scientific and sustainable investments like Starlit Suites – the 1st of its kind high rental income generating serviced hotel apartment investments across 8 cities of India.
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