12 Nov 2019

Is it really possible to invest 0 baht in real-estate?

An excellent asset to make an investment for passive income is in “Real-Estate”

When we talk about real-estate investments, I’m sure you’ve heard about “0 baht condo investment” many times. It makes you wonder, “is this really true?” Before we get to answering that question, let’s learn about real-estate investments work. 

When we want to invest in a condo, of course we have to “survey the location” to see who would want to rent our property and how many we could rent it out for. Once we figure that out, we can move right into buying the condo. 

Condos are quite an expensive asset that many times requires a loan from a bank. Generally, banks will approve a loan for 80-90% of the bank’s appraisal value of the property. We’ll need to get the rest to pay the 100% value of the property to the property owner. So the “0 baht real-estate investment” that we’re talking about would mean, we’d need to get a 100% loan from the bank. 

But even if you were able to acquire a loan for 100%, it doesn’t mean you’re going to pay 0 baht, because there are many expenses that come along with a real-estate investment. For instance, once we agree to purchase the property, we have to sign a purchase agreement which is required to apply for a loan with the bank. There’s your first expense: the contract fee. This is of course dependent on how you negotiate with the property owner. Then, there’s the 2% transfer fee, which is also negotiable. Don’t forget about stamps, common area fees, and power meter deposit, which are all expenses required to purchase a property that cannot be covered by the mortgage. You could, however, apply for an additional loan to renovate your condo on top of the mortgage to cover these expenses. 

At this point, many of us tend to think that this is quite an interesting investment option because it requires so little of our money. However, as with any real-estate investment, there is risk associated with it. Once you acquire a mortgage, you’re now subjected to “interest rate risk”.  Bank loans aren’t for free!

As interest rates rise, you’ll have a harder time setting a competitive rent, which means it becomes harder to find a renter because we have higher cost. The idea of any real-estate investment, especially for a condo, is to find ways to set rent to be higher than the monthly mortgage payments. The difference is your return!

Even if your rent was competitive, you’re still always at risk of not being able to find a tenant. If your existing tenant decides not to renew the lease, finding a new tenant to fill the gap immediately isn’t always easy. Most investors are faced with a vacant property for a certain period of time in between leases. So during such times, you won’t have rent to pay for your mortgage. You’ll instead have to pay the mortgage out of your own pocket. The longer it takes to find a new tenant, the deeper you’ll have to go into your pocket!

Still, real-estate investments remain an attractive option, but requires a deep understanding. Always remember: high risk, high return.