Are you considering buying Thailand property
as rental investment?
If your answer is yes, then what should your formula for calculating your return on investment be?
Let’s start by researching the simplest way to achieve a positive return:
First, let’s not get confused between Capital growth and rental yield, there is a big difference!
Capital growth:
Capital growth can be best explained as purchasing property, either in a good location with population growth and the Real Estate market is either growing or expected to grow now and into the future. This is “supply versus demand”. Yes, you buy land, commercial sites or housing now and by doing good research, you sit and watch the market grow!
If you buy property now, at say, ฿5,000,000 and growth is anticipated at 3% per annum in that region, each year, with demand outweighing supply, you could expect a minimum capital growth of at least 3%. However, choosing the right location, this could be far greater.
Simply put, you’re not receiving money, the asset is growing in value only. Everyone has heard the adage; “they’re not making any more land”. Well that is very true, and as the population grows, more need a place to invest or live. It is what it is, so ultimately, in a good location, prices will increase. If you research and choose carefully, Capital growth will be in your favour. When you’re ready to sell, market the property well using the service of a professional real estate broker to obtain the best possible outcome for you on the sale, then use the agent again to locate and present another property for consideration and purchase to start the process over again. This is Capital growth only. However, if you wish to rent or lease this property out to achieve a monthly, quarterly or annual income, this is categorized as Rental Yield. Combine the two, Capital growth and Rental yield and you will join the list of Real Estate entrepreneurs.
First steps
If you’ve been considering property investment, chances are you’ve come across the term “rental yield”. As an investor, it is an important concept to understand, to assess the potential income and cash flow of an investment property. This is extremely important if you have used a financial facility to obtain a loan to purchase. First, consider your loan interest rate! If it is high, above 5 – 6% then always remember that is “your repayment due” monthly or periodically. To make money, have your deposit higher than what the bank is expecting, so you can negotiate better interest rates. Yes, you can negotiate with banks and financial lenders. After all, that’s how they make their money. If you’re not a high risk to them, you stand a much better chance of discussing your venture and asking for a lower interest rate. The lower the interest rate, the higher your profit will be from Rental Yield.
If it is your intention to use your Thai spouse’s name, then make the effort to have the deposit in the bank for a generous period beforehand to establish credibility, rather than them seeing 1 deposit 1 month ago.
It goes without saying, the best return will come from a cash purchase of the property. With cash, allow for ongoing maintenance, rates and taxes, common fees, etc., and then watch your money come in from renters.
What rental yield should I expect?
Rental yield is the rate of income return over the cost associated with an investment property, typically expressed as a percentage. It’s a frequently used matrix in property data, and it’s important to understand how it is calculated and what it means to you, legally and financially.
How do I calculate rental yield?
There are 2 types of rental yields, gross and net. It is essential to understand the difference and how each of them are calculated.
Gross rental yield
To work out the gross rental yield, you need 2 key indicators – the annual rental income and the property value.
- Annual rental income = weekly rent x 52 “or” monthly rent x 12.
- Property value = could be purchase or market value, depending on whether you are looking at the current performance, or future prediction.
Once you’ve worked out the 2 amounts above, the calculation is relatively simple:
Gross rental yield = (Annual rental income / Property value) x 100
For example, a property that was purchased for ฿3,900,000 and returns a monthly rent of ฿15,000 per month (฿180,000 per year) would have a current rental yield of 4.61%.
However, if the current market value of the property is ฿4,500,000, and the rental income remains the same, at ฿15,000 per month then the potential rental yield would be 4.00%.
It’s important to understand that current or past rental yields are not necessarily accurate indicators of future performance, especially in a heated property market where prices are soaring, but rental prices are stalling, that old supply and demand scenario again. The more properties available to choose from allows the prospective renter to negotiate a better deal for them. If you stay fixed on your rental price, you may find that your property does not attract a renter for periods of months, hence no income which is relative to the overall annual income and yield. No renters, no income!
Also, gross rental yield does not consider any expenses associated with keeping the property. So, a property with high rental yield but also high expenses may result in a low net rental income. Please consider each expense you may incur and allow for approximately 20% more. Do not forget insurance costs. Yes, an expense but it can be an overall saving is the property is subject to damage either by natural disasters or bad tenants.
Net rental yield
Calculating net rental yield requires a lot more factors – known or estimated – but it’ll also give you a more accurate prediction of rental return.
In addition to the Annual rental income and Property value, you will also need to research and/or estimate all the costs and expenses associated with a property, such as purchasing and transaction costs, ongoing fees and expenses as well as vacancy costs. These include but are not limited to (where applicable):
| Property Costs | Ongoing Expenses |
|---|---|
| Property purchase cost / market value | Mortgage interest repayments |
| Loan Costs | Repair and maintenance |
| Building and pest inspections | Amphur rates / taxes |
| Land tax | Property management fees |
| Stamp duty | Loss of rent – non-occupied |
| Legal fees | Insurance / Depreciation |
| Add up all the property costs to get a total property cost figure | Add up all the expenses throughout the year to calculate a total annual expenses figure |
Once you have all the required figures, you can use this formula to work out the net rental yield:
Net rental yield = {(Annual rental income – Annual expenses) / Total property cost] x 100
Using the property in the previous example, where the purchase cost was ฿3,900,000 and the monthly rent was ฿15,000, (฿180,000 per year) if this property’s overall cost of purchase was ฿4,200,000, Including land taxes, duties, lawyer fees, etc., and the annual expenses are ฿45,000, then its current net rental yield would be 3.21%. This is significantly lower than its gross rental yield of 4.61% and may greatly affect your assessment of its value.
The more factors you can include in the calculation, the more accurate the resulting rental yield figure will be, but it can be difficult to get an accurate estimate of all the associated expenses. There are a many “minefields” to be mindful of in the market for property investors, such as those who have ulterior motives looking to make a quick sale, unqualified information, loan sharks, title deeds which don’t have legal ownership, etc., If you’re after a more accurate depiction of properties to buy for rental yields, cash flow and capital growth etc., you should consider discussing with an experienced, professional Real Estate Agent or legal professional?
How important is rental yield?
Rental yield can be helpful in determining the potential value and return of an investment property. However, gross rental yield is not a very accurate indicator as costs and expenses are not factored into the equation; and net rental yield is often based on many assumptions and factors beyond your control, such as vacancy periods, mortgage interest rates and maintenance costs which can be highly volatile and impact the rental return significantly.
Summary
So, while it’s important to consider the rental yield, it should be used as an indicator only, together with other key factors such as location, aspect and potential capital gain, in assessing the overall return and value of an investment property. If you have a mortgage or loan, to make money after repayments for the investment property, you must insure the rental yield can accommodate repayments plus return a positive profit!
Please also take into consideration the financial institutions current interest rate on deposits and loans. Which is considered the best option for your personal circumstances? If researched well, buying a rental property when interest rates are low may be a good investment. Likewise, if the bank rates are low, consider the possibility of purchasing a parcel of land and home or both for its growth potential providing “it is” within an area regarded as having positive growth. There is that old expression again; “They’re not making any more Land”! The moral of this blog is that there are opportunities within the Real Estate market however to obtain the best result, use a professional Real Estate Agent to help you make the decision that best suits your current situation.
We hope this information assists you in some shape or form. We also remind you to seek professional advice both financially and legally before entering any Real Estate agreements.
Disclaimer
The information above is an example only and should not be used solely in your decision-making process. Please seek legal, accounting and professional advice to value add to your journey into, or within, the current Real Estate environment.