The truth behind ‘rental guaranteed returns’ in Thailand

Guaranteed rental return is one of the latest schemes that is taking the property market in Thailand by storm. It’s easy to see why many people are tempted by the idea of this scheme. After all, who doesn’t like certainty? But a lot of people are also in doubt and left with questions — is guaranteed rental return something you can really benefit from, or is it too good to be true? Here’s what you need to know before purchasing a property with guaranteed rental returns.

What is the guaranteed rental returns scheme?

Many property developers in Thailand offer Guaranteed Rental Returns to woo investors. It’s a unique type of buy-to-let offer, where developers guarantee passive income to buyers in the form of rental income for a contracted period of time. In essence, you purchase a property from a developer who promises to rent it out on your behalf and then pay you the rental income. They generally feature a fixed percentage return on the sale price of the property, paid over a certain period of time; this can be anywhere between three and ten years, with a potential return of 3% to 10% per annum. This is, of course, a desirable deal for many investors who don’t want the trouble of managing their property investments.

Why purchase a property with guaranteed rental returns?

If you want a hassle-free investment, purchasing a property with guaranteed rental returns might be an option. Properly managing a property to ensure that it is rented out with maximum occupancy requires effort and expertise. And every month you don’t have a tenant, you are losing potential income. With guaranteed rental returns, you don’t have to worry about managing your property for a predetermined amount of time. During that time, you will get a steady cash flow and a reasonable amount of liquidity. When the rental guarantee expires, you are free to resell the property, manage it yourself, or work with an agent.

Are there risks with guaranteed rental returns?

Although GRRs could be quite alluring, investors need to be aware that it’s not as simple as it seems. Here are some risks you need to be mindful of:

No certainty

Guaranteed rental returns may include the word “guaranteed,” but there’s actually no certainty about it. If you have experience in the real estate market, you know that it has its ups and downs. There are times when tenants flock to your property. However, there will also be times when you cannot find even one person interested in renting it. No one can predict the future, so anyone who says that you’re guaranteed to gain massive profits is bluffing.

Unrealistic rental returns

There is no way of ensuring that the property you’re purchasing will deliver its promise in the open market. The developer might not manage to secure a tenant during the guaranteed period. Moreover, it’s also possible that they might not get the guaranteed rent. Keep in mind that competition can be challenging, so most landlords may need to reduce the rent to attract tenants. Thus, your monthly income might be lower than what was promised.

Things can get more complicated once the term ends

Many real estate investors who purchase a property with guaranteed rental returns tend to sell their properties once the program expires. This results in a significant number of similar properties becoming available in the market all at around the same period. And even when you decide to keep the property and manage the rent yourself once the term ends, it can be hard to find new tenants. This is because you may see numerous properties going to the rental market at once. Whether you decide to sell the property or chase tenants by yourself, you need to remember: when supply is high but the demand is low, prices will decline.

Overpriced

Many properties with guaranteed rental returns have inflated sales prices. This is because developers need to buffer in and build a margin in case the property remains unoccupied, and they must pay you money. You could be spending the money upfront just to buy the property anyway.

Points to consider before buying a property with guaranteed rental returns

Guaranteed rental returns may offer a degree of safety and security. However, there are some points you need to consider if you’re interested in buying a property with guaranteed rental returns.

What’s included in the guarantee

Make sure to double-check the inclusions and exclusions of the rental guarantee. This is because, in some instances, the actual amount you receive may be slightly lower than the percentages shown in the marketing materials. It should be noted that some developers provide an actual NET price that you will earn. It might not include any yearly maintenance fees or utility costs per usage that tenants or vacationers who stay at the property will pay throughout their stay. Additionally, you need to be aware that sure developers demand the purchase of furniture packs, which are occasionally excluded from the price range that the guaranteed returns are offered on.

Property prices in the market

Be sure to check the property prices and rental rates in the area where you’re planning to buy a property with guaranteed rental returns. Many developers base the guaranteed rental return on market price. Therefore, it’s a good idea to find out if you’re getting a great deal.

A background check

Do your research and make sure the developer or property management company has the ability and a proven track record in running rental property in order to deliver the promised guaranteed rental return.

The guarantee should be on a contractual document

There should be an actual written contract in place that contains the potential for legal recourse if the developer fails to generate income. Without some sort of contractual document, the guaranteed rental returns might just be an illusion – a marketing tactic to lure you in.

The payment schedule of the returns

Read the fine print carefully to understand the guaranteed return payment plan. Some of the holiday markets in Thailand are seasonal. Therefore, profits might be significant at the peak/high season. However, it’s possible that the total percentage of profits can only be generated and paid out once a year.

The risks that come with guaranteed rental returns don’t mean that the scheme is a scam or a mere marketing tactic. Guaranteed rental returns have been around for quite some time in Thailand. There are several fantastic projects that have successfully met their rental guarantee agreements and provided their investors with some very impressive returns, as well as capital appreciation. However, if a deal sounds too good to be true, you should always be cautious.