Can a “rent guarantee” investment really be guaranteed?

Issue 6 | Feature brought to you by The Beachfront

Andres Pira of The Beachfront says yes to rental guarantees, but make sure you’re smart about whom you invest with.

Editor’s note: Thailand Property Magazine often receives questions from our readers in response to our published articles. In some instances, we will pass the question along to one of our clients whom we consider an expert on the topic. In this case, we’ve asked Andres Pira, Managing Director of The Beachfront, Phuket to reply.

Dear Thailand Property Magazine,
In several of your articles I have read about condo developments offering buyers a guaranteed percentage of rental return for a certain number of years, sometimes it’s as high as 7%. I live here and have seen how the number of tourists and renters rise and fall depending on the season and politics. My question is how can companies promise to unfailingly pay out these high rental returns regardless of the fluctuating seasons and market? Should buyers beware, or is it really that safe of an investment?

Dear reader,
Andres Pira here, writing from The Beachfront, a development in Phuket that is offering exactly what you’re referring to. It’s called a “rental guarantee,” which is becoming an increasingly popular type of investment for buyers in Thailand. To answer your question, let’s start with the concept of rental guarantee:

Rent guaranteed properties, in theory, allow the buyer to make a safe and effortless investment while he or she waits for their property to appreciate. It’s safe in the sense that during the length of the contract the buyer will receive regular and stable rental returns, and effortless in the sense that the development’s management company assumes all maintenance and occupancy responsibilities. This is an especially useful method of investing for the expat and foreign investor market, which tends to consist of very transient people who are thus not able to easily manage their properties.

In rent guaranteed investments, the buyer simply hands the keys back to the developer for a set number of years and in turn receives regular rental income paychecks; the amount of which is typically a percentage of the property’s purchase price. For example, if you were to purchase a property at The Beachfront for 2,400,000 THB (our starting price) and agree to our standard 7% rental guarantee, you will receive 168,000 THB of rental income for each year of your four-year, renewable contract.* Now, whether any rental return can actually be guaranteed or not, let’s start with the short answer:

Companies that offer rental guarantees factor in the cost of returning their buyers a fixed percentage of the purchase into the initial sale. This means that the developer should be prepared with the proper funding, so even if the season is low or the market is unstable the buyer will still receive the same rental income each month, quarter, or year, depending on the contract. Contracts can be anywhere from two years, to ten or more.

Now for the long answer, as there are certain things that a savvy buyer should be aware of before investing in a rental guarantee property:

First of all, the literal word “guarantee” is a tricky one because, of course, nothing in life can truly be guaranteed, can it? It is entirely possible for a developer to get hit by a market decline, or run out of money for some other reason before the contract ends. As part of a development that does offer rental guarantee investments, it would be disingenuous to write this off as a complete impossibility.

What one should consider when making this type of investment is how the development’s management company will influence the likelihood of the guarantee.

Consider this: Renting out a large number of properties on a daily, weekly or even monthly basis is both a professional and laborious business. The developer will essentially need to act as a hotel manager; responsible for continuously negotiating agreements with travel agencies and marketing companies to keep occupancy rates up, while also managing the project’s cleaning and maintenance. Even if the project is in the most perfect beachfront location, if it’s not marketed or maintained well, the probability of it making that target rental return will be low.

For a rental guarantee investment that has a very high probability of achieving its target returns, buyers should stick to purchasing within developments that are managed by well-known and established hotel groups. In other words, the merit of the guarantee will depend upon the experience and marketing network of the guarantor. This is precisely why The Beachfront has chosen Best Western, the world’s largest hotel chain, to manage it. You would be hard-pressed to find a “rent guaranteed” development with a guarantee that’s more probable. A word to the wise investor: Don’t buy only in consideration of the mere promise of a rental return, especially if the guarantee provider doesn’t have a proven background in the hospitality business. If a developer offers to execute this kind of agreement with a service management company you’re not familiar with, investigate whether it has an actual track record or is no more than a startup with low capital, minimal network and no reputation.

I hope this has answered your question, but if not you can reach out via email at info@thebeachfrontphuket.com or call +66 081 459 0152. You can also review more details about the rent guaranteed project, The Beachfront at http://www.beachfrontphuket.com/