More and more foreigners decide to purchase property in Thailand for various reasons which vary from buying a holiday home, a place for retirement or pure investment. In order to attract the attention of such potential buyers many developers offer different rental schemes such as rental pools or guaranteed rental returns.
Especially, guaranteed rental return programs become more and more popular in Thailand as a marketing tool in order to angle for buyers attention and to stand out from the crowd. Many buyers feel safe with investing in such properties as they appreciate the fact that they are promised to receive a fixed income for an agreed period of time. It seems to offer an hassle-free opportunity to generated income, whereby all responsibilties can be left with the developer or its management company.
Whenever a buyer considers to invest in such property, it is of highest importance that he carefully reviews the entire sales documentation provided by the developer including, but not limited to, the legal agreements to be executed. Review of nicely designed marketing materials and brochures might be satisfying in order to get a first impression of the property, however, surely will not suffice in order to provide a comprehensive description of the applying terms and condtions including rental guarantee.
In regard to guaranteed rental returns a buyer may consider the following major points:
i) First of all, the legal structure of such guaranteed rental return scheme needs to be carefully examined in order to dermine if such guarantee is subject to certain terms and conditions further desrcibing if, when, and how such rental payments shall be paid. It may appear that such guaranteed rental payments are actually not guaranteed at all. In addition thereto, it should be verified under what conditions a buyer may occupy the property for private use during the guaranteed rental period, „opt-out“ from a rental scheme, whether the gurantee is assignable in case of a property resale, what remdy is available in the event the guarantee is breached and what tax liabilities are imposed on rental income. Furthermore, a buyer should verify the financial stability of its contractual party who promises guaranteed rental payments. It needs to be considered that a guarantee is only as stable as your contractual party is. In this context a developer´s financial background and proven record of success (in rental management) should be examined.
ii) In addition thereto, it needs to be understood that a rental guarantee might not be genuine and is nothing else than a partial repayment of the purchase price of an overprized property in instalments from the developer to the purchaser. In other words, the payments under the guaranteed scheme are simply priced into the price of the property. Therefore it seems to be advisable to compare the purchase price of your property of choice with properties of same or similiar design, construction quality and location in order to determine whether the price of your property reflects the true market value. If such guaranteed rental return is not of interest for a buyer, then a developer could be approached in order to request a price reduction equaling the amount paid under the rental program.
iii) Finally a buyer should realize that every guarantee has a price. If the risks shall be lower, the return will be lower. This means that a developer will only agree to provide a guaranteed rental return if the promised return to be paid to a buyer is low enough that it still allows him to rent out the property for a significantly higher amount and keep the balance.
To summarize it, rental programs such as rental schemes, guaranteed rental programs or rental pools might be an interesting investment, however, be aware that careful due diligence should be performed in order to determine whether the investment represents a genuine investment satisfying your personal requirements.
This article is written by International Law Office Patong Beach Co., Ltd., a Phuket based law firm. For enquiries, please contact Michael Greth, Consulant, by email (michael@ilo-phuket.com) or phone (+66-(0) 76-222 191-5).
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