A rental guarantee is a property investment opportunity where the seller offers a guarantee to the buyer for a specified return and for a said period of time.
An offer for a 2-bedroom condominium worth 12,000,000 THB is purchased with a rental guarantee of 10% for five (5) years.
This means that the seller is obligated by contract to pay the buyer 1,200,000 THB (10% of 12,000,000 THB) every year for the next five (5) years as agreed on contract.
Meaning after five (5) years the buyer has realized 6,000,000 which is 50% gross return on his investment already (we would have to deduct specific maintenance and management fees from this to come up with the net).
Remember that the buyer still owns the property and can continue to rent it out, resell it, or keep it for personal use.
The important point is that the buyer's 12,000,000 THB was not stagnant.
It was invested and generated a return and continued to grow because of the rental guarantee opportunity.
Many people invest in real estate computing the average monthly rental rates and multiplying that by 12 to see the full capacity of their investment then deducting all the other expenses to see what is the maximum ROI they can get from their investment.
What they fail to realize is they might underestimate the work and experience it takes to manage the property properly to assure it is rented out with maximum occupancy, because every month there is no client you are losing potential income.
Making a good return comes from risks and it can be controlled by good management and a well-directed work flow.
Now with a rental guarantee program, for an agreed period, managing your property investment won’t be your problem.
You will be receiving a stable cash flow and reasonable level of liquidity during that time.
Possibly after the rental guarantee expires you can either resell your property or manage the property yourself or possibly with your preferred agent.
Well, with having such attractive returns there must be a downside.
Well, unlike keeping your money in a bank
A property investment is not liquidated by signing a few documents.
It needs to be sold.
However, this can be used to your advantage at times because if you invest in the right property and its value increases then you make a return from the rental guarantee and then some more from the increase in property value.
Another downside of investing in a rental guarantee program is that you might have limited access to your property or sometimes none during the agreed period.
This is because the party responsible for ensuring the rental guarantee has control over the property to ensure it generates enough income to pay you the rental guarantee.
This does not exclude the fact that this party might manage to earn above the promised guaranteed return and profit in the process.
A common trend with rental guarantee offers if they are all in the same development with a fixed rental guarantee term is that many property investors who use rental guarantee programs tend to sell their property once the rental guarantee program expires, this causes a significant amount of similar properties becoming available in the market all at around the same period and when supply is high, prices will drop.
It is basic economics and this can be solved by carefully planning an exit strategy for your investment.
There may be some pitfalls with rental guarantee programs especially if the party offering the rental guarantee does not have the financial capability to compensate during periods when the property is unoccupied.
This is why it is very important that you go over the contract and do some due diligence on your end to background check the party offering you the rental guarantee.
Almost similar to a time deposit a Rental Guarantee Program will continuously supply you with the agreed return.
It is important to make it clear if the Property with the Rental Guarantee Program can be transferred to a new owner in the case you would like to liquidate your investment.
“Real estate investing, even on a very small scale, remains a tried and true means of building an individual's cash flow and wealth”. - Robert Kiyosaki
It is easy to get comfortable with the yields from rental guarantee investments but people must always keep in mind that if there is an opportunity for a better yield then you need to have at least a plan on how to liquidate and move your investment to a higher yield.
These are called exit strategies.
Keeping your property investments as efficient as possible will also maximize the growth rate of your property portfolio.
Always having a clear exit strategy is ideal in making investments when rental guarantees are no exception.
Rental Guarantee Investments have two (2) main periods to exit :
The first one being an exit before the rental guarantee expires and the second is an exit after the rental guarantee contract expires.
When exiting before the rental guarantee expires, you will need to check with the party who is responsible for the rental guarantee offer and find out if you can sell the property and pass on the guaranteed rights to the new buyer.
Another way is by re-assigning the rental guarantee contract to the new buyer who will then acquire the rights to the rental guarantee program.
All of these need to be discussed before signing a rental guarantee program so that your exit strategies become clearer and easier to execute when and if it becomes necessary.
Once all of this is in place you have some choices when liquidating a rental guarantee offer.
Like most investors, you may think of reselling above your investment cost which is ideal, but for a new investor it won’t be as attractive as when you first made the investment since the premium that you will be adding on your investment will reduce the ROI.
As ideal as this sounds, this is not as attractive and might cost time before you are able to exit.
Another is to sell at the same price you have invested.
This method is quite good and it will keep all the figures the same as originally stipulated in the contract the only difference is the time period.
This works quite well as long as the time period is reasonable enough for the party taking over the rental guarantee investment.
Lastly, you can always resell below your original investment.
This doesn’t mean incurring a loss.
Calculate all the costs you have put in the investment and compare it with all the returns you have collected and you should be able to come up with the price you would want to sell and it wouldn’t have to be above your total investment costs since you have been collecting returns.
By doing this you will be offering an increased ROI for the new investor.
This will be the more attractive and a great way to quickly exit the investment and liquidate to make room for a new one.
Now, here are some points to go over when planning to exit after the rental guarantee expires.
It is important to check with the party who is responsible for the rental guarantee offer and find out what are your options.
Find out if you can extend the rental guarantee assuming they would want to continue managing the property, a buy-back option, or even simply a full-renovation and refurbishing package if you do decide to keep the property for yourself.
If the rental guarantee can be extended than you can resell during the period of extension as the new set time frame and you can exit with your investment plus the returns happily.
This is a nice clean exit strategy and you should always check your exit options when going over the contract.
The buy-back option is probably the safest exit strategy because at the moment you sign the contract for your investment you are already guaranteed a buyer for your investment after collecting the returns for a set period of time.
All options above explain how to make it attractive for investors and as good as it sounds finding the investor is another question altogether.
So, having the buy-back option in your contract allows you a guaranteed exit.
You simply have to consider the timing since buy-back options are normally given after a rental guarantee contract expires or after a set period of time.
So, flexibility is not as good but with a bit of planning this can be turned into a great advantage.
"Don't wait to buy real estate, just buy it and wait".
· Are you sure you are purchasing property solely for investment purposes?
· Are you aware of the terms of the Rental Guarantee Program?
o Investment Cost
o Additional Costs
o Annual Expenses
o Guaranteed Return
o Return Payment Schedule & Collection Method
o Duration of Guarantee
· Do you have options before the Rental Guarantee Program expires?
o Selling the Rental Guarantee Investment to a third party
o Transferring the Rental Guarantee Investment rights to a third party
o Terminating the Rental Guarantee Program
· Do you have options after the Rental Guarantee Program expires?
o Rental Guarantee Extension
o Buy-back Options
o Renovations & Refurbishing
With all these in mind, you are now aware of how a Rental Guarantee Program works.
The return you can gain as well as the exit strategies available.
Now, you can take advantage of this great opportunity.
If you want assistance in working on your own checklist, contact us at +66 (0)38 250 955.