Your thoughts on this business opportunity....

[Kleyshay 0]

Not sure this is the correct section but here goes anyway.....

 

During a conversation with the guesthouse owner (Thai) where I stay, he was telling me he had built the place and had been asked if he would sell.

I was surprised, in our present climate, I couldnt see anyone, especially a farang buying it and asked why it didnt go down the lease route, he came back with this:

 

A 22 Room centrally located guesthouse for lease

A 10 year lease is on offer

Owner wants 5m Key money

 

Costs are as follows:

All Utilities : 25000 p/m

Staff : 22000 p/m

Rent 65000 p/m

Accountant: 2000p/m ?

Total of : 114000 p/m

 

Assuming a 50% occupancy: 11 rooms at say 600 baht per night x 30 days = 198000

 

A cashflow of 84000 less taxes

Obviously you would need to get that initial 5m back too....lol

 

I am assuming any farang would have to form a company to have this place, and wouldnt have a clue as to what this costs ?

Your thoughts on this please, and no its not an advert and no it's not my business, either.

I am of the opinion that Pattaya and maybe Thailand in general, is trying to attract the higher spending tourist staying at the likes of holiday inn, hard rock, amari etc etc rather than many people on a budget looking for a 600 baht room, but that is only my humble opinion.

Although having said that I know for a fact a 50% occupancy rate is easily obtainable, as i have been here low, high and peak seasons and seen with my own eyes the numbers he gets through the door.

[agogogaran 0]

Not sure this is the correct section but here goes anyway.....

 

During a conversation with the guesthouse owner (Thai) where I stay, he was telling me he had built the place and had been asked if he would sell.

I was surprised, in our present climate, I couldnt see anyone, especially a farang buying it and asked why it didnt go down the lease route, he came back with this:

 

A 22 Room centrally located guesthouse for lease

A 10 year lease is on offer

Owner wants 5m Key money

 

Costs are as follows:

All Utilities : 25000 p/m

Staff : 22000 p/m

Rent 65000 p/m

Accountant: 2000p/m ?

Total of : 114000 p/m

 

Assuming a 50% occupancy: 11 rooms at say 600 baht per night x 30 days = 198000

 

A cashflow of 84000 less taxes

Obviously you would need to get that initial 5m back too....lol

 

I am assuming any farang would have to form a company to have this place, and wouldnt have a clue as to what this costs ?

Your thoughts on this please, and no its not an advert and no it's not my business, either.

I am of the opinion that Pattaya and maybe Thailand in general, is trying to attract the higher spending tourist staying at the likes of holiday inn, hard rock, amari etc etc rather than many people on a budget looking for a 600 baht room, but that is only my humble opinion.

Although having said that I know for a fact a 50% occupancy rate is easily obtainable, as i have been here low, high and peak seasons and seen with my own eyes the numbers he gets through the door.

 

 

repairs/breakages, consumables, advertising, public liability insurance, lawyers fees to name a few extras

[lovedog100 1,372]

First off, key money is rent paid in advance that is non refundable. Take the 5m and divide it by 120 months and you get 41666 bht per month. Now add that to your rent and re calculate known costs.

 

Costs are as follows:

All Utilities : 25000 p/m

Staff : 22000 p/m

Rent 106666 p/m

Accountant: 2000p/m ?

Key money p/m 41666

Total of : 155666 p/m

 

198000

-155666

-----------

42334 Bht per month

Not big money for the investment, it doesn't add in incidentals as maintenance, replacing sheets, towels and such. How about toilet paper, cleaning supplies, loss from theft, advertising, insurance, lawyers, replacing light bulbs.

 

To attract the higher end customer, who buy the way doesn't stay in a 22 room guest house. You will have to make some big improvements, add a pool, internet with wifi, new furniture, paint, light fixtures, linens and towels, paint, parking lot, security, room safes, plasma TV's with cable.

 

I give your own question back to you. What are your thoughts on this business "opportunity?"

[FatherMojo 2]

5m Key money is a deal breaker for lots of folks. Basically the true monthly rent is (5m/120 = 41,666 + 65,000) = 106,666 which is quite a bit of money for rent. And it would be very difficult to get it back from the next buyer as all the furnishings would need to be replaced. If I were to pay 5m + replace the furnishings after a few years for say 2m(?), I would be looking for at least 7m when looking to sell the place... Who would pay me that?

 

 

Good luck to your friend the owner, but I think he should rethink the key money and the monthly rent amount.

