Run For the Hills

Date: 09/08/2006

International Living Postcards-- Saturday Edition

Saturday, Sept. 9, 2006

If you're actively in the market to buy a piece of real estate in another country…you're making inquiries…your e-mail address is finding its way onto developer, agent, and promoter lists…and you're seeing the offers, typically attached to pre-construction buys: "Three-year rental guarantee of 12% net," for example. Can this be for real, should be your first reaction. And the short answer is, no, probably not.

In fact, a reader wrote last week to ask about this precise claim, being offered by a developer in Thailand. Instead of replying out of instinct to the reader to advise that he run for the hills, I decided to invest a little time in some research and followed up with contacts in the country.

Their consistent responses to my inquiries? Run for the hills.

Yes, it seems, as an investor in this (and similar deals), you'd be guaranteed an annual return from rentals of 12% net for three years. How can the developer afford to promise every investor this level of investment income? Simple. He's overcharging them all to begin with. That is to say, he's increased his sales prices so that you (as an investor) are paying out the three-year 12% return up front…to the developer…who is then putting the excess aside so he can pay you out with your own money over time.

Anytime anyone suggests that a rental investment deal will earn you more than 10% net per annum, you should question him carefully. This is not an impossible yield…but it's sure not typical.

Anytime a developer guarantees you rental income…well, now you know what to do.

Run for the hills.

Regards,

Lief Simon
Real Estate Editor, International Living

P.S. One consequence of overpaying for a piece of real estate in return for receiving a guaranteed rental income (aside from the absurdity of being paid that guaranteed return with your own money) is the potential for the value of your property to fall when the guarantee period ends. A friend told me recently of some properties in New Zealand that were sold with guaranteed rental returns and that recently came to the end of the guarantee return period. They are now selling for as much as 25% less than their original purchase prices.