Guaranteed Return on Investment: The Hard Truth

Guaranteed Return on Investment Condo Decoded: Is it Good or a Scam?

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Guaranteed Return on Investment Condo Decoded: Is it Good or a Scam?

Guaranteed return on investment or yield have been one of the most successful campaigns that attracted many condo investors. Many projects with guaranteed return on investment sold very well. The popularity led to many new projects come up with this offer. But is it really a good investment, because sometimes the offer is too good to be true. Before we investigate into that, lets understand first what exactly is a  Guaranteed return on investment property. 

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Jerbit 2-4 Thinking Process

Every time must investors forward a new project for me to analyze, I always go through this process to understand and see through to the core whether the project is really beneficial or not. I designed this thinking process for myself, and for my clients, but today I will share everything with you.

Jerbit 2-4 Thinking Process is a 2 rules to follow and 4 steps to take to analyze any guaranteed return on investment projects. I have written down exactly how to do it so that you can follow and find out before investing. It’s logical and powerful. 

Rule No. 1: There’s nothing free in this world

I know that’s basic, but then why do people still fall prey to these campaigns if they know it. It means they are forgetting this rule. If you are getting something, you’re actually paying for it in one way or the other. Or, if you’re really getting ‘something’ for free or over-receiving it, somebody is losing that ‘something’. Some deals are too good to be true. And some deals are too but true. You should ask yourself who is losing in here?

Rule No. 2: Ask the right question.

If you ask a wrong question like,”hmm, is this really a good investment?” You are asking your brain to find good reasons to support the investment scheme. There are many good reasons like how I explained in the first part of this article. These supporting reasons will be readily available to you by the developer’s sales team. You don’t need to think about it. So, ask the right question otherwise you won’t get the right answer.

So, what’s the right question? Follow Rule no. 1 and ask,” If I am getting so much benefit, who is losing? If the developer is losing, think… why does the developer want to lose?”. Developers are not stupid. They will never be on the losing edge, so you need to reframe your question, “what is the developer getting? How is he benefiting? …. which means, what am I losing?” 

Investigate and analyze. Do some due diligence. You should look into the following things:

Step 1: Find out the facts and figures

(I will show calculation examples, later).

  1. Price / sq.m – Find out the price/sq.m of the condo project. 
  2. Rent based on guaranteed return on investment – Find out the rent required to generate the guaranteed yield. That is, if the developer gives a 10% guarantee, what must be the rent of the condo to be able to generate 10% yield. The formula to find out ROI is

You can calculate the rent required using the formula below.

Step 2: Find out the condo price of Project A ‘without’ Guaranteed Yield offer. 

Ask the salesperson if you want to buy the condo without guarantee plan, what would be the price of the condo. Note it down.

Step 3: Find other similar condos for comparison.

Go to a property finder websites that has condos for sale and find out nearby condos with similar characteristics like room type, room size, low or high rise building, building age, grade, quality, standard, in nearby location or similar priced locations.

We want to compare condos of other similar projects to this project. So, find the closest condo that you think should be of a similar price range. Don’t find condo with similar price because we want to find out the correct price. And don’t worry if you can’t find exactly the same type of condo. Just find as much as you can and get the following 2 information:

A. Price/sq.m of other similar condos
B. Rental rate of those units. 

Step 4: Analysis

Analyze your collected information and connect the dots. Your goal is to find out whether the condo price by the developer is correct or inflated. You can do this by comparing the rent and price of similar projects. This is what the developer usually do:

  • Increased Pricing following by guarantee ROI (can be also viewed as discount)
  • Bad Location: They build condo on cheap land in bad location but are selling at market price of good location.
  • Building projects where there is no comparison. Like islands

Following the above Jerbit’s 2- 4 Thinking Process, here is an example of real projects available in the market. Study and understand them thoroughly so that you know what clues to look for and how to calculate your investments.

