Income generated by real estate in Phuket
It is difficult to imagine a person in the modern world for whom the word "investment" is an empty sound. The truth is that investments now are not just about investing capital to increase it. Investments are at least about preserving monetary funds and protecting against inflation. The world is looking for ways to avoid the devaluation of money. And devaluation is happening right before our eyes if nothing is done about it.
When we choose where to invest our funds, it is important for us to take into account two variables: minimizing all risks and stable income. And for all these variables to be present, we must ensure the reliability of the real estate market in a particular country. Over the last 10 years, we have observed a confident growth in Thailand's real estate market, the reason for which can be found in our article.
When it comes to discussing real estate in Phuket, it is best to examine it as a distinct market from the rest of the country. The cost of residential properties and island infrastructure not only continues to grow and develop, but more importantly for us, land for construction is becoming increasingly scarce.
It should be noted that 60% of the island is comprised of national parks and reserves where construction is prohibited. Additionally, high-rise buildings are not allowed, meaning that buildings located closer to the sea must be lower, and consequently, the number of potential apartments is limited.
Nevertheless, the real estate market in Phuket is young and expanding, and it is possible to acquire a villa or apartment by the sea, at a much lower cost compared to the price per square meter in Singapore or Australia. With the active development of the island and the real estate market, more and more interesting new residential complexes are emerging.
If we pay attention, the western part of Phuket is the one being developed the most, as the eastern part has virtually no beaches and lacks tourist infrastructure. The main attractions, viewpoints, and beaches are located on the western coast. Therefore, it is logical to invest in real estate in this area.
Where does income come from?
While it's clear how to preserve capital, let's talk about income sources.
1. Capitalization.
The most profitable and lucrative way to invest your funds is to purchase a property at the stage of excavation. On average, the cost of a property increases by 30-40% during the construction period, plus the added benefit of interest-free installment payments for the duration of the construction period (more details in our article "Installments and Mortgages in Thailand").
The key rule to follow is that the property must be liquid. Liquidity refers to the ability to quickly convert your apartment or villa into cash, that is, to sell it. Liquidity is a direct consequence of high demand, which is primarily based on the location of the property, its proximity to the sea, and the available infrastructure. Therefore, be cautious when choosing a property in Phuket.
The Guaranteed Income and Rental Income Program is a concept commonly offered by real estate developers. Initially, a fixed percentage of return is offered to the investor, following which they may opt for a rental program. It is important to note that careful consideration must be exercised to ensure that such offers are in line with industry norms. Typically, real estate developers offer a return of 7% per annum for a period of 3-5 years. Offers with returns greater than 7% per annum or those with a longer term of more than 10 years should be subject to more scrutiny.
The rental pool program, also known as the rental program, can be accessed following the conclusion of the guaranteed income period. Under this program, the real estate developer selects multiple apartments with similar features in a condominium and rents them out. The rental income generated is then divided between the investor and the developer based on a predetermined ratio of 60/40, 70/30 or 80/20, with the larger share going to the investor. For instance, if the rental pool ratio is 60/40, the investor receives 60% of the rental income, while the developer receives 40%.
The combined income program, a relatively new program, involves offering both guaranteed income and rental income concurrently. This can be achieved through a combination of unlimited returns of 5% and a rental program with a 70/30% split, or through a guaranteed return of 6% over a period of 6 years along with a rental program with a 60/40% split. With this program, investors are not restricted to a specific income cap during a limited period of time from the moment the property becomes operational.
Comparison of prices at the start and at the time of completion
Let's do some math. Suppose you buy an apartment for 5,000,000 baht at the construction stage. After two years, the building is completed, and the value of your apartment has increased by at least 30%. This means that the value of your apartment in the completed building is now 6,500,000 baht. Add to this a guaranteed program of 7% for 3 years, which equals 1,050,000 baht. In 5 years, your minimum income will be 51%, which is 2,550,000 baht.
For example, in the Serene eco-condominium investment project, the price has increased by approximately 15% from the start of sales to the present moment. By the time it is completed in October 2023, the expected price will increase by another 20%. Therefore, the total capitalization will be 30-35%.
Another example is the boutique investment condominium, Harmony, where the developer has set a price increase schedule leading up to completion. Sales began at the end of December 2021, and within six months, the price had already increased by 20%. By the time of completion in December 2024, the price is expected to rise by another 20%, resulting in a total capitalization of 40%.
When making a purchase, buyers have the option to take advantage of interest-free installment plans or receive significant discounts or furniture packages as a gift for 100% payment or the purchase of 5 or more apartments. In some cases, investors may choose to buy entire floors, thereby receiving the most advantageous terms and generating correspondingly high profits.
Capitalization is applicable not only to condominiums but also to any construction project, including villas. For instance, the developer of premium and luxury-class Botanica villas typically experiences a capitalization rate of around 50%.
It is difficult to decline such an offer, especially when purchasing in a currency that is considered one of the most stable in the world. The Thai Baht is relatively immune to significant fluctuations, and the average inflation rate over the past 45 years has been a mere 3.89%.
Let's note that Thailand is known for its low taxes, and sometimes even their absence. For comparison, the tax on purchasing property in Spain will be around 10%, while in Thailand it is up to 6.3%, in most cases - 1.1%. You can read about taxes, property maintenance, and ownership forms in our article.
If you have any remaining questions or would like to receive a profitability calculation for a specific apartment, please do not hesitate to contact us via social media. Our team would be happy to provide you with free consultation and assist you with any inquiries you may have.
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