Understanding Incentives: Rental Guarantees
Rental Guarantees have become one of the most popular incentives offered by a developer for new condominiums. Investors love them because they offer a safety net and a level of confidence in a project. Below are some frequently asked questions surrounding Rental Guarantees.
How Does it Work?
- When you sign your agreement, you will have a “guaranteed rental” amount per month typically for 1 or 2 years (depending on the development)
- The rental amount is pre-determined and typically calculated at “tomorrow’s rental amount” by using expected rental appreciation rates
- The developer essentially becomes your tenant and they “sub-lease” the unit and are responsible for finding a tenant for you
What if the Rental Market Is Significantly Different in the Future?
- IF the rental market dictates that you can actually command more rent for your suite than previously agreed, you are able to (typically) “opt out” of the rental agreement and rent it on the open market
- IF the rental market slows down or the developer is unable to sub-lease your suite, then you are still guaranteed the rent as outlined in the agreement
(think of the rental guarantee as a safety net that has the odds stacked in the investors favour!)
What are the Major Benefits to an Investor?
- It shows enormous confidence in a project by the developer
- It shows enormous confidence in the rental market in Toronto
- No Vacancy
- Investors save on Commissions charged for rentals
- Investors able to calculate their exact rental income with no vacancy for the duration of the rental guarantee (typically 1-2 years)
- For projects with 2 year rental guarantee, gives investors a built in mid-term investment strategy of renting the suite out for two years before selling
- Rental amounts are typically based on future rental amounts
What Are Some Examples?
The rental guarantee amounts also paint a picture of where the developers believe rental amounts will be in the future. The current rental rate (per square foot) downtown is approximately $3.00 per square foot (for example, a 500 sq.ft. suite at $3.00 per square foot would rent for $1,500 per month).
The chart below shows some examples of the amounts that developers are offering for rental guarantees. The chart highlights just how bullish the developers are on the rental market downtown and serve as a reminder to our ever growing market and the strength of the marketplace as an investment opportunity.
| TYPE | SQ.FT. | LOCATION | GUARANTEED RENT | RENT PER SQ.FT. | CLOSING |
| Studio | 310 | Ent. District | $1,800 | $5.80 | 2105 |
| Studio | 313 | Core | $1,450 | $4.62 | 2017 |
| 1 Bed | 495 | Yorkville | $2,000 | $4.04 | 2017 |
| 1 Bed + Den | 462 | Core | $2,000 | $4.32 | 2017 |
| 2 Bed | 742 | Core | $3,000 | $4.04 | 2017 |
