Comparing Purchase Vs. Rental Prices

[hermespan]

Thank you administrators and participants for this forum. I have been coming to Thailand for twenty-two years but have never settled in, nor do I have even the most fundamental understanding of real estate basics (and I am a arithmetic failure). But I am looking into possibly buying a condo in Thailand. I don't know what the standard measurements are in order to determine if a place is a good investment or not but I came up with my own common sense (?) one...

I looked at several condos for rent/sale bulletin boards by companies in Pattaya. I wrote down the selling and renting price then calculated how many months it would take to repay the mortgage based on that rate. It does not look favorable and this is if one actually *does* get that monthly rent, and it doesn't take into account maintenance, taxes etc.

For example one two bedroom condo sells for THB13,000,000 and rents for 65,000. That means 200 months (16.6 years) to just pay off what one spent in purchase price. Of six units, rates ranged from 121 to 214 months. Again, I don't know what is considered normal but on the gut level I think 'this is not a good deal. Look in Bangkok or an up and coming city elsewhere. Or don't buy at all.'

Someone with more experience than myself suggested another formula: to calculate the 'yield' take the monthly rate and divide by the purchase price. The common result is 5-8%. I do not know if higher is better or worse.

Another factor to me is how easy it would be to rent the place out - it looks like there is a glut of cheap rentals available in Pattaya, i.e. it is not a seller's market.

When I go to the vendors' kiosks in malls they are pushing 2 million plus brand new condos, not second-hand ones within my budget (around one million) sold by 'motivated sellers' ('wife died, gotta sell in 30 days' etc) AND like salesmen everwhere they want to sell the sizzle not the steak. I tell them: 'I am not interested in seeing photos, only in the math.' Does it make financial sense? Usually they have even less unmderstanding of financial basics than I do. While it is true that emotional/aesthetic appeal dramatically would affect rentability, the first step as far as I am concerned is calculating the hard figures.

I figure make my profit going in, so that whatever happens to the market I will profit. This looks like a mammoth task that will take time, research, connections and good luck.

BTW, my purpose is not to have my own residence (I live out of a suitcase, constantly travelling) but passive income.

[johnnyk]

A friend of mine lived several years in Thailand after retiring from a VERY successful career in commercial real estate in southern California (owned his own brokerage). He rented and said he would never buy because the "numbers don't add up." His formula was the purchase price should amortize in 100 months. In other words each month's rent should be 1% of the purchase cost. He rented a nice high-floor, beach-view condo in Pattaya paying 24K/month. The asking price of the condo was 4.2 million so by his formula the rent should have been 42K/month but that was not achievable.

His other points were that he did not want to tie up money and he wanted the freedom to leave at no loss if the <deleted> hit the fan.

[london]

Without appearing to be rude, you appear to be quite naive.

Quoting figures on 13 million Baht condos and then saying that your budget is around 1 million baht is confusing and doesn't help you in making any sort of decision.

The first question you need to ask is why are you looking at buying a condo in the first place?

It would appear from your post that you don't really have any idea as to what constitutes a reasonable return from any real estate investment.

From my point of view, a return (yield= rental) of 6% or better is exceptionally good. If you are seeking higher returns then sure, you'll get them as other members will attest, but I would never base any real estate investment on yield alone.

Capital appreciation is the key.

Pattaya may or may not give you the long term return you are seeking.....but IMO, a budget of around a 1 million is just too limiting. Put the money in a fixed term deposit account where it is safe and secure and you'll earn 6% or more and not have the worries.

Good luck

[Hooters]

nobody can say for sure what will happen in the future.

here are some examples

wish I bought in Singapore back then

wish I bout in India back then

wish I bought on the gold coast (oz) back then

There are hundreds of examples. I can promise you that NOBODY new they bought very well at the time and countless people said don't buy , you will lose your dough etc etc

One thing for sure is that new property prices keep rising in BKK and Im assuming in Pattaya.

I would buy to live as a number one priority that way you cant go wrong and upside is market may rise. As mentioned a 6% return is a rule of thumb if you decide to rent

[hermespan]

London writes: "Without appearing to be rude, you appear to be quite naive."

I am the first to admit this.

London writes: "Quoting figures on 13 million Baht condos and then saying that your budget is around 1 million baht is confusing and doesn't help you in making any sort of decision."

