When buying property in Asia, expats have limited access to traditional financing options such as mortgages. However, there are viable alternatives to consider, depending on the property.
Responses to last week's article on investment property clearly indicated that property is considered a good asset, whether it is purchased for use as your home or as a pure investment, and regardless of location.
Many readers were also unaware of the options in making diversified investments in property without actually purchasing a dwelling. These options allow those expats who don't want to take on the responsibility of ownership to spread investment allocations across this important and highly profitable asset class. They require direct cash investments on a smaller scale, which can be more affordable.
There are further property options in Thailand that are becoming more popular. As with all investments relating to property in Thailand, extreme caution is required, and you will be wise to undertake thorough due diligence and seek legal advice before making a commitment.
Some readers were very interested in the methods of raising finance to purchase a physical property, whether it be a home, a holiday retreat or a pure investment. There are a number of options available. Qualification depends on the property location and your status, as well as the commercial aspects of the property.
In the Western world, finance tends to be easier to secure than in Asia. This is generally because the legal systems and property markets are more recognised, allowing financial institutions to hold assets that they can easily liquidate in case of a default. Markets tend to be more mature, providing consistency, and banks tend to be more progressive in making loans against such asset types.
Once you have decided to acquire a property, there are a number of options to consider when it comes to raising finance and completing the transaction.
CASH "Cash is king" in terms of your power to purchase. However, it is rarely the best commercial option for you as you will be able to put your cash to better use while availing yourself of financing.
For those who are uncomfortable with debt, consult a finance professional who can explain the sense of making your finances work better for you through leveraging (see Net Worth, "Sensible leveraging", Nov 21, 2011).
LOCAL MORTGAGE FINANCE
Until relatively recently, local bank finance for expats in Thailand was rare to non-existent. And while many banks now accept applications from expats, not many seem to be successful. Thai banks are conservative in their lending policies and customer criteria. Loans to expats also attract much higher interest rates than loans to Thai nationals.
Some professional advisory firms have built up strong relationships with Thai banks and applications submitted through them seem to have a far higher success rate. This is because the banks know that these firms will submit only serious loan candidates.
FOREIGN PROPERTY LEVERAGE
This has become a popular method of financing property purchases in Thailand over recent years. If you own a property in your country of origin, or another Western country, it is possible for you to re-mortgage that property and release further equity for use as an investment. The table shows an example.
With interest rates in Western economies at all-time lows, the current rates applicable to these types of mortgage are low and make such a transaction very attractive.
INVESTMENT LEVERAGE
Commercially, this is by far the most attractive of all methods. This is a dual use of your assets in that you have an investment portfolio working for you and the property creating income as well.
It is relatively easy to lever a loan from an investment portfolio. To do this, you assign your investment to the bank making the loan. The best part is that the entire portfolio continues to work for you.
For example, if you have an investment portfolio of 400,000 (19.8 million baht), a loan of 50% of the investment value can be leveraged from it. Interest is payable on the loan at attractive market rates.
The loan is then used to purchase the property in Thailand.
Using our example above, we borrow 165,000, or 41.25% of our investment portfolio value, at 4% annual interest. Thus we have the following:
Portfolio value: 400,000.
Growth on portfolio at 6% per year: 24,000.
Less loan interest of 6,600.
Net portfolio value after one year: 417,400.
Net investment return after property purchase interest: 4.35%
Although you are still paying interest on the loan as if it were a mortgage, the rate is lower.
In addition, you are still enjoying growth on your full investment portfolio value. Thus the commercial result is in your favour, which allows you to maximise the use of your assets, while still minimising the interest costs.
This is an ideal way for you to purchase your home in Thailand and pay no rent.
DEVELOPER FINANCE
Over the past few years we have seen more developers offer units for sale with a limited amount of finance.
This involves making a modest deposit and then paying the balance by instalments over the period of construction and sometimes even beyond that.
This works for many developers as it can give them the market edge in achieving sales over others who leave their buyers to find their own finance independently. This method can also allow buyers time to arrange further financing and still secure the purchase of their chosen unit.
These methods of financing the purchase of your property vary somewhat in methodology and cost.
By using a conservative attitude and carefully calculating the costs involved, you are able to make the optimum use of your available resources while reducing costs to a minimum.
Before you buy a property in Thailand or anywhere else, contact your professional adviser. He should be able to advise you on all of the available options and the one most suited to you and your circumstances.
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 enquiriesthailand@fsplatinum.com.