It seems like yesterday since I wrote here an article Jumping into the Thai real estate market head first, yet long and rather eventful 6 months has passed since than. And so I thought it could be interesting to see what progress has been made on this latest of our real estate investing adventures.

Firstly I need to report, that due to other family and business related commitments we have not had as much time as we would like to have in order to proceed with this investment on somehow faster schedule. In other words, our in May 2007 purchased “diamond in rough” was left sitting untouched until up to late November.

Connecting the services
As the house was sitting idle for quite some time even before our purchase, all the necessary utilities were long disconnected. Hence for our little renovation to proceed first thing we had to tackle local bureaucracy and get the services reconnected.

To our surprise this proved not as hard as we anticipated, but still has taken about 2 weeks in time and about 6,000 baht (US$200.-) in funds. The fees were somehow higher due to a need for a brand new “water meter” system installation.

Tenderly loving and caring
With all the utilities connected up we employed a trustable and well known local handyman to oversee the entire renovation. Even though the property was in an “unliveable” state, all that was needed to get it upto scratch was just a few light works such as general cleaning, a change of one internal door and complete painting of all windows, doors, ceiling together with the walls both inside and outside. All this was for a pricely sum of 23,300.- baht (US$800) finished in matter of 3 days.

Again I must say that once the price and scope of work was agreed, the locals certainly do not tend to muck around with their business. They jumped at the task at hand as soon as possible and, with some minor supervision, finished the work in good quality within a very short period of time. I am not sure if the thought of a quick cash payout or anything else affected the work attitude or if it is just a regular occurrence here, but both the overall renovation result and the speed with which it was achieved exceeded our expectations.

The important numbers updated:
• Exact purchase and transfer cost 163,000.- baht (US$ 5,500.-)
• Utilities 6,000.- baht (US$200.-)
• Renovation cost 23,300.- baht (US$800)
• Yearly cost of ownership estimate (repairs, taxes, fees) 4,000.- baht (US$ 135.-)

Making money from the rent
The next step is now again a crucial one – finding a tenant. This may prove somehow more difficult than we are used to since smallish Thai towns such as the one we live in here do not really have any real estate agent we could employ for this. If I understand it correctly, the normal way of advertising a property for sale or rent involves in most cases one simple FOR LEASE / RENT sign in front of it.

Of course we are trying to do a little better than that and have already posted number of leaflets around the most frequented areas of the town. To date this only resulted to 3 inquiries and nothing more.

As it stands we are looking for 2,500 baht in monthly rent (US$ 85,-) which would mean quite satisfactory 15.3% gross yearly return on overall investment (30,000.- baht in yearly rent / 196,300 baht of total purchase and renovation cost), however should we not have any luck at that price within next month or so, we are thinking to go as low as 2,000.- baht per month. This would decrease our return to about 12.2% per annum.

In my opinion still well worth the hassle considering the term deposits here in Thailand pay around 2.5% p.a. and the best term deposit rates worldwide seem to sit somewhere around 8% (should anyone need any pointers look at New Zealand).

Dreaming up the future
Hence overall I must report: so far so good. We are pretty much meeting or exceeding the budget together with all the other expectations and currently we are only left to overcome one last important hurdle – finding a suitable tenant. If that can be done at the rental levels I indicated above, than really the sky is the limit here as similar property investments are by no means rare here in Thailand countryside.

So wish us luck and make sure to visit here soon for another installment of our Thai real estate investing adventure!

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In the midst of the US property boom I thought it an interesting idea to look around and show here what kind of property investing options are available in the country, where I currently temporarily reside – Thailand. As I may have already mentioned here on my blog Sound Of Gold, with some breaks I have been only living here in Thailand for about 7 months now and my keen eye for investment opportunities (or so I like to think) looked around number of times at what, where, how and for much is available here.

Investing in Thailand, no kidding
I imagine that only a small number of private investors would be willing to take the plunge and put the money into an uncertain property market of a developing south east Asian country. On the other hand though, look where is the fastest economic growth coming from these day? China and India. And is the developing and some would perhaps say uncertain nature of these giants discouraging the biggest western investment houses to put their money there? It does not look like it. Yes you may argue that China and India is not Thailand but nevertheless.

Foreign ownership problems
The first thing I need to stress here is that for a foreigner, buying any type of property in Thailand is by no means an easy exercise. There is number of rules and regulations designed for the country not being completely “sold out” to cashed up foreigners, one of the main ones perhaps the maximum 49% foreign ownership limit on any thai asset.

Of course Thailand, same as lot of other Asian countries, can be very flexible with their regulations, so let’s just say that “where is the will there is a way” applies here perhaps more than anywhere else. And so I am fairly sure that foreigners can (and do) control a large portion of various businesses, properties, stocks and any other asset class here.