Firstly, My idea was to see how quickly a place 'amortizes' (learned a new word today) in practice regardless of the price. Secondly, I wrote down only those places that were available for either rental or purchase. Most were not, certainly the one and a half million baht places were not. I do not know why this is the case.

London writes: "The first question you need to ask is why are you looking at buying a condo in the first place?"

I have a modest inheritance (C$170K). I have no debts, no dependents, no property, no car, no job, no pets, no investments. I am free as a bird and as vulnerable to the bad weather as one! It will take me 6-8 months to figure out how to survive in some small business or a new profession ('What do I want to do when I grow up?'). Sometimes I think 'I am tired of travelling Asia like an old hippy, stashing suitcases here and there. Maybe I can get someone else to pay for my place by renting it out, then in 8 years I will have a place to retire to - with only minimal monthly fees.' And rental income would be a form of forced budgeting/not spending too much. Another motivation for owning foreign real estate (relative to my citizenship) is I don't trust my own government not to seize assets on minor pretexts such as taxes due, alimony payments, or seizure because they don't like what I write (I have a history of getting into trouble as a journalist). In fact, I don't owe any back taxes, I have never been married and have pretty much given up politically-incorrect reporting - but the fact remains, as a libertarian I don't trust governments, and want to keep my assets beyond their reach. Mind you, there is a risk that any government can nationalize foreign owned property. I am more of a cash and diamonds (or farm land in Cost Rica) kind of guy, but I am considering a condo as a 'lock and leave' residence for the future. After living out of suitcase for twenty years and living in hotels it can wear one down. Mind you it has its upside too.

London writes: "It would appear from your post that you don't really have any idea as to what constitutes a reasonable return from any real estate investment."

It is not an appearance - it is the reality. I made this clear in my post's confession of financial planning ignorance, no?

London writes: "From my point of view, a return (yield= rental) of 6% or better is exceptionally good. If you are seeking higher returns then sure, you'll get them as other members will attest, but I would never base any real estate investment on yield alone. Capital appreciation is the key."

Thank you for your seasoned opinion (I presume you have some experience?). Of course selling price 15 years from now is a factor. I figure go for the gold - capital appreciation AND yield. And a backup place to live.

London writes: "Pattaya may or may not give you the long term return you are seeking.....but IMO, a budget of around a 1 million is just too limiting. Put the money in a fixed term deposit account where it is safe and secure and you'll earn 6% or more and not have the worries."

Well, certainly not in Canada or Thailand, maybe in Australia, but one has to jump through so many hoops to open bank accounts these days (compared to my experience in Switzerland and Isle of Man in the 1980s) but yes in uninsured banks in Cambodia I can get close to 7% minus capital gains tax.

London writes: "Good luck"

I will need it

BTW, I recognize that I am not in the league of many who buy in Thailand. When I question my peers who also inherited money, they did so in the 90s, have businesses/careers, and they each inherited half a million dollars. So, THEY could buy four houses in Pattaya developments or Bangkok lux digs. Now, I just have a pot to piss in. I am not a rich man by any means. What I am doing so far is investing in myself (real world education/training) and health care. Next step is figuring out a suitable business that allows me to live simply in the second world. Condo may indeed be a bad move for me now.

Edited November 16, 2011 by hermespan

[london]

Dear Hermespan,

thanks for your response and honesty !! Refreshing, as many others here will attest.

OK, now I understand your situation better, apart from your age, but thats your private business,

You have said a lot of things that make me a bit more concerned about you and what you do with your inheritance.

Firstly, please don't regard Thailand, or any place that isn't your country of citizenship, as safer than your own country. It is easy to think that they are, but at the end of the day, its your country that you know and where you will be looked after should worse come to worse...and I hope that never happens to you.

Thailand is a lifestyle destination. It really isn't the best investment on the planet (nor does it come close). That said, if you are looking at longer term, then sure, I feel that it is a wonderful place to plan your retirement.

However, you will always be a farang and you will always be a guest in the country.

I bought in Bangkok around 15 years ago and still hold properties here. One I live in when I am in BKK and the others I rent out. When I purchased the rental ones, they were all in excess of 3.8 million - 4 million baht each. At the time, the yield was around 6%. Honestly, the capital appreciation hasn't been good at all but the yields have moved up to around 10% +. I'm ok with that as it gives me income in the same currency as where I live. I like this aspect of investing. You are not concerned about currency fluctuations.

