Definition and Purpose of GRR
What is Guaranteed Rental Return (GRR) in real estate sector? GRR is the formal contract between property buyer and project developer in which developer agrees to pay buyer a certain amount of guaranteed return within a fixed period of time. The GRR scheme is specially created by property developer with the aim of encouraging wealthy property investors to purchase condo units for safe, stable rental income.
Image: Discover ASEAN
GRR Benefits for Real Estate Investors
GRR rate varies from 8 to 12 percent, depending on negotiation between home buyers and property developers. For example, if developers agree to pay home buyers a GRR rate of 8 percent within five years for the property worth $100,000 dollars, then buyers will get the expected rental return of $8,000 dollars per year.
However, real estate investors also need to calculate additional costs imposed by developers that may lead to the reduction of GRR. Other costs might include management fees, sinking funds, utility bills and property taxes. As property buyer, you need to clarify these points with the developer whether you will receive net GRR or gross GRR.
If you have to pay $100 dollar per month for management fee and another $100 dollars for utility bill, the additional costs will be $200 dollars per month and $2,400 dollars per year. So based on the above example, $8,000 dollars is gross GRR and $5,600 dollars is net GRR per year.
In the GRR contract, developers must pay investors or home buyers a fixed rate regardless of the occupancy status of the property, but have all the rights to manage the property in any form such as using it as a hotel room or office space.
In some instances, developers might overprice the property to leverage the game, but it is still attractive for new investors to earn a passive income without the burden of having to manage the property themselves.
GRR Risks for Real Estate Investors
Despite attractive offer by developers, the GRR scheme also has some risks that home buyers could not get the expected return. In some cases, bad developers might not have the required expertise to market, manage and rent the property successfully.
Hence, they will face difficulty paying you the guaranteed return on your property. At this point, real estate investors are recommended to study particular project carefully such as developer’s reputation, financial source and management expertise and so on.
To avoid the risk, home buyers must verify every controversial point with developer by stating it in the formal written contract. The most important point should state explicitly that in the case the GRR will not be generated or developers fail to pay the return, there will be legal recourse in which home buyers have the right to demand compensation or payment from developers.
Purchasing your rental property is just the start. Next, you need to think about managing the property and making improvements.
What you consider essential when buying a property to live in is different to what you need to look for…
What you consider essential when buying a property to live in is different to what you need to look for…