3 Risks of Investing in Rental Condominiums
Investing in condominiums for rent is a highly popular form of real estate investment because it doesn't require using your own capital; instead, you can obtain a bank loan. Renting out the property is like having someone else pay the mortgage for you, and if the rental income exceeds the mortgage payment, you get a double profit. However, while seemingly easy, investing in condominiums for rent actually involves several risks that need careful consideration. Three key risks that shouldn't be overlooked are:
Pre-purchase inspection of secondhand homes: Avoid subsequent demolition.
The Bangkok Metropolitan Administration (BMA) has received numerous complaints about buyers purchasing secondhand homes without knowing that the houses had illegal construction or modifications, including those violating building control laws such as the Building Control Act B.E. 2522 (amended by Act No. 2 B.E. 2535) and the Bangkok Metropolitan Administration Building Control Regulations B.E. 2544. This results in the buyer having to bear the burden of correcting and demolishing any illegal structures after ownership transfer. Therefore, the "Pre-purchase inspection, avoid subsequent demolition" project was established to help secondhand homeowners avoid this hardship by providing a certificate of building compliance with building control laws. This can be done according to the details below:
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1. Inability to find tenants becomes a burden on yourself.
While it's true that we're not using our own capital, obtaining a loan from the bank means we're "in debt," or in other words, "we're still using our own money." The envisioned ease comes from the confidence that tenants will help pay the mortgage. However, in reality, we may not be able to find tenants at all. The more inconsistent the tenant search, the more difficult our financial situation will become. If financial planning is poor, it could even lead to defaulting on payments and financial loss. Factors contributing to this inability to find tenants include: an unsuitable condo location, an oversupply of rental units, and rental rates that are higher than competitors in the area.
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2. Condo issues/imperfections.
To ensure continuous and problem-free rentals, the condo must be free of issues, with all equipment and amenities in place. Failing to invest in this, or not promptly addressing problems, can damage tenant confidence. Furthermore, resolving condo imperfections takes time. And there are costs involved. Therefore, if we choose a low-quality condo, we must be prepared to deal with the problems that may arise. At the same time, tenant selection plays a significant role, as damage can lead to subsequent expenses. Even if we manage to collect rent from the tenant, we may lose time, potentially disrupting the rental process, or incur additional costs for damages we were unaware of.
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3. Risk from Uncertainty in Market Changes
Poor economic conditions, unemployment, and tight liquidity can easily affect condo rentals. We must remember that condos purchased for rental purposes command higher rental prices than regular rentals. Similarly, buying an unfinished condo and making a down payment to secure the best price and maximize profit upon completion can negatively impact finances due to delayed completion. Or consider buying a condo in an area where the BTS (Skytrain) is still under construction, hoping for a prime location and easy rental once completed. The completion date of the BTS is uncertain. Therefore, when deciding to buy a condo for rental purposes, it's essential to consider the potential "uncertainty" and whether you can handle it. If you assess that it's too much of a burden, postponing the decision until you are more prepared is the best solution.
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Investing in Condos for Rental It also requires a very careful assessment of one's own financial situation to cope with periods when unable to find tenants. Furthermore, it demands knowledge and understanding in choosing a condo, which could be either new or resale. Attention must be paid to location selection, target market analysis, and market research to determine if the chosen area has sufficient population density, the number of competing rental condos, and the price range, in order to find a suitable location and compete effectively with other investors. Therefore, in reality, investing in condos for rent is not as easy as some might think. It requires dedication, commitment, in-depth research, careful consideration to minimize risk and maximize the chances of success.
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Thank you for the valuable information from REIC.