I don’t mean to discuss the obstacles but rather would like to go on with one of our first attempts on purchasing an investment property here. A fact I also need to point out here is that my wife is of Thai origin hence I can shamelessly state here that yes, we certainly enjoy some unfair advantage if compared to an average foreign investor.

Real life example
After a few months of research, we have decided that we will look into few properties located within the perimeter of a provincial capital we currently live. This is mainly due to two reasons:

• lower purchasing prices
  As anywhere else major cities here attract some huge premiums over the country. Real estate market in Bangkok is alive and well and purchase prices there are, give or take, almost on par with any other averagely priced western capital. For me, value inclined investor, a major no no.
• virtual non-existence of real estate management business
  Again with the exemption of Bangkok (and perhaps Chiang Mai and some other more westernized bigger cities here) there is virtually no real estate offices one could call, talk to or walk into in order to see whats available. For us not having a reliable property manager look over our investment simply narrowed the choices to the close by locations where we can do the management ourselves.

Once we had that clear, next came the task of finding the right property. Again a little tricky here with absence of local real estate office we could talk and with local newspaper not even featuring the real estate section (talk about developing country huh?). With little bit of research we discovered that most properties here are advertised only directly by their owners and the only way one could actually find out the deals is by walking around and looking for the FOR SALE signs.

Another and much more convenient source of available properties turned out to be the websites of major thai banks. If you can find the correct section, their sites often feature rather large number of foreclosed properties available for sale to interested parties. Needless to say that such properties could also attract a healthy discount (not always true) in order for bank to recoup its loans.

The art of the deal, Donald watch me!
And that is how we struck our gold . Browsing the local bank’s website I noticed a small single level townhouse in a little suburb neighbouring the local university. It has two bedrooms, decent size living room and a small outside backyard.

As the asking price was 220,000.- baht (ca US$ 6,800) and the similar properties in the immediate neighbourhood fetch between 2,000 and 2,500 baht per month, the annual return right of the bat would have been between 11% and 13.5%. But that’s excluding some desperately needed repairs and maintenance works as the house was unoccupied for quite a while and surely needs some loving touches.

At this point I thought to myself, that it surely looks like a decent deal and should be rentable to the crowd of out of the city university students, who already occupy number of similar properties in that area. Also with no experience with thai property, I was quite happy with seemingly low price as if everything goes wrong we won’t lose our shirt, sort of speak.

After further discussion with the head of local bank’s foreclosure department, it was suggested to us by him to put in an offer around 150,000.-!! Get that? The guy selling the property is basically advising us how low are they willing to go. My investing mind started to ring the bells.

And so we again went through all the facts but could not really see any major obstacle preventing us from putting in the offer. The numbers add up, the rental market is there, the property will be ours forever once purchased (no leasehold or some funny type of ownership scheme) so we bit the bullet and obliged with an offer of 150,000 baht (ca US$4,700.-).

On the end, the bank came back advising that we can have it for 160,000.-. Since we had the cash to pay it without the need of finance, bank seemed to look at us more favorably and prioritized our lowish offer against few higher but leveraged ones. In the following few weeks we registered the land and house title to my wife’s name (well that’s how it’s gotta be done here as shared or only my name on the title would mean many many more bureaucratic obstacles to clear) and we are now the proud owners of our first thai diamond in the rough. Others say a dump .

And the numbers?

• Purchase and transfer costs ca 165,000 baht (ca US$ 5,000.-)
• Needed repairs (a very rough, worst case scenario to round it up nicely) 35,000 baht (ca US$ 1,000.-)
• Potential yearly rental (better safe than sorry lowish number at 2,000 / month) 24,000 baht ( ca US$ 750.-)
• Other yearly ownership costs (repairs, taxes, fees – all fairly low in Thailand) 4,000 baht (ca US$130.-)
• Theoretical yearly ROI of not too shabby 11.8% not even accounting for the capital growth.

In the next phase, we need to get all the utilities sorted, get the property into a “tenant friendly state” and than rent it out. But since we are now expecting family and hence understandably have some other more urgent issues to tackle, the first step into building of my Thailand real estate emporium is being put on hold for about a month or so.

So what do you think? Gutsy or stupid?

Related thoughts:
If you are thinking to purchase house, then you need to seek all the relevant information about mortgage rate. In case of 1st mortgage, you should consult with some fame consultant. There are many banks and online companies that are providing information and mortgage calculators, in order to calculate the installments and interest rate. Now days it is very easy to find mortgage leads for proper guidance. While on the other hand, people who fail to payback because of lacking planning usually become part foreclosure listings. In this competitive mortgage market a lot of options are there for best remortgages.

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It has been a while since the last since Australian investment property attracted as much attention as it does last few weeks. As it seems, with the upcoming changes in economical conditions, investors old and new are once again setting their sights on the property market. And so I thought this may be a good time to refresh our minds about some popular approaches to property investing in Australia.

