A short while back I received an invite-only introduction to an investment: 'A 15% Guaranteed Property Rental Return, Capital Guaranteed'.
This is not my first exposure to something like this. About 2 years back, I was also exposed to such an investment during my international exchange.
At the time, property interests me more than stocks because I think that there's an intrinsic value to property that goes beyond monetary.
When I was complaining to my friend a few weeks back about a particularly insulting person online, he mentioned that they still offered such investments in Thailand as well.
Some areas that these investments are offered are:
1) Thailand
2) Malaysia 3) Philippines
4) Australia Or basically anywhere that has a large amount of land and developing property. Overseas types of investments can be really unique and unheard of, such as this one. READ ALSO: I Finally Figured out How to 'Double your Money in 5 Years, Capital Guaranteed' - from a Bank!
One particular proposal was interesting - it was invite-only and held at a hotel function room, similar to land investments from the early 2000s offering a 15% guaranteed yield rate from the very first year for 3 years.
The offer was very tempting and I made it a point to learn everything I could about it.
The following analysis is not Financial Advice, so please do your own due diligence.
What is the Guaranteed Yield?
The guaranteed yield is typically offered by the developers themselves and sold by real estate agents. Most of this offer is priced in - suggesting that developers foresee that they would be significant investors who will purchase the majority of the units for investment purposes.
Most guaranteed rental rates only last for a fixed period (usually 2 or 3 years). But since the developers are that comfortable with using the legal term 'guaranteed', it does imply that investors could will most likely be entitled to claim for any loss of rent or compensation from the developer for loss of rent during the relevant contractual period.
Positives
1) High Guaranteed Yield...
I was able to confirm that the yield is guaranteed. Not only is it guaranteed, but the rental % is usually quoted after the company has some of its deductions.
Even for some companies that account for the deductions, the deductions are usually done quite transparently to show where they're coming from, which creates little complaint in this part of the investment.
2) …Even before the property is developed:
Since this deal is being offered by developers directly, its possible for them to structure a deal where the rental yield can even begin from the time that the contract is enforced. In a nutshell, if the developer fails to develop the property on time and find renters on time, they will still pay out from their own the rental yield.
3) Potentially High Buy Back:
Some developers will offer to buy back the property for an above-market-rate offer once the guarantee is over, especially if they see that the land has appreciated well or the short duration of the offer allowed to get a much better grasp of how to use the property/land.
Sounds amazing? Unfortunately not, since these are the negatives:
Negatives:
1) Not a viable long term investment for rental nor selling
Most developers are offering such a deal in order to attract long term buyers with a foot in the door technique - guaranteed rental yield for several years before buyers have to figure out how to manage the rest of a 20 or 25 year mortgage themselves.
Property owners would have to compete with the developing properties in the area to sell or rent - in fact, they could end up competing with the original developers too! And they would likely lose value on both ends, if new developers were also offered on the same GRR basis.
2) Highly susceptible to 'scams'
I wanted to write on this matter but someone described an example so well that I'll just borrow it and credit for how eloquently and simply it's put.
Similarly for even something as outrageous as a 15% rental yield, you can have a property overvalued by the developer at $1,000,000 when the unit is only worth $500,000.
For a 2 year GRR, the developer could rent out the unit at $25,000/yr (5% gross of the actual value), top up the difference of $125,000/yr and still walk away with a quarter million in profit per person.
Unless you have connections or experience in assessing actual property/land value [which is especially hard to do in an overseas country]
3. The legalities of 'Guaranteed' come into question
With tourism grinding to a halt, some developers may not have enough cash in reserve to deliver on the agreed upon returns. There have been rumors circulating that some developers are invoking force majeure to stop payments.
Force Majeure means: 'The unforeseeable circumstances that prevent someone from fulfilling a contract.' This legal term can have varying definitions that usually only those familiar with legal jargon would be familiar with.
Each sale agreement could have different definitions, which is troubling - because anything from an earthquake to Covid-19 to almost any arbitrary criteria might have the developer invoke it if things go badly for them.
The variability also means that Force Majeure would likely be more determined on a case-by-case, making a legal battle for your 'guaranteed' money dragged out at best, or a loss at worst.
Conclusion
Though the scheme is highly susceptible to dishonesty, some of these issues have been sorted out by the governments of said countries over time, usually in the form of adjusting rental laws.
But it's too much of a risk for me at this juncture, especially since it's often impossible to filter what is legitimate without domestic expertise. The real estate market is also largely unregulated across the countries where this structure is popularized.
The scariest thing about this to me by far is that it could take YEARS of things going seemingly well before it could all go to hell VERY QUICKLY.
And the magnitude of capital outlay for property means that you would MINIMALLY lose hundreds of thousands of dollars if the worser case scenarios came to pass.
Instead, many of my business partners referred to my Investment Advisor are looking at Leveraged Private Annuities for their passive income diversification.
These investment vehicles work similar to property in terms of borrowing but:
a) Provide a regular net payout between 5 to 11% per year in 'rental' passive income after all costs
b) Parts of the passive income are contractually guaranteed by law, and the capital as well
c) Not taxable, nor has any stamp duties, potential rental issues or maintenance costs
d) Have potential capital appreciation
In any case, if I really did have any more capital - I would likely consider that for a passive income structure instead.
But it's not like I have a lot of savings, sadly.
Money Maverick
EDITED BY TINA.
Sources: https://thethaiger.com/thai-life/property/guaranteed-rental-returns-are-they-real
https://pulserealestate.net/the-knowledge/average-roi-property-investments-phuket https://www.propwise.sg/should-investors-buy-overseas-properties-with-rental-guarantees/