better rent than buy a house or condomiums in thailand
In recent weeks I have received several enquiries with regard to buying real estate property. These have inevitably been from a middle-aged (or older) expatriate who has decided to settle in Thailand with the girl of his dreams that he met last month or the month before, who loves him so much that she¹s leaving her place of work in Soi 8 or Pattayaland Soi 2 to settle down in the nice little
house she¹s found for them somewhere along Jomtien Beach.
Usually, the enquirer wants to find out why the property cannot be held in his own name, and if it¹s okay to put it in his girlfriend¹s name.
Some of these enquirers are so naïve that they even ask how they can obtain a mortgage on the property. ³Oh dear,² I think when I hear these tales, ³Not another oneŠ²
For their own protection
At the height of the currency crisis in 1997, Thailand had agreed with the IMF to liberalise its laws with regard to foreigners owning real estate in Thailand.
The matter was debated in parliament and the press at great length, and the usual jingoistic (some would say xenophobic) statements were aired that if the protectionist laws were amended, we greedy farangs would sweep in and buy up all the land in Thailand and exploit the poor innocent Thais in our typical colonialist fashion.
(I wonder why the fact that Thais or anyone else with money can buy any amount of landed property in the U.K. or U.S.A. is never aired as a counter-argument, and neither the British nor Americans seem terribly worried that their country is going to be taken over by colonising Asians but that perhaps is another topic for another day.)
So the debate went on and on, and announcements were eventually made that the law was going to be amended to allow foreigners to lease up to 1 rai of land for up to 30 years, on which to build a residential property provided this was preceded by a remittance equivalent to 10 million baht of hard currency from overseas deposited in a bank in Thailand.
However, like several other politically unpopular bills, this one also is still pending, as far as I¹m aware.
Nonetheless, some local real estate firms trumpet in their
advertisements that foreigners can now own their own property. But this is just a clever ploy to get you through their doors. The mechanism which has been used for years to get around this protectionist law has not in fact changed.
An expatriate can own a condominium in his own name provided not more than 40% of the apartments in the condominium complex are owned by foreigners. That has been the case for a long time already.
But if you want to buy a house or land, an expatriate can only do so through a legally registered company, of which a single expatriate cannot own more than 39% of the shares (recently amended from 33%), and collectively not more than 49%.
You also need at least six Thai partners to hold the remaining shares (although you can go a long way to protect your interests by being the sole authorised signatory and ensuring these local partners sign their undated resignations and share transfer deeds at the time of setting up the company.)
Of course, you could avoid the costs & hassle of setting up a company by putting the house in your wife/girlfriend¹s name. This will undoubtedly make her very happy even happier than the visits you made to her favourite gold shop and motorcycle shop (which are the usual precursors to visiting the real estate agency.)
However, what happens a year or two down the road when you have a major disagreement about something, or her Thai Œhusband¹ shows up (they all seem to have them squirreled away somewhere)? You, like so many before you, may find yourself standing on Jomtien Beach with only your passport in one hand and a bag of clothes in the otherŠand your life savings gone.
Getting a mortgage
In U.K., U.S.A. or Europe, getting a mortgage on a property is almost taken for granted. Few people are in a position to buy a property for cash on the table.
The relatively low price of property in Thailand means that many expatriates who decide to settle here are tempted to buy a residential property, or a shophouse for their girl-friend to run a travel agency, beauty salon, snooker hall or beer bar on the ground floor, while they love I mean live upstairs.
Some of the more naïve ones imagine that they can just march into a local bank and get a mortgage on the strength of the property and their Œpersonal¹ guarantee on behalf of their girlfriend.
Sorry, but that isn¹t going to happen.
Unlike in the West, where the title to the property guarantees the bank in the event of default, and an endowment or insurance policy its money in the event of the borrower¹s dying, laws in Thailand to help banks recoup bad debts were only implemented last year, and the efficiency of the court system is such that it could take up to 10 years to recoup defaulters¹ bad debts.
Banks are not interested in holding real estate on their books, since this is a non-performing Œdead¹ asset; they want to recover the money they lent, to lend it to someone else and earn interest on the loan.
Understandable, since they¹re in the money business, not the real estate business.