 

 

FatherMojo

[CheshireTom 1,377]

First off, key money is rent paid in advance that is non refundable. Take the 5m and divide it by 120 months and you get 41666 bht per month. Now add that to your rent and re calculate known costs.

 

Costs are as follows:

All Utilities : 25000 p/m

Staff : 22000 p/m

Rent 106666 p/m

Accountant: 2000p/m ?

Key money p/m 41666

Total of : 155666 p/m

 

198000

-155666

-----------

42334 Bht per month

Not big money for the investment, it doesn't add in incidentals as maintenance, replacing sheets, towels and such. How about toilet paper, cleaning supplies, loss from theft, advertising, insurance, lawyers, replacing light bulbs.

 

To attract the higher end customer, who buy the way doesn't stay in a 22 room guest house. You will have to make some big improvements, add a pool, internet with wifi, new furniture, paint, light fixtures, linens and towels, paint, parking lot, security, room safes, plasma TV's with cable.

 

I give your own question back to you. What are your thoughts on this business "opportunity?"

 

The staff costs seem to be the minimum operating staff costs. The place would need managed, or is it assumed that the buyer would be contributing his efforts for free.

[Kleyshay 0]

To attract the higher end customer, who buy the way doesn't stay in a 22 room guest house. You will have to make some big improvements, add a pool, internet with wifi, new furniture, paint, light fixtures, linens and towels, paint, parking lot, security, room safes, plasma TV's with cable.

 

When I said I believe Pattaya is trying to attract the bigger spending customer I quoted the likes of Holiday Inn, Hard Rock and Amari, and did not include this or any other guesthouse.....that was my point. I am well aware the 600 baht guesthouse is not going to attract a high end customer, apologies if I was unclear about that. As for the big improvements, the place is almost new and has all the above without the pool, plasmas and parking lot.

 

42334 Bht per month

Not big money for the investment, it doesn't add in incidentals as maintenance, replacing sheets, towels and such. How about toilet paper, cleaning supplies, loss from theft, advertising, insurance, lawyers, replacing light bulbs.

 

Sure, alot of possible extra costs to consider.

 

I give your own question back to you. What are your thoughts on this business "opportunity?"

 

Well as you ask, my thoughts are that I personally would not want ANY business in Thailand. I am more than happy to use the place as one of many holiday destinations throughout the world, that I visit. My opinion is that the only real 'winner' in 99% of leased businesses in Thailand is the Thai landlord, although I have no experience of this personally.

I just posted the question to you ex-pats, as I thought you would/should have alot more idea than myself if one can make this a viable business to live here if one wanted to. And actually survive on the profits made. I come to Thailand purely as a tourist and I am more than happy with that. I could not survive on my holiday with a budget of 42334 bht p/m less all the above costs, but to those that live in Pattaya, I would think most do not spend as freely as the tourist.

Edited January 18, 2010 by Kleyshay

[joekicker 53]

This is not a bad deal, especially as a first offer. HOWEVER, why are you assuming a 50 per cent occupied rate? This is the real key, is how you are going to (partly) fill those 22 rooms.

 

.

[torrenova 644]

I don't think staff costs are as low as 22k

I am not sure you could get Bt600 a night per room.

I'd guess the standard of the F&F is more Thai than western.

Utilities at 25k per month is laughable if the rooms are aircon. If not, nowhere near Bt600 per day.

 

For it to be worth 5m, you'd have to be getting back 2.5m+ per annum. On the numbers given, it is worth zero as you wouldn't even get your 5m back.

[Kleyshay 0]

This is not a bad deal, especially as a first offer. HOWEVER, why are you assuming a 50 per cent occupied rate? This is the real key, is how you are going to (partly) fill those 22 rooms.

 

The reason I assumed 50% is because I have stayed there and seen, and when I wasn't there was informed by others of the numbers in there. I have seen the invoices books to back this up and no they were not the 'other' set of books either...lol

 

Averages for the last year were:

 

Jan 09: 16 rooms

Feb 09: 13 rooms

Mar 09: 10 rooms

Apr 09: 13 rooms

May 09: 7 rooms

June 09: 7 rooms

July 09: 6 rooms

Aug 09: 7 rooms

Sep 09: 6 rooms

Oct 09: 8 rooms

Nov 09: 12 rooms

Dec 09: 19 rooms (before this is questioned: 1st Dec - 14th Dec average of 17 rooms were filled & 14th - 31st (FULL everyday)

 

So thats 124 filled over the course of 12 months

The max possible would have been 21 rooms (1 room is being used as a store) x 12 months = 252

An occupancy rate of 49.2%, OK so maybe my 50% may seem optimistic but near enough.

