The Rental Guarantee Report
The Concept, The Positives, The Dangers, and what to look out for.
Rental Guarantee Investment programmes are becoming more and more popular in recent years, and in fairness have been the success story of the property market, especially in Pattaya as well as all over Thailand and even on a global scale.
Like timeshare, it is challenging to find fault in the fundamental factors of the Rental Guarantee concept. It only makes sense, mainly when applied to a tourist destination.
Airbnb is an extension of this very concept. The sheer success enjoyed by its founders and the fact it has become a worldwide phenomenon is just further proof the idea is fantastic.
Thailand is one of the world’s most popular holiday destinations, and the following factors have all played a part in the growth of a market that is simply huge today. In general, everyday people are becoming more open to making overseas investments these days.
Since the crash in 2008 when what was previously blind trust in the banking system led us to question the banks for the first time. The low rates of interest they are offering in the west forced us to seek alternative options. Bricks and mortar is something we have always been brought up to believe a safe investment.
It is estimated that in Thailand alone, the Rental Guarantee market is attracting investment of USD 30million plus per month.
To date, there have not been any examples where the offerers of these guarantees have failed to deliver on any mass scale. Fortunately, this is why it has grown into such a lucrative market.
When operating these programs in Thailand, in almost all cases, they are breaking the law. The attraction and the sales pitch is that you get “a secured investment” which sees you directly “purchasing a freehold property” and then leasing it for any number of years back to usually the developer that built it. This is subsequently sold to you in the first place for an agreed amount that equates to anything from 5-10% per year of the price you paid for the property.
The clear banana skin in Thailand is that a private residential property such as a house or a condominium is forbidden by Thai law to used to offer a “short term lease” and the minimum period legally permitted is 30 days.
The reason that this is relevant and is only becoming more and more important is because of the way the Real Estate market and the Rental Guarantee market have both exploded along with things like Airbnb, booking.com, being accessible by the general public. Also, the ability for people to connect by social media has all played its part.
Firstly, One of many laws in Thailand that were ignored just like prostitution, condominiums or houses flouting the hotel act and offering short term leases became so prevalent that it was making a significant impact to the licensed hotels, which in the end had no choice but to start making official complaints.
Once any active party starts getting involved, especially parties with financial clout then inevitably the authorities have no choice but to take action.
Secondly, so many condominiums were running as hotels with different holidaymakers in and out every day that the residents of individual buildings also started complaining.
Now because of the oversupply in construction that is obvious for anyone to see, it has also indirectly affected the Rental Guarantee guys as the rates that can be commanded for the longer termed tenants (above 1 month) are significantly lower than they were 4-5 years ago in Pattaya and the occupancy rate is now less than 30%.
So to recap, we initially established the driving factors behind the growth of the industry and the reasons why so many developers have now added a Rental Guarantee to their products to stimulate sales in a stagnant market.
Moreover, we have mentioned factors that have meant the dynamics in play now make it a much riskier proposition altogether.
After doing some research into the market and posing as potential investors and making contact with some investors, we found out the following things:
The developers told us that up to 60% of their new sales can come from existing investors and that a very high % of investors have a level of trust now that they don’t question anything about the property they are purchasing and only see the return they are receiving.
This was confirmed when we spoke with some investors who said that after a small “first investment” it wasn’t long before they were confident enough to invest a much more substantial part of their portfolio into these programmes.
So there was a trust there, we were in no doubt of that, but we wanted to see if that trust that had been gained was being abused or not, as for everyone who praises these developers there is a scepticism and the phrase “Ponzi Scheme” is often muted when this topic is being discussed publicly.
The simple facts are this:
For it to be genuine, then the property has to be making more than the amount that is being paid to the investors.
Moreover, now, this is much harder to achieve than it was ten years ago due to the factors mentioned above.
Not mentioning any names as not wanting to start wars, we were slightly alarmed when looking into the biggest operators in the business and how their business practices had changed quite dramatically in recent years.
We were also surprised at how many of these developers were offering a return as soon as full payment was made even if the property was far from complete. In essence, they were taking full money upfront and offering to pay a return for up to 3 years while the property was being constructed which cannot be right considering there is zero income being generated by the property to make up any part of the payments being paid out.
Another impossible to miss factor was that the prices these properties are being sold at don’t reflect the market price whatsoever, in fact, they can be as much as five times the price of existing completed properties in the same area.
After our research, we came to only one conclusion. Which is simply, the change in circumstances has meant that what was initially genuinely achievable is no longer and to continue operating the developers have had to increase the prices they are selling their new properties for to compensate for the shortfall in income versus amount guaranteed to pay out.
The investors have blind trust because they have received returns for some time and that trust leads them not to question details they probably should or would under normal circumstances, and that trust is now being taken advantage off by numerous developers.
Our research into everything to do with this concept leads us to give anyone either with existing investments in Rental Guarantee programs or for this considering investing, the following advice:
Consider it as if offered genuinely and legally. It is a great investment vehicle and addition to any diverse portfolio, but I would check the following details to make sure your investment isn’t only making up a shortfall and being distributed out amongst older investors to cover guarantees that aren’t being made genuinely.
Make sure the price of the property you are buying is at least no more than 15-20% more than you could buy an unmanaged property for in the same area. I would be very wary about anyone offering you returns on properties not finished and operational.
Developers even accepting money up front sets off alarm bells because they shouldn’t want this money front loaded and it should be paid over the period of construction for their benefit as well as the investors.
If you are considering investing with a long established developer, as naturally most do, then take the time to convince yourself that their existing operations are yielding the returns needed for this to be genuine.
Check the legalities and allow for the fact that, Thailand is Thailand, by which I mean if the only way to operate and generate enough income to cover a guarantee requires some short term letting then look at the development and see if:
It has management in place.
It is a small enough operation to go under the radar.
If it has a full-time resident, that might cause trouble?
Would a hotel find it a threat?
Does the company offering the guarantee have any Thai Partners? If so, are they influential?
Bearing in mind, the developer or offer of the guarantee is making money on the sales price, how much is the shortfall if any between the realistic income that can be generated compared to the amount being “guaranteed”? Moreover, if this isn’t too much, you can assume that they have factored this in and will give back some profits from the sale.
If there are any changes in business practices on the more established ones such as:
1. Signs of needing an endless amount of money.
2. Guarantees now being offered with more beneficial terms than before or other signs that they need to increase their sales figures.
3. Sales prices consistently rising.
If the returns being guaranteed have reached a point so far away from what is realistic when comparing to the regular rental market.
If any operation is becoming too large to fly under the radar and still insisting on short term rentals being the catalyst to their success, in this case, please see if they are on agoda.com and booking.com., if they are not then that’s a sign that all might not be what it seems.
Any projects where construction is behind schedule is a worry especially if the developer has taken money upfront as they do not only have the money to complete the installation, but it is also in their interest to finish it ASAP to help cover the outgoings that are being paid.
We have noticed that some of these developers are also choosing some very obscure locations and if any developer is doing this and it is not what they were initially planning to do then the question needs to be asked, is this merely a cost-cutting exercise that enables the operation to continue under tighter budgets?
If after all this consideration you are interested, then we recommend that you only invest if the following criteria are met:
The property is fully completed.
The sales price is at least comparable with the market value or even better and is a value that you could borrow against.
The guarantees offered are realistically achievable.
The company managing it have the experience and resources to deliver on what they are offering.
We also advise getting a lawyer to look over the contract but at the same time understand that this is Thailand. See if the developer is offering to put up any assurances against the guarantees, essentially meaning, what have they got to lose?
We hope you find this information helpful.