Next: Jerbit 2 – 4 Thinking Process example

Example

We will use the example of the project I mentioned earlier.
Condo for sale, 25 sq.m. Start at 1,799,000 baht. Guaranteed Yield 10% for 5 years. Let’s name this project Project A

This means that if I buy this condo, I will get 899,500 baht back in 5 years (10% = 179,900/year). If you think about it, I’m already getting 50% of the condo price. I’m almost buying it on a big discount! Lucrative and attractive right? Let’s apply Jerbit’s 2-4 Thinking Process and have a conversation with yourself.

Rule no. 1: There’s nothing free in this world. Market’s average gross return on investment is around 4-6%. Property market is in oversupply not in demand. How would any property rent out at 10% yield, and why would the developer give me 10% for 5 years if he has to bear the difference in rent? Either the developer is losing something or I am paying something that I don’t know about. (May be) something is wrong. 

Rule no. 2: I am paying 1,799,000 baht and getting 899,500 baht back in just 5 years time, which means the developer is losing 899,500 baht. They are selling the condo for a 50% discount? I don’t think so. They must be getting some benefit somewhere… somehow. I must find out how are they profiting from this project.

Let’s start some due diligence work.

Step 1: Find out the facts and figures.
A. Price / sq.m of Project A and
B. Rent based on guaranteed return on investment 10%

  1. Price per sq.m
    Calculate the price / sq.m of this project. 1,799,000 baht for 25 sq.m
    – Price/sq,m = Price/Size
    – Price/sq,m = 1,799,000/25
    => Price/sq,m = 71,960 baht/sq.m.

    I notice that the price/sq.m is high because: 
    1. this project is not in Bangkok.
    2. It is a low rise building
      This is how I start to notice things. I know I must think deeper. 
  1. Find out rent based on guaranteed return on investment of 10%

    For 10% return on investment, how much must I set the rental price of this condo if someone wants to rent it? We use the simple return on investment formula to calculate the rent.
    return on investment = (Rent x 12 month) / Price.
    Therefore, Rent = (return on investment x Price ) / 12 
    Rent = (10% x 1,799,000) / 12
    => Rent = 14,992 baht per month.

    To generate a yield of 10%, the condo must rent out at 14,992 baht per month. (Hmm, think for a moment. Do you think this 25 sq.m can get almost 15,000 baht/month?) Again, I’m not publicly telling you which project is this but its not in Bangkok. 

    But, again, who cares right? Because the developer guaranteed it. Yes, the developer guaranteed the rent for you but how about after 5 years? You must think in the long term. From the 6th year onwards your rent may drop sharply. To know what’s the correct rental we will do some research and find out in step 3 but before that, let’s complete Step 2

    Step 2: Find out the price of Project A without Guaranteed Yield offer. Project A is for sale at 1,799,000 baht for a 25 sq.m with a 10% guarantee yield right? What is the price of the condo alone without the guaranteed yield offer? You need to find that out. How? Talk to the salesperson. 

Note that usually these projects are motivated to sell the guarantee plan because there is more profit in there. So, make sure you find out. This is how I talk to them.

“If I buy to live, can I pay 899,500 instead of 1,799,000 baht since you will return 899,500 to me anyways. I’m not renting out. I’m living in.” The answer will always be a no. (which also confirms Rule no. 1, there is something deeper into this).

Finally, I was told that the price for condo alone is 1,199,000 baht. Great! What’s the price/sq.m? It’s 1,1990,000/25 = 47,960 baht / sq.m.  Now, we can analyze all the information we collected in the step 3, but again, before that let’s find out the correct rental price in other similar condos. 

What is the rent of the comparing condos?
I found out that condo of similar size and location were being rented out at around 7,000 to 8,000 baht per month. Let’s say the average is 7,500 baht / month. If you are not sure of how to find condos for comparison, think in terms of the tenant. If you were renting a condo how would you compare each condo. 