I would suggest though that to find a condo that you would be prepared to live in (eventually) for around 1 million baht is not possible...unless you have a very basic lifestyle. But as you get older, you will want some comforts.

Malaysia was a great opportunity up until about 18 months ago when new rules came in restricting foreigners to properties over 550,000 RM approx $180,000. Prior to that, you would have bought a modest condo for 1 million baht.

Really, with what you have said, take your time. Don't rush into anything at present. The next 12 months will see a lot of upheaval in the financial markets and you may have better opportunities further down the track.

Frankly, I am trying (!!) to save at present as I do believe we will be able to buy better mid next year.

The other region I am looking at that may (stress may) be worthwhile is the Philippines. Have a look there.

Remember too, there are many sharks out there that would be only too happy to part you from your money. Please be careful and do take your time.

Good luck !

[hermespan]

Thank you for your kind reply.

To answer your curiosity, just because I am immature does not mean I am young. I am in my mid-fifties. My not being 35 does affect my financial and lifestyle choices. So far (but increasingly less so), I live on the edge, security-wise and, finances-wise. I have travelled to 18 second and more often third world countries where I am a total stranger and do not speak the language: Indonesia (mixed), Nepal (ugh), Madagascar (mixed), Bangladesh (ugh), Taiwan (mmmm), Cuba (ugh), Why? Because they are within my budget and I like exotic destinations. But increasingly I look for things like good quality medical care and cheap vegetarian food (both in India btw).

In fact, I prefer Malaysia, for multiple reasons that I won't go into here. But by the time my inheritance came through the law you mention had changed so now I cannot buy local's working class standard condo. This was a major disappointment because Malaysia IS a country I feel entirely at home in and have local friends. I haven't been able to find the equivalent of thaivisa for Malaysia in order to learn such things as can I buy a condo there and put in a local's name (fraught with risk of course). Even considering the inconveniences such as bumiputra policies I find Malaysia better value and more interesting than Thailand.

Philippines I have no simpatico for. But this doesn't mean I could not invest in the real estate market. I bank offshore, why not invest also? So I continue to look for suitable places to settle in or at least become involved in the economy. I am in no hurry and will visit and rent in every place before I buy - if I do at all. Sri Lanka? Ethiopia? Transneitsra? Somaliland? :rolleyes:By the time I am a geezer I might have found my 'paradise'. Of course they are all trade-offs.

Best wishes for few insurmountable problems and maximum profit in your real estate holdings.

[london]

Many thanks too for your kind words.

Please look at parts of Indonesia, particularly if you are familiar with it. I am VERY bullish on Indonesia (not all, but parts) and do spend a bit of time there. There are opportunities there too !

[Darrel]

"For example one two bedroom condo sells for THB13,000,000 and rents for 65,000. That means 200 months (16.6 years) to just pay off what one spent in purchase price"

What you have to bear in mind is that Pattaya is Tinseltown and most asking prices are fantasy plucked out of thin air. I doubt that one resale property in a hundred actually sells for the asking price. Many don't sell at all, and most of those that sell probably only do so after a 30 or 40% reduction, or more. Such a shame that the real sale prices here aren't a matter of public knowledge, as they are in most developed countries. That would make really interesting reading.

Every now and again you will come across a unit that is being sold by someone motivated (aka dead). In the last year I have seen a half dozen or so that interested me. They were listed at discounts of about 30-40% to the average price for similar units. They all sold, though the final prices were between 30 and 50% discount on the average asking price. Some of them promptly reappeared on the market at much higher asking prices as they had been bought an agent's brother-in-law, or indeed in some cases by the agent himself. Is that a conflict of interest? You be the judge.

There is also a lot of fantasy in the rental prices. Yes, you may get 50K/month between November and February, but if you want a tenant all the year you will probably have to settle for a lot less than that. Example: I'm paying 10K/month for a yearly contract on a unit that was rented last month for 20K. Prior to that it was empty since March. This is not fantasy; this is fact. This 65sqm unit is on sale at 3.2M which is a silly price. I offered 2.5M (which I thought was generous) but it was refused and I am led to believe that they will only let it go for 2.8M as that way "they would not be selling at a loss". How true this is, I dont know, but you can do the math yourself. It isn't a pretty calculation and I'm more than tempted just to rent it for the next 20 years as at least that way if some tosser moves in next door, or builds a karaoke bar in the car-park, the most I will lose is a few thousand Baht deposit for leaving before the end of the contract.