Negative gearing
Negative gearing means that your property is on the day to day basis actually losing money. The profits are made from the increase in value of the property during the time an investor holds it. Obviously, to realize such profits the property must be sold once/if its value increases to desired level.

Example:
Property purchased for $300,000 with 20% deposit and 7.5% p.a. interest only loan renting for $300 per week.
Yearly rental: $15,500
Less yearly interest: $18,000
Less other expenses (maintenance, body corporate fees, council rates etc.) $3,000
Yearly cash return: - $5,500

This technique works best for investors who can offset their ongoing day to day losses from holding this property against the tax they pay on another income. Higher the tax bracket the investor belongs to based on his other incomes, more can be offset against his property loss.

If all the other incomes put the investor into 40% tax bracket, he will receive $2,200 back to offset the loss on his negatively geared property. This means that his cash position for holding this property after one year will be - $3,300

Making profit:
Say it a fairly average year so the properties in the area increase in value by about 7%. This means that, on the paper, our negatively geared apartment is now valued at $321,000. Therefore if sold:
Proceeds from sale $321,000
Less deposit paid on purchase: $60,000
Less outstanding loan $240,000
Less day to day cash loss $3,300
Gross profit: $17,700

This is a simplified explanation of the negative gearing approach. As you can see the investor needs to meet the ongoing losses from from his own pocket and is effectively placing a bet on rising trend of the property values in order to make the profits.

Positive gearing
Positive gearing is fancy buzzword for a basic investing strategy easily understood by everyone. Positively geared property is producing more cash to the investor than it costs him to run it. Nice and simple, find enough positively geared properties and you may retire the day after. The problem is that this type of property is fairly hard to come by.

Example:
Property purchased for $150,000 with 20% deposit and 7.5% p.a. interest only loan renting for $300 per week.
Yearly rental: $15,500
Less yearly interest: $9,000
Less other expenses (maintenance, body corporate fees, council rates etc.) $3,000
Gross profit: $3,500

This technique will work for anybody lucky or savvy enough to find such an investment. To make money, the property does not need to be sold, the investor only needs a reliable tenant paying the rent in timely manner. If chosen wisely, property like this will not only provide the investor with cash surplus year after year, but it will also continues grow in value providing for additional profits should he decide to sell.

As no loss exists, the cash generated from this investment will need to be taxed at one’s marginal rate, same as any other income.

Positive cashflow
Positive cashflow strategy may be somehow difficult to grasp at first. It can perhaps be thought of as negative gearing (ie. property losing money form it “day to day operations�) which, with the help of some perfectly legal tax deductions, turns positive cash returns.

Important thing to remember - with this strategy few more important factors come in play:

• date of the property was built (properties built after 1987 providing for bigger claims an investor can make to the tax office)
• other depreciable items (additional claims could be made to the tax office for number of various items in the property eg. carpets, aircons, etc.; this is where a document known as Depreciation schedule comes in handy)
• investor’s tax rate (for two different investors, same property can be both cashflow positive for one and cashflow negative for the other depending on their marginal tax rate)

Example:
Property purchased for $220,000 with 20% deposit and 7.5% p.a. interest only loan renting for $300 per week.
Yearly rental: $15,500
Less yearly interest: $13,200
Less other expenses (maintenance, body corporate fees, council rates etc.) $3,000
Gross profit: -$700

So far nothing much different from the negatively geared scenario. As it looks now our investor will need to come up with $2,500 from his own pocket just to make up the difference.

Making profit:
However watch what happens once some smart accounting come in play:
Building built after September 1987 so the cost of its construction can be claimed back from the tax men (ie. depreciated) at the rate of 2.5% over the next 40 years. In our case the investor claims 2.5% of $125,000 ie. $3,125 here and additional depreciable items exist totalling to another $2,375.
 
The depreciable total (while not paid out by the investor) is in Australia legally deductible from other investor’s income hence reducing his total taxable income by $5,500. Because even after such reduction, our investor is still within the 40% marginal tax rate, in effect he is being refunded 40% of the claimable $5,500 giving him additional $2200 in profits from his property.
 
This amount coming back from the tax office than fully covers the day-to-day loss from the property and actually leaves the investor with $1,500 profit.

As you can see this strategy does have its merits, however it may prove rather tricky to execute. Before investing, one must do a thorough research to obtain reasonably accurate estimates of all depreciable items as well as generate substantial other income (higher tax bracket better) allowing for bigger tax refunds on his claims.

Few closing words:
All the items I named gross profits would obviously still need to be taxed depending on the investors tax situation and the investment holding period. Also, I am aware of omitting some significant purchase and sales costs which would play a significant role in each situation. As all the strategies were described in fairly simplistic manner, if you are new to all this, you will need to do some more in-depth research before proceeding with your property investing carrier any further.