Master of Science Program <\/span><\/p>
in Real Estate Development Innovation <\/span><\/p>
(MIRED) Faculty of Architecture and Planning <\/span><\/p>
Thammasat University <\/span><\/p>
<\/p>
Many people believe or have received information that investing in real estate, whether it's buying a condominium to rent out or running dormitories, apartments, or leasing spaces to sublet, is always profitable. Especially in the current situation where many condominiums have seen price drops due to decreased demand, attributed to the new normal. Many are considering this a great opportunity to invest in purchasing condominiums for rental purposes. Through this article, the Real Estate Development Innovation program (MIRED) aims to inform you about the risks associated with investing in rental condominiums to aid in your decision-making process. <\/span><\/p>
- Investing in real estate, regardless of type, is characterized by low liquidity. Buying and transferring ownership is more challenging than with other asset types due to high prices. Buyers often need considerable time to gather information for decision-making, and there are many comparable properties available for them to consider before choosing yours. Additionally, the process of transferring ownership is complex and involves multiple parties. <\/span>
<\/li>
- Real estate, in any form, is typically high-priced. Buyers may need time to save money to purchase their desired condominium. However, sometimes the desired unit may be purchased by other buyers before they can act, or sellers may raise prices according to supply and demand. Alternatively, if buyers do not want to save up, they may consider borrowing from financial institutions, which introduces another risk. Buyers cannot predict how the financial institution they deal with will adjust interest rates or change repayment terms. <\/span>
<\/li>
- The immobility of real estate means that location is a limitation and risk when purchasing a condominium for rental. A well-decorated unit with quality furniture in an unsuitable area, with inconvenient access, poses a risk. If buyers find it difficult to reach the condominium they purchased, they can assume that potential tenants will also face similar accessibility issues. Furthermore, since condominiums cannot be moved, they are subject to natural disasters like floods or earthquakes, as well as human-made threats such as riots or terrorism. Even if the land does not depreciate, the building may lose value or popularity due to such events, like being located in an area prone to protests, which could deter customers or lead to theft or vandalism. <\/span>
<\/li>
- There is significant competition in the residential real estate market, with many substitute products available. Even within the same condominium, other investors may have purchased multiple units for rental. If competitors enter the market first, they may have advantages in setting rental prices and strong connections with property management or brokers. Additionally, rental units may face competition from external alternatives like dormitories or apartments, especially if tenants are unable to afford a condominium or seek short-term stays, leading them to consider hotels for greater convenience. Families seeking privacy may also opt for single-family homes or townhouses nearby instead of your condominium. For those interested in competition or market conditions, you can refer to Michael E. Porter's Five Forces Theory for further insights. You will understand that purchasing a rental condominium faces considerable competition in the market. <\/span>
<\/li>
- The development of large-scale public transportation systems in Bangkok, such as the BTS and MRT, has reached some outer communities, providing residents who work in the city with more control over their commuting times. Consequently, the necessity to rent a condominium or apartment in Bangkok's Central Business District has decreased, impacting investors who purchase condominiums for rental. For instance, I currently live near Kasetsart University, and if I were to move my workplace to Sathorn or Silom, I initially planned to rent a condominium in Sathorn for over 25,000 THB/month to save commuting time. However, with the BTS Green Line now extending to my neighborhood, I can reach my workplace in just 30-45 minutes (including transfers), eliminating the need to spend 25,000 THB on rent. I can now better manage my commuting time, relaxation, and lifestyle. <\/span>
<\/li>
- Condos and units inevitably depreciate in value due to three factors: 1. Physical deterioration, 2. Wear and tear from usage, and 3. Economic conditions. Typically, residential units are affected by physical deterioration if not properly maintained. The responsibility for maintaining the condominium usually falls on the property management. If you purchase a unit in a well-located building with good transportation access for investment or rental purposes, but the management is subpar and neglects resident services, your unit may not sell or rent well, or may sell for less than its purchase price (this reflects physical and usage depreciation). <\/span>
<\/li>
- Timing is crucial in buying and selling real estate. As mentioned, real estate projects have development timelines. You may reserve a unit now and expect to rent or sell it once the project is completed, but this may not align with your expectations. Changes will occur during the development or construction phases, and your target tenant group may have other options or information available. Even if you secure a tenant, the returns may be lower than anticipated. <\/span>
<\/li>
- If you haven't saved money for investment, you will need to borrow from financial institutions. If your decision to purchase a unit fails to yield rental income or if the rental income is less than the interest plus principal on the loan, along with maintenance costs for utilities and common fees, you may find it unprofitable. Yet, you will still be obligated to repay the loan to the financial institution. <\/span>
<\/li>
- Opportunity cost in real estate investment is often higher than in other investments. If you have a significant amount of cash, you have other investment options that may yield higher returns (though with higher risks). For example, if you have 1 million THB and expect to buy a well-located or well-maintained unit for rental at a 6% capitalization rate, you might think this is better than the current inflation rate (2.82%) plus fixed deposit interest (1%), yielding a 2% profit. However, in reality, well-located or well-maintained units from reputable developers are rarely priced this low. For instance, a 32-square-meter unit near Ekkamai, Thonglor, or Asoke currently starts at around 3 million THB. If you invest this amount elsewhere, like in stocks, even with higher risks, you might achieve better returns. Alternatively, you could invest in bonds for stable, albeit lower, returns. Additionally, if you desire a well-located unit but it exceeds your budget, you will need to borrow from a bank, which charges interest rates of at least 2.55%. When factoring in inflation, you may find it challenging to achieve the rental income you desire. <\/span><\/li>
This article is lengthy and not intended to discourage your investment in rental condominiums. It merely aims to make you aware of the risks associated with this type of real estate investment. In the next article, I will present methods to mitigate or alleviate the risks of investing in rental condominiums. <\/span><\/p>