Look at the numbers of non-performing loans (still around 43% of total loans issued by local banks), and the high percentage of mortgage defaulters, and that might give you some inkling why banks here have virtually stopped offering new mortgages on real estate.
In Europe, banks can seize collateral property and sell it on fairly quickly. Here, in a depressed property market, even auctions have proven less than totally successful in moving those real estate properties which banks have been able to repossess against defaulting loans. More often than not the few meagre bids have not reached the bank¹s reserve price, and the bank simply withdraws the property from the auction.
Obtaining a mortgage anywhere will depend largely on the ability of the borrower to repay the loan. This will be evaluated by the lending institution on the basis of stability of employment income and past credit record.
Nowadays, even local business people with good credit records are having great difficulty obtaining mortgages. Typically, they have to show they have at least the value of the mortgage on deposit in the bank already, and are prepared to keep it there as collateral.
So if you¹re prepared to deposit the value of the property in the bank in her name, of course she might be able to get a mortgage if she has a good employment record and her regular salary is sufficient to repay the loan. And of course the property then has to be in her rather than your name.
But to imagine that an expatriate boyfriend (who could leave the country any time) will be accepted by any bank as guarantor of a mortgage being applied for by a local lass whose employment record comprises working in a go-go bar for a year or two, and whose average bank balance has been perhaps 400 baht a month, is naïve in the extreme.
Last week I offered my opinion that the only reasonably secure way of protecting your interests if you¹re thinking of buying a residential property is by forming a company and making yourself sole authorised signatory of that company.
Inevitably, some readers will disagree, and some will undoubtedly be writing vehement letters of protest to the Editor of this publication protesting that they¹ve been married to a Thai lady for X number of months/years with no problems whatsoever, and that they¹re absolutely sure she will never do the dirty on them as regards the property which they¹ve been living in so happily, and which is registered in her name.
Well, if she married a farang some years back, Thai law precluded her continuing to own either land or a house in her name after that marriage was legally contracted. So that would tend to indicate that perhaps the Œmarriage¹ wasn¹t fully legal, or the land title slipped
through a bureaucratic loophole somewhereŠ
(More flurries of protesting letters will undoubtedly be spawned by those remarks!)
Anyway, this unfair law was recently amended, so a Thai wife can now legally continue to own land or a house which she owned before the marriage, without fear that the authorities might negate the land title if ever she tried to sell it. Similarly, a Thai lady legally married to a farang can now own and more importantly register property in her own name.
But like any other valuable investment, putting property in someone else¹s name no matter how much you may trust them at the time is fraught with danger, and leaves you potentially open to abuse.
Would you rather trust your life-savings to a bank or your
housekeeper? I know many of you cynics will say, ³Depends on which bank.² But I think you get my drift.
Similarly with your house. There have been far too many reports of gullible farangs being thrown out of the house they paid for with no recourse in law to ignore the fact that it happens. And far more frequently than most macho men would care to admit to their drinking buddies...
Things to consider
Potential property investors here or anywhere should look at five things: long-term demographics, supply, demand, tax, and inflation.
First, let¹s look at the supply & demand situation in Pattaya. There are far more residential properties available than there are potential buyers. Some have stood empty for years. So, one could reasonably conclude that it is a buyer¹s market, right? Wrong.
Most people don¹t like to lose money. And Thai property owners are no different. Having had to pay inordinately high interest rates to the banks if they had a mortgage on their property (which they may still be paying), or a substantial amount of pre-devaluation Baht if they paid cash, they are fundamentally averse to suffering a loss on the property even, it seems, when they start running short of cash.
I know of several cases where people prefer to borrow money Œon the street¹ for 4%-5% a month interest, using their property as collateral against the loan, rather than try to raise a loan from a bank (which these days is not only a difficult and lengthy process but might still be refused), let alone sell their property at a loss.
Property prices were expected to drop by some 30% after the economic crisis in 1997. But real estate agents will tell you that property prices have fallen comparatively little in the past three years unless the bank is beating on the owner¹s door demanding repayment of a non-performing loan. It seems Thai landlords prefer to leave a house vacant than suffer a capital loss on their investment.
Rent or purchase?
Then, look at the ratios between the purchase price being asked and the rental price for the same property.
