Rental guarantees for condo investments

Secured property investments with 10% rental guarantee for 10 years!

Foreign property acquisitions or long-term rents are often made as an investment strategy only. The buyer or lessee intends to use the acquired flat only during his holidays or to use it not at all. Therefore, a guaranteed rental income is very welcome. As a result, it is a huge marketing advantage when the developer can offer such additional benefit to the potential buyer or long-term lessee. 

Although 10% rental return for ten years at first glance seems to be pretty ambitious, it would be unfair to condemn this generally as a Ponzi scheme to make the properties on sale more enticing. However, a wrong structure and certain guaranteed return promises are qualified under the law as a fraud. The Thai government severely punishes such fraudulent property investment offers, not only concerning the developer but also the “gatekeepers” as lawyers and advisors which help to sell such condominium units.

How does the buy-rent-rent scheme work?

The property investment itself is carried out as usually: Either the investor acquires legal ownership in a condo or a corporate structure is set-up to hold the property through a Co., Ltd. or the investment is done by a long-term lease agreement. Whether the investment price under the “rental guarantee program” unreasonably differs from the standard market price, should be evaluated on a case-by-case basis.

At the same time, the property is leased back to the developer for 10 years and then aggressively managed and marketed on a short-time basis (serviced apartment, condotel, AirBnB or similar) to maximize the return on investment. The investor gets his share of yearly 10 percent points and [three to four] weeks of free occupation in the unit. The rest of the year unknown subtenants inhabit the villa or condo and the investor (landlord) has no direct legal relationship with them.

The investor might get an extension option for [5] years to benefit from the arrangement for another five years. But eventually, the developer has a buy-back option right for [125%]. All returns are index-linked, depending on inflation or else.

How to do it right as a buy-to-let landlord

Is this guarantee factored into the purchase price of the units, which means that the investor has to pay for his own rental guarantee? Does the developer has the financial resources, or inclination, to back up the guarantee? And is this relevant? Can the foreign investor be stuck with tenants in his property but no rent payments? What are the consequences that the investor as a landlord has no direct relationship with the subtenant? What happens, if the property is overcrowded, not fire safe, or becomes an unlicensed hotel under the Hotel Act? Is the rental guarantee a sign for an oversupplied property market?

Need a broader explanation? Is this a good deal? What are the risks? How to reduce the potential loss exposure? How to avoid that the rooms are excessively worn down and damaged? Is such investment scheme easier in Pattaya or Samui? Which contractual clauses should be negotiated? What is the exit strategy? Does the developer have robust financial health and the correct systems in place? What will happen when the bubble is eventual bursting?

Professional service offer from Bangkok 

Assignments on real estate investments are one of the core business activities with a particular competence, long-standing experience, and unique market reputation of the law firm. PUGNATORIUS Ltd. typically provides these seven services:

  • Investment structures for foreign property acquisitions
  • Property due diligence examination
  • Leasing transactions and protected lease schemes
  • Industrial estates, resorts, factories
  • Hotel and hospitality projects
  • Property tax structuring
  • Legal opinions and property investment reviews

Details are described at “Legal services and tax planning for real estate acquisitions and property developments.”

Disclaimer: A little knowledge is a dangerous thing. This low-resolution high-level outlook constitutes neither legal advice nor an attorney-client relationship.  

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