Paying a Mortgage from Rental Proceeds
This article marks the end of my first six months writing for the Property Gazette and introduces a change of format for my next series. To date I have covered property in Phuket as an idealist aspiration, with regard to pricing trends and most recently from a practical legal aspect.
Over these months I have been pleasantly surprised to hear from many local residents, (most of them property owners) thanking me for articles which they had found to be both informative and instructive. That these articles, which were intended primarily as brief summaries for people with little or no experience of Thai property, were also of value to local residents, suggested to me that there may be still be a lot of readers who still have unanswered questions about property in Phuket. Rather than embark on a further series of highly detailed treatises, which would probably bore most of you, I will over the coming months open up this column to any reader who has property related questions and will answer as many of them as time and space allows.
Please feel free to ask any kind of question, but please ask your questions in a general manner, wherever possible leaving out specific names, personalities or properties.
To kick the series off I will pose a fictitious question, but one nevertheless, which I find myself answering almost every day.
I want to buy a property with the minimum possible down payment and cover the mortgage payments from rental income. Is this feasible?
The short answer is - probably not. Your biggest gains are more likely to be of a capital rather then an income nature.
This issue however contains within it two significant questions that need to be answered separately. a) can I (a foreigner) get a mortgage (and on what terms?) b) what kind of rental returns are possible from residential properties in Phuket?
Firstly Thai Baht interest rates are high (typically 5-7 percentage points more than those for the USD to which the Baht is to all intensive purposes pegged), so it makes little sense to finance a property purchase locally if you can do so offshore (but bear in mind that it is highly unlikely that your home bank will accept a Thai property as collateral).
Further to obtain a local mortgage the Banks require a primary claim over the properties title deed, this is not a problem if you are buying a freehold condo, but greatly complicates matters if you wish for example to lease land to build a house. While the lessor may agree to allow the land title to be used as collateral for a loan to build your house, the bank will not usually allow the lease to be registered so long as the land title secures your mortgage. This limitation severely hampers the execution of a secure lease.
The rental income side is rather more difficult to be specific about. Houses for medium term lets (1-3 years) are probably the most stable in terms of income with likely current returns of from 4-8% p.a. dependent on the size, location and type of property.
Purchasers of holiday homes typically want to use their property for a month or two each year, which precludes medium term lets and should therefor probably look at managed resort housing or condominiums which can be let as serviced properties for short holiday lets. Because of the higher management costs of this type of property, the returns can fluctuate widely with the occupancy. These types of property, which have only really existed in Phuket since 1990, have yet to find their own in the market. If they are successful in matching hotel occupancy rates, then they have the potential to return from 15 to 20% p.a. , but in the last four (somewhat lean) tourist years most have been struggling to do much better than find tenants for a few high season weeks a year, this enabling their owners to just about break even.. The last few months have however shown a definite increase in occupancy for the better managed resort properties in Phuket. This bodes well for future returns.
I look forward to hearing from readers with questions for the April issue.