The question of whether it is right for you to own or rent your home in Asia is not always easy to answer. The final decision often depends on both commercial and emotional thinking. I was recently involved in helping a client make such a choice.
In emotional terms we are all attracted to a property asset. One obvious benefit of ownership is that we can do as we want with our property. That means we can change things around and decorate as we feel appropriate without having to defer to a landlord. Most landlords take a conservative view of decoration because they wish to maintain their property with as few alterations as possible to attract the greatest number of potential tenants. That means white paintwork and conservative fittings rather than orange ceilings and highly contemporary fixtures, which only suit the person who designed them. The reality is that many restrictions apply when you are renting.
Purchasing often results in the owner feeling more content and secure. From a legal perspective you are allowed to own a leasehold property in Thailand but as a foreigner you may not own land. Thus ownership of a leasehold condominium unit is perfectly legal for expats. Leases may run for 30 years and will usually have a renewal clause at the option of the lessee. This would give you effective security for 60 years of ownership.
It is strictly illegal for foreigners to own land. One way around this is to lease the land and build the house on it yourself. This would enable you to effectively have the emotional "ownership" you desire. However, if you take the route of starting a company in which you own a minority shareholding, you need to be very careful. There are many technical issues involved and the Thai government takes a dim view of those who circumvent the regulations to suit themselves. Thus you would be very wise to carefully seek the right legal advice and seriously follow it.
There are also strict guidelines about how much of the overall space (49% of the saleable area) may be allocated to foreign ownership within each condominium development. You will thus be wise to have this checked very carefully before you make a commitment.
Apart from the emotions involved in having your own personal palace, what about the commercial issues of ownership? If you buy there will be several outgoing expenses to consider in addition to the purchase price. Stamp duty is one such cost and the responsible party for this is not really defined in Thailand. Various arrangements are made between buyers and sellers to either share or cover such costs.
Once you have purchased a property there will be several other expenses for which you are responsible, including monthly maintenance fees for the general upkeep and running of the condominium and building insurance. Usually contributions toward a "sinking" or "reserve" fund are made in case expensive maintenance is required. Such a fund will avoid the sudden burden of very heavy bills for unforeseen repairs in the future.
You also need to consider how you will pay for the property. Whether you have the finance available or not, you may opt to take a mortgage as funding for your purchase. This is a tricky decision because mortgage rates for foreigners in Thailand are high, often making an outright purchase more economical.
You then need to consider the cost of ongoing maintenance. Redecoration and repairs will creep up on you and items such as sudden leakages which affect neighbours, for which you will become ultimately responsible, need to be considered. Do not forget air-conditioners which will eventually need repair or replacement. You would be wise to create your own sinking fund for this type of expense, saving monthly over an extended period.
Have you considered other risks in Thailand? In practical terms what situation may occur where you could lose the property? Provided you have complied with all the laws of the country, all should be well. However, we never know what is around the corner in terms of turmoil. In 1997, the currency crisis that began in Thailand caused major turmoil and devaluations in many countries across Asia. If you were selling out of necessity at that point, it could have hurt you tremendously.
You should also consider the resale market in case there comes a time when you wish to sell. Perhaps you will be moving countries, going back to base in old age or under unforeseen family circumstances. What are the practicalities of selling in Thailand? New property is popular and has a purchase premium. The downside here is that properties devalue heavily in the first few years. The resale market in Thailand also is rather narrow because Thai nationals prefer new property as it has no "people history".
It is currently commonplace to have a property for sale on the open market for a long time before you secure a sale. This could be highly disadvantageous if you need to move quickly.
Are you also aware that you need to pay capital gains tax when you sell? It is not traditional capital gains tax in the way that most Westerners know it. A deemed property value for each individual unit results in a calculation that determines the amount of gain you have made over the time you owned your property. This is then converted into taxable income over the specific number of years you have owned and income tax is charged on this gain.
For long-term expats, ownership may be a good choice, particularly if you end up making a significant capital gain while owning your home.
Turning to the rental market, there is usually less to consider. You find a place you like and move in. You pay the rent and there are no other costs. The owner will need to fund all the maintenance and repairs as well as ongoing costs.
Of course, you are limited in what you may do to the property. However, you will often find that if you strike a good relationship with the owner there will usually be flexibility and understanding both ways. You also have freedom to leave whenever you wish, within reason.
While rent is often described as "dead money", you need to take account of interest, taxes and maintenance costs involved in ownership, as well as potential capital gains.
One way to get a perspective is to calculate investing the capital sum you would require for a purchase against the return on that same sum, and how much that would contribute to your rent. A professional adviser can help you make an informed decision as to whether to own or to rent is the best choice for you.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to firstname.lastname@example.org.
About the author
- Writer: Andrew Wood