Income Generation Tip from Thai Residential – Phuket Real Estate Company in Asia
“Bricks and Mortar” has always been synonymous with stability – not just architectural stability, but financial stability. Property is viewed as a store of value for your money, an asset which appreciates when inflation ravages more liquid investments.
But in Phuket, as elsewhere, investors are now driving the market, and they are demanding solid rental income.
Property buyers in Phuket today are much more likely to be investors than people looking to settle here. We have our share of owner/residents, too, but low deposit rates around the world are attracting more and more foreigners to invest in the Phuket property sector for its rental potential.
Condominium and villa developments on the island are both promoted as income producing assets. But it is condominiums which make up most of sales in Phuket, owing largely to the fact they are more affordable.
Condos and Condotels
The market for condominiums in Phuket is buoyant, and this market is driven largely by foreign investors seeking an income-producing investment. They see a tropical island with a well-established tourist industry as an ideal place to buy a rental property. We don’t disagree!
The biggest questions most investors have are:
what kind of returns can I expect; and
who will manage my property for me?
Most condominiums offer some type of rental program, and these are usually professionally managed by either the developer, or a group engaged by the developer specifically to look after the rental of the units.
The developments in really high demand are the ones offering guaranteed rental returns (mostly new builds). The returns are different with each developer, but investors can generally expect to receive between 5-8% per year. Sometimes the guaranteed income period is as short as 2 years, but there are developers who offer guaranteed returns for up to 20 years. (More on these terms below)
If your condo is part of a rental program, you will also be offered personal use of two weeks (occasionally as much as 2 months) each year. The amount of personal use you are allocated will depend on the developer, and whether you plan to use it during high season or low season.
One type of hybrid development which has gained popularity is the “condotel.” Condotels also have a professional management group, which in some cases may be a major hotel chain. What differentiates them from condos, however, is that they have both a condominium and a hotel license. The extra hotel license allows the properties to be rented out on a short-term basis (i.e. for periods shorter than 30 days).
Anyone familiar with airbnb, and the issues it has faced around the world, will know that many cities (and countries) have put regulations in place to protect their hotel industries. In Thailand, if you provide rental terms shorter than 30 days, you require a hotel license. Because condotels have this already, they fall within the existing law.
But what about other condos? The management (or “juristic person”, as they are known) of most condos will condone owners receiving short-term rentals, but technically they require a hotel license.
Since 2008, however, there has been an exemption for “small” or individual owners. You can apply for this exemption if you have a condo with up to four bedrooms, which sleeps no more than 20. A good lawyer can help you with the application for a hotel license exemption.
This license exemption is less common for condos than it is for villas and bungalows, unless you are looking at condo which already has the hotel license. Foreigners in Thailand are not allowed to own landed property (e.g. villas) in their own name, but a number do take long-term leases on bungalows and villas, and then offer these for rental.
It stands to reason that none of the above should be tackled without the help of an experienced Thai lawyer. You will likely have a lawyer to handle the purchase of your property already, and you will want them to also examine any rental guarantee.
Short-term guarantees should be considered extremely realistic because developers have usually built these guaranteed rental payments into the sales and marketing costs of the development. Some developers even prepay the guaranteed returns as a lump sum once full payment on the condo has been made.
Any longer-term guarantee will rely on the buoyancy of Phuket’s tourist sector. In the past, when tourist numbers have contracted significantly, there has been a knock-on effect on the local economy. Phuket’s property market has largely ridden out these downturns without any major contraction of its own.
What downturns are we talking about? Just little things like military coups, bird flu, the Asia Crisis, 9-11, a tsunami, the tech crash and SARS. Oh, yeah, and there was also that global financial crisis – the one which had its origins in the US mortgage industry, and which sent property markets around the world into a tail spin.
Guaranteed returns depend on units being full week on week, year on year, but in each of these cases, the industry survived and thrived. If history is any guide, it would require a complete decimation of the tourism industry to have any lasting effect on the Phuket property market.
In terms of rental guarantees, the only thing likely to derail most ROI agreements (aside from poor management or bankruptcy) would be a ruinous contraction in the tourist economy. If a buyer is motivated by the promise of guaranteed rental returns, however, they should have a lawyer carefully review any agreement drawn up by the developer or management company, as well as the companies themselves.
So, are guaranteed returns actually 100% guaranteed? Judge for yourself, but we would say they have proven to be as reliable as the tourist industry in Phuket itself.
If you are looking for income generation, then Phuket real estate is an extremely viable option for you.
Guaranteed return rental schemes are well run, and offer attractive yields to investors. However, there are things which no developer can control (e.g. global health scares, natural disasters, terrorist attacks) which have the potential to impact your returns.
Phuket has overcome numerous slowdowns in its tourist industry during the last two decades. Whereas another tourist area may have succumbed, Phuket emerged stronger each time.
So while guaranteed returns can never be 100% guaranteed, the resilience of Phuket’s tourist industry is a strong indicator that any investor in Phuket property can expect reliable returns.
This article was written by Thai Residential Co. Ltd.
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