“Guaranteed 12%.” It is one of the most common phrases in this market, and one of the most reliable signals that I should keep walking. Not because a good return is impossible here — it is very possible — but because of the word in front of the number.
How the guarantee is manufactured
A guaranteed yield is not magic. It is a promise made by an entity, and a promise is only as good as the entity making it. So the first question is never “what is the yield?” It is “who is guaranteeing it, with what, and what happens to them if they can’t pay?”
There are a few common machines behind the number. Sometimes the guaranteed return is simply baked into an inflated purchase price — you are being handed back your own money and applauded for it. Sometimes it runs for a fixed window, after which you are exposed to the real market at a price that already priced in the guarantee. Sometimes the guarantor is a thinly capitalised entity that will not survive the first downturn that tests it. In each case the yield is real right up until the moment you need it to be.
A guarantee is a transfer of risk, not a removal of it. Always ask where the risk went.
The questions that end most pitches
I ask three things, and they end a surprising number of conversations. First: is the guaranteed return reflected in the price — would the unit be cheaper without it? Second: what is the underlying, unguaranteed yield this asset produces on its own? Third: if the guarantor disappeared tomorrow, would I still want to own this at this price?
If the naked asset is sound — good location, honest price, real demand — then the guarantee is just decoration, and I do not need it. If the naked asset is weak and the guarantee is the only reason the deal looks attractive, then I am not buying a property. I am buying a promise from a stranger, secured against my own optimism.
So I walk away from the 12%, and I go looking for the boring 6% that is actually real, actually mine, and still standing when the cycle turns. Over a decade, the boring number that survives beats the impressive number that doesn’t. Every time.