In the USA and UK, the Œstandard¹ rule-of-thumb for value/rental is
around 100-120 times. In other words, if your house is worth £100,000 and in a prime location and good condition, you can expect to get perhaps £830-£1,000 a month rental income from it.
(Of course, you have to pay taxes, rates, maintenance costs,
insurance, agency fees, etc., so you may end up with only 5%-6% net return per annum on your investment property. In real terms, not a very good nor a very flexible investment. But that¹s another subject for another day.)
Here in Pattaya, however, the rule-of-thumb ratio seems to be more
like 200 times.
For instance, the Œaverage¹ shophouse sells nowadays for Bt.1.3-1.8 million, depending on location. Those same shophouses would rent for perhaps Bt.6,500 to Bt.9,000 per month respectively. Which means the purchase price is about 200 times the rental price.
In other words, you would have sunk an amount of capital into buying the property which would be equivalent to paying 200 months¹ rent (which for those who don¹t have a calculator handy is 16 years and 8 months.)
Alternatively, the same Bt.1.3-1.8 million wisely invested in secure
medium-risk offshore investments could reasonably be expected to
generate an income stream averaging 10% p.a. or Bt.130,000-180,000 a year, while leaving the capital intact and securely yours.
Renting that property for a year would have cost you only
Bt.78,000-108,000 from this income-stream, so you would still have
money left over for fun or whatever.
Simple arithmetic tells you it makes better economic sense to rent
rather than having your capital tied up in a property which is
unlikely to appreciate much in value and almost certainly not beat
inflation, if past history of the property market is any indication of
Location, location, location
Another point to consider is location. That property may be located
in a Œgood¹ area now, but who knows whether that area will have become more popular or less popular 10 years hence?
³Ah,² you say, ³But that¹s how I¹ll make a capital gain!² Yes, if the
area improves. But you might have to swallow a capital loss if the
area deteriorates and that has happened many times in many Œselect¹ spots of Pattaya which are booming one year and deserted the next.
(And, I freely admit, vice versa.)
So as far as making a capital gain on an investment property is
concerned, that is very much pot luck.
Housing estates and even condominiums are subject to the same whims & fancies, it seems, although admittedly much less than commercial property.
But consider whether you would be content living in the same house in the same location for the next 16 years. Because that¹s the rental equivalent of purchasing the property outright.
It is more likely that you will want to move to another location
perhaps quieter, cleaner, newer sometime during that period.
Then you¹ve got the problem of finding a buyer for your house
perhaps in a deteriorating neighbourhoodŠ You could easily lose money on your investment if you move, not to mention the taxes you will have to pay either when you sell or buy the house.
Even buying a brand-new condominium has its pitfalls. For instance,
in Bangkok there are many blocks of condominiums which went up at the height of the building boom which are standing three-quarters empty, and the owners are now fearful that the lifts, security and
maintenance services will be cut off because there is not enough
income being generated from management fees to cover the operating costs. How are they going to sell or even rent their condos then?
Fortunately, the situation is not that bad in Pattaya although there
are always plenty of condos, houses, commercial shophouses, bars and restaurants for sale to lucky buyers with cash to spend just look at this week¹s Mail Market section... Or perhaps it¹s the sellers who are really the lucky ones?
In the past couple of weeks I have offered my opinion on buying
property in Pattaya, first with regard to protecting your interests,
and secondly from the economics¹ standpoint of cost-effectiveness of renting versus buying.
Coincidentally in the interim, there have been a couple of articles in
the national press about fraudulent practices that even I was unaware of.
I have also received several enquiries from potential real-estate
buyers, who are concerned not only about shady practices that might affect them, but also about the taxes they might be burdened with.
Let¹s look first at just one of the shady practices that has
apparently been going on at least around Bangkok.
Earth moving developments
It has been reported that, in more than one instance, a piece of
prime real-estate in a good location was shown to a prospective buyer, and a price agreed. When the land registration deed for the
newly-acquired property was subsequently examined, however, the
location of the land on the deed turned out to be in quite another
area from what the buyer thought he was buying.
Typically, that land was nowhere near the land shown, nor anywhere near its value.
Let me hasten to add that I am not suggesting that this practice has
been followed by any Pattaya real-estate firm or property developer,
nor any individual seller.