"When I go to the vendors' kiosks in malls they are pushing 2 million plus brand new condos, not second-hand ones within my budget...."

Ah. Some people end up in a back street with a needle hanging out of their arm, or in the gutter with a brain pickled by alcohol. Others just sell new-build condos in Pattaya. Have mercy on them, for they know not what they do.

They are pushing new builds because they get 8% commission and someone else does all the marketing. It's that simple. They mostly dont want to know about resales because resales involve some work and, dare I say it, even a bit of skill; two things that as a rule they dont know very much about.

One final thing that intrigues me is what is going to happen when all the new 1-2MB units that are currently being sold off-plan are built in a year or two's time? By my calculation there are at least 5000 of them, possibly more. Yet there is no real shortage of condos for rent now, even at the busiest time of year, and certainly not the rest of the year. And that even in buildings that have easy access to public transport, which most of the new builds certainly will not have. I suspect that rental prices will drop significantly due to oversupply.

[london]

Darrel, you are my Pattaya guru !!

Thanks for the post !

[johnnyk]

Example: I'm paying 10K/month for a yearly contract on a unit that was rented last month for 20K. Prior to that it was empty since March. This is not fantasy; this is fact. This 65sqm unit is on sale at 3.2M which is a silly price.

Exactly what I said. A decent return on a 3.2M condo would be 1% or 32K/month= 384,000/year. As Darrel says, he is renting it for 10K/month or 120,000/year. That's the state of the rental market.Piss poor.

There's one guy I know of who paid 800,000 for 32m2 studios in Jomtien and fixed them up nicely to get 8500/month (the magic 1%!). Its possible he has even lowered the rent to 6500 which suggests the market aint great these days.

You can see it here:

http://www.pattayasecrets.com/forums/index.php?showtopic=64051&hl=ericg

If you have C$170,000 maybe invest $30K for something similar and invest the rest in dividend stocks or corporate bonds back home, you can get a safe 5% if you look carefully.

[ludditeman]

Rent is about 5% of purchase price

Then you have operating expenses, furniture, repairs, depreciation on property.

You would have to be crazy to buy a condo as an investment today (maybe 10 years ago when it was 50bht to 1$)

[Darrel]

Exactly what I said. A decent return on a 3.2M condo would be 1% or 32K/month= 384,000/year. As Darrel says, he is renting it for 10K/month or 120,000/year. That's the state of the rental market.Piss poor.

There's one guy I know of who paid 800,000 for 32m2 studios in Jomtien and fixed them up nicely to get 8500/month (the magic 1%!). Its possible he has even lowered the rent to 6500 which suggests the market aint great these days.

I think your calculations are flawed.

I would not pay 12%/year for rent. If that was a realistic figure then everyone would be piling into buy-to-let.

As for paying 8500B for a 800K 32sqm unit, dream on. That is completely over the top.

The reality is that the rental return on 3.2MB for the unit I'm in is low because:

a ) I negotiate hard

b ) there isn't a lot of all-year demand

c ) the asking sale price is way over the top.

With the emphasis being on "c".

Edited November 17, 2011 by Darrel

[Darrel]

As an aside, I received an email from the developer of a recently-released building.

They are offering me fully-furnished 1-bed 32sqm units at under 1.2MB, if I buy direct from them. This represents a decent discount on the list price, and of course it reflects the agent's commission which they wont have to pay.

[KarenBravo]

With only C$170k I wouldn't get into anything as illiquid as property.

You never know when you might need money in a hurry.

[Darrel]

I have a modest inheritance (C$170K). I have no debts, no dependents, no property, no car, no job, no pets, no investments. I am free as a bird and as vulnerable to the bad weather as one! It will take me 6-8 months to figure out how to survive in some small business or a new profession......

You dont seem to mention whether you have an income, or a pension to look forward to.

As far as I'm concerned there are two simple rules about property in Thailand:

1) never spend more than you can afford to lose

2) never buy anything that you wouldn't want to live in yourself for the next 30 years

At least that way if it all goes belly-up you can either live in the place yourself, or fall back on your other savings/income, or both.

[trogers]

I have a modest inheritance (C$170K). I have no debts, no dependents, no property, no car, no job, no pets, no investments. I am free as a bird and as vulnerable to the bad weather as one! It will take me 6-8 months to figure out how to survive in some small business or a new profession......