Step 3: Project A is a low rise building, not in prime location, and not a brand. From researching the prices of other similar 25 sq.m condos available. I found the cheapest new (1-3 years old) condo to be around  1,000,000+ baht and highest to be 2,900,000 baht. Comparing all the features and characteristics of other condos with Project A, I found 2 condos very similar to Project A. One was for sale at 1,200,000 (25 sqm) and the other at 1,400,000 baht (but 26 sqm). Therefore, the price/sq.m of those condos is

– Price/sq,m = Price/Size = 1,200,000/25 = 48,000 baht/sq.m
– Price/sq,m = Price/Size = 1,400,000/26 = 53,000 baht/sq.m

Now, I notice:
– the price of Project A with Guaranteed Plan is at 71,960 baht/sq.m is quite high.
– the price of Project A without Guaranteed Plan at 47,960 baht/sq.m is reasonable.
Don’t worry about accuracy, it will never be accurate. We just need the best information possible to make comparisons and get a general idea of what we are investing in.

Now, think. In Step 1B, the rent calculated was at 14,992 baht per month, compared to 7,500baht/month real pricing. It is clear that I will never be able to achieve 14,992/month rate after 5 years. Another sign that this is not a sustainable investment.

Step 4: Analyze everything. Note that there is no fixed formula for the analyses. You must use your logic, observation and business sense. Use information you found out in figuring things out. In this case I noticed 3 things: 

  1. There is a big gap in guaranteed and no guaranteed price, that is 1,799,000 and 1,990,000. A 600,000 baht difference. So, I must find out whether it’s worth paying that extra amount or not.
  2. If it’s not worth paying then should I buy this condo without guaranteed plan or should I consider other condos?
  3. There is also a big gap in rental price based on 10% yield and the market rental price of the comparing condos. 14,922/month & 7,500/month. My return on investment after 5th year may drop sharply.

    So, by my logic, I am going to investigate into these areas.

Let’s begin. Guaranteed yield offer is 600,000 baht more expensive. If I buy it. I can 10% guarantee for 5 years which is 899,500 baht. So, I’m paying extra 600,000 but I’m getting back 899,500 baht.

899,500 – 600,000 = 299,500 Profit. Sounds good! In 5 years time, I made 299,500 baht, right? Yes! But, as I found out, that’s an illusion. Math will never lie, so let’s do the math. Let’s split this into 2 scenarios to see what happens if I buy both of them. Deal 1 and Deal 2.

Deal 1: No Guarantee Plan

Cost: 1,199,000 baht 

Income: 7,500baht/month. = 90,000baht/year. (found from Step 3)

Now, I will be realistic and fair. I might have an average vacancy of 1 month (7,500 baht) and need to pay agent fee for 1 month (7,500 baht) every year. Therefore, I will lose 15,000 baht every year. Hence, my actual income would be 75,000/year. (90,000-15,000 = 75,000 / year)

Rental Income After five years: After 5 years, my rent will be a little bit higher because with time property value increase and rent also increase. The standard is 3% increment per year. So, my rent would increase from 75,000 baht/year to +3% rental increment corrected and shown  in the graph. 

If we plot this into a graph, the average income from rent every year will look like this for the next 20 years . 

Rental Income from Deal 1: Buying with NO Guaranteed ROI

Leave it there for a moment. Now, lets talk about Deal 2

Deal 2. Guaranteed Return on Investment Plan.

Cost: 1,799,000 baht.

Income: 179,900/year for 5 years =

Rental Income After 5 years: First 5 years I will get 179,900 per year. But after the 5th year, my income from rent will be the same as Deal 1 because it’s the same condo. As you can see, there will be a sharp drop in rental income after 5th year.

Rental Income from Deal 2: Buying with Guaranteed ROI Plan

Now, let’s compare the 2 deals. My rental income in both the deals will look something like this. The first 5 years I get higher rent but from the 6th year onwards, both Deal 1 and Deal 2 will have the same revenue.

 

6th year onwards, both Deal 1 and Deal 2 will have the same revenue.

Next: The Real Profit Investigation

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