But it is curious that one enquiry I¹ve received recently was from a
couple (a farang married to a perfectly respectable and charming Thai lady an exception to the typical relationship in Pattaya which I was warning against in the first of this series of articles) who were in
the process of buying part of a local housing development, but were experiencing great difficulty getting straight answers from the Thai developer to quite reasonable and straightforward questions.
One of these questions was why the developer was selling a piece of land which happened to have a house situated on it, but there would be no paperwork or deeds pertaining to the house itself.
There may be a perfectly reasonable explanation for this apparently
anomalous transaction. But not being in the real-estate business I
have not as yet been able to discover the answer (which I suspect has to do with paying taxes or rather not paying them.) I¹m sure the
Editor will receive a flurry of letters from local real-estate firms
regarding this practice, and I look forward to their explanations.
The development in question may indeed be perfectly legitimate, and the Thai developer merely a very shrewd businessman (or rather businesswoman in this case) who was looking to maximise her return from her investment. Or avoid taxes.
However, why she would be unwilling or unable to show the clients a copy of the land title deed (which is a public document available from the Land Registry) is certainly cause for concern in light of the
published case mentioned earlier.
As I pointed out in the first of this series of articles, under the
current land ownership laws foreigners cannot own land or houses in their own names. (This may change if a proposed bill is ever passed into law but how long that may take is anyone¹s guess; the last time property laws changed here it took seven yearsŠ)
Hence many foreigners by-pass the protectionist law by purchasing a house through a company. (I gather the Thai authorities are making noises about passing legislation to close this loophole also; but that may also take a long time although when it comes to self-protection, laws seem to be passed here with greater alacrity than when granting concessions. But that¹s yet another example of TIT ³This is Thailand,² to borrow Mr Trink¹s favourite phrase.)
What many buyers (especially foreigners) fail to take into account
are the taxes that become due upon transfer of a property title,
however the property is purchased, and no matter whether through a company or in their girl- or boy-friend¹s name.
Three taxes will have to be paid when the property is bought or sold. But because of the peculiar local system of taxing property on a rather arbitrary assessed value rather than true market value, these could amount to as much as 30% of the purchase price.
When a tax bill arrives often some two or three months after the
sale is completed this could come as a nasty shock to a buyer, since the seller often neglects to mention this liability during the
negotiations... (And after all, why should they tell you if you don¹t
already know or ask? As in all business transactions here or indeed
anywhere, caveat emptor is the rule: Let the buyer beware.)
In addition, if the house is purchased through a company, one has to bear in mind that corporate tax is higher than personal tax, and the cost of setting up the company has to be considered as part of the initial investment outlay, even if this is a relatively modest
additional cost perhaps around $1,000 all told.
An investment or a millstone?
Buying a property to live in is one thing; buying it as an investment
is another, whether in Thailand or indeed anywhere.
In the depressed property market currently prevailing in Thailand,
homeowners could suffer a considerable capital loss if they sell their properties for what many would regard as true market value. Naturally enough, they are reluctant to do so. This is one reason why property prices have not come down as much as was anticipated after the currency crisis of 1997.
If the homeowner bought the property on a mortgage or financing
arrangement, the loss will be compounded by the interest he or she
will have paid in the meantime, which until very recently was
inordinately high not to mention the taxes that may have to be paid
on the property, either by the seller or the buyer.
Thus if you are looking at property purely from an investment
perspective, it could take many years for the overall costs to be
recovered. Even in developed markets, property values over the long term just about match inflation.
In the meantime, there are all sorts of Œcharges¹ on the investment to be considered: local taxes; insurance; maintenance & repair which could be a major expense should the tenants run amok and trash the place, as recently happened to some friends of mine right here in Pattaya!
I know of other cases where a property was bought as a long-term
investment, and has become a millstone round the owner¹s neck. The property is sitting idle with no prospective buyers in sight, no
rental income, but still incurring a tax liability each year. It is
therefore a depreciating capital asset which is a drain on resources,
rather than an income-generating investment.
At the end of the day, it is entirely up to you whether you buy or
rent your home, and this is often an emotive rather than rational
But after taking into consideration the significant capital outlay,
bureaucratic complications, peripheral costs, taxes and inflexibility,
my advice would have to be "Rent don¹t buy."
Get real about real estate
By Leslie Wright