You dont seem to mention whether you have an income, or a pension to look forward to.

As far as I'm concerned there are two simple rules about property in Thailand:

1) never spend more than you can afford to lose

2) never buy anything that you wouldn't want to live in yourself for the next 30 years

At least that way if it all goes belly-up you can either live in the place yourself, or fall back on your other savings/income, or both.

This amount of inheritance will not be sufficient for retirement in Thailand if you are in your early 40s. Besides needing a roof over your head, there will also be the cost of medical care and treatment to cover you between the age of 50-70. I believe your considerations are limited to how to invest this inheritance over the next decade to obtain a total sum suited for retirement. This would means a portfolio for higher risk and returns mixed with some secure but liquid instruments.

In the meantime, you should only consider earning a regular income and living off it, including payment of rents.

[hermespan]

Darrell writes:

>You dont seem to mention whether you have an income, or a pension to look forward to.

No to both. That's what I meant by 'no job', i.e. no income.

As I worked in the cash economy as a window washer and ESL teacher for twenty years I didn't exactly contribute much to CPP. In 9 years I will get enough to live on dog food.

And I agree with the other vposter C$170 isn't enough to get bound to property. I am, to use the American expression I learned in Virginia 'nigger rich'.

[David H]

As an aside, I received an email from the developer of a recently-released building.

They are offering me fully-furnished 1-bed 32sqm units at under 1.2MB, if I buy direct from them. This represents a decent discount on the list price, and of course it reflects the agent's commission which they wont have to pay.

Hello Darrel, I was curious as to what developer was offering you 32 sq. mt units for 1.2. I am possibly interested in buying another unit or two if the location and building are right. Could you possibly let us know. David H

[Darrel]

It's the one with the fancy TV ads. It was just a bulk email, not a "special deal".

As far as I know all the developers will discount the agent's commission if you approach them directly, and I suppose that is what was happening here.

I dont really pay much attention to new developments; I dont like the small room sizes and I dont like the modern finishes they all have. I prefer large units that were originally sold as shells.

[johnnyk]

Exactly what I said. A decent return on a 3.2M condo would be 1% or 32K/month= 384,000/year. As Darrel says, he is renting it for 10K/month or 120,000/year. That's the state of the rental market.Piss poor.

There's one guy I know of who paid 800,000 for 32m2 studios in Jomtien and fixed them up nicely to get 8500/month (the magic 1%!). Its possible he has even lowered the rent to 6500 which suggests the market aint great these days.

I think your calculations are flawed.

I would not pay 12%/year for rent. If that was a realistic figure then everyone would be piling into buy-to-let.

As for paying 8500B for a 800K 32sqm unit, dream on. That is completely over the top.

The reality is that the rental return on 3.2MB for the unit I'm in is low because:

a ) I negotiate hard

b ) there isn't a lot of all-year demand

c ) the asking sale price is way over the top.

With the emphasis being on "c".

Not my calculations, I'm not a landlord. These are the figures from a friend, the rule of thumb from a successful large-scale investor. You are correct. Nobody is willing to pay it (in Pattaya or Thailand in general) which is my point. It's why he never bought in Thailand, its way cheaper to rent and you aren't tied down. Basically, owners are not realistic and over value their properties. My friend said he never bought a property in California, commercial or residential, if it didn't pay off in 100 months. When I say he was successful I mean he retired full-time before he was 40 and has massive income from properties he still holds in Long Beach.

The other guy I know has no trouble renting his studios @8500/month. They are always rented on longer-term leases because they have been done up very nicely and compare very well to most of the dumps in the under 10K/month category, best I saw for sure.

Maybe its not true in all cases but these are two guys I know and that's their story.

Edited November 19, 2011 by johnnyk

[kanderson]

Rent is about 5% of purchase price

Then you have operating expenses, furniture, repairs, depreciation on property.

You would have to be crazy to buy a condo as an investment today (maybe 10 years ago when it was 50bht to 1$)

At VT 1 in Jomtien there has always seemed to be a clear market for sales and rentals.

My 1M Bt 38 sqm unit has been rented, vertually continiously for the past 4 years or so.

I didn't buy it to make money, i could be happy living there once I retire, but it's nice to have some cash flow - even a small amout.

With some 1,650 units at VT 1 the maintainace seems assured. The rooms are small but it's very economical and location is so good in many ways.

I figured with so many units - a mini market exsits - and I like big swimming pools.