This was achieved by walks ins, repeat business and word of mouth, with no advertising and IMHO a very poorly presented website comstructed about 6 months ago.

Crucially any potential buyer would need to get more people through the door in that low season period as shown in the figures. I suppose a better website with maybe multi language, some advertising, promotions (longer term reduced rates, * nights for price of * nights or similar etc) may work.

 

 

I don't think staff costs are as low as 22k

I am not sure you could get Bt600 a night per room.

I'd guess the standard of the F&F is more Thai than western.

Utilities at 25k per month is laughable if the rooms are aircon. If not, nowhere near Bt600 per day.

 

Yes the staff wages ARE 22k p/m (currently 3 staff @ 7000 baht, 7000 baht & 8000 baht)

Why are you unsure you would you not get 600 baht a night ? It is being achieved already.

I would say the room standard is more Western than Thai and it does have remote controlled air con and yes they do supply pillows

The rooms are of reasonable size some are 26 m sq and some are 30 m sq inc shower room & balcony, modern, have air con, in room safe, wardrobe, work desk, free wi-fi, cable tv, fridge with 2 bottles of free water everyday, electric shower & cleaned everyday........by all means please suggest somewhere else for the same money or less and I am happy to go have a look and give you an honest comparison.

Again I re-iterate from my original post, this is not my business to sell or indeed an advert, I couldn't care less if he sells it, leases it or keeps the place, I am merely stating fact of what the facilities are, as some of you are guessing incorrectly.

.

 

 

As for utilities, I was only stating what I was told based on a 50% occupancy rate, obviously more rooms occupied then higher bills. But I will try to confirm this myself, as I am sure you have more idea than me and this may be incorrect.

 

The place would need managed, or is it assumed that the buyer would be contributing his efforts for free.

Is the buyer not allowed to manage the place with a valid work permit / company then ? If not then yes obviously another wage would have to be added to the wage bill, thus reducing profits even further.

Is the point of having any business, so the buyer takes any profits to put in his or her pocket ? Assuming a business makes a profit, how then is this contributing efforts for free? I would have thought the owner would take his 'wages' out of the profits made or are you saying he or she should take them in addition to ?

 

Although some are questioning the facilities, room rates and occupancy rates, the general opinion seems to be that this would only not be viable as a business because the price of key money and rent are too high. So what would you think the key money / rent should be then?

You seem to see it as the landlord makes 106,666 baht p/m while relaxing in his hammock, with the buyer hopefully making 42334 baht p/m perhaps running around like a headless chicken. Do you think this should be evened out a bit more or is it just a not acceptable income for Pattaya?

Edited January 19, 2010 by Kleyshay

[CheshireTom 1,377]

Is the buyer not allowed to manage the place with a valid work permit / company then ? If not then yes obviously another wage would have to be added to the wage bill, thus reducing profits even further.

Is the point of having any business, so the buyer takes any profits to put in his or her pocket ? Assuming a business makes a profit, how then is this contributing efforts for free?

 

If, and that is debatable, the farang owner succeeding in securing a work permit, there is a minimum salary that must be paid by law. Currently, that figure would wipe out your entire profits.

 

 

I would have thought the owner would take his 'wages' out of the profits made or are you saying he or she should take them in addition to ?

 

Salary/wages are a cost. They come before profit on the P&L. It's pointless using the profit figure to calculate ROI if the guy still has to be paid for his work.

 

That said, the place looks decent enough for 600 Baht a night.

[FatherMojo 2]

Kleyshay,

 

You seem to have a pipeline with the owner which sounds nice. Why not just post the Income Statement for 2009 showing us the actual information for the year and then the people will be able to give a better estimate of a proper price for the business. Also, let us know the area this place is located.

 

The profit might be too high as I am not sure of the taxes/accounting charges along with the usual repairs and maintenance typical charges. I think the proper rent would be nearer to 40k baht per month with key money of around 1.5m baht.

 

 

FatherMojo

 

 

Edit: edited for key money

Edited January 19, 2010 by FatherMojo

[Kleyshay 0]

Fathermojo:

 

Yes I do get on with the owner, i have known him for about 12 years, from my first visit to Pattaya.

I am not interested providing every invoice or statement, if TSBA or Sunbelt want to do that for him and potential buyers, then fine.

Therefore I appreciate then you guys could then not possibly give accurate figure, though if you think 40k p/m plus 1.5m is about right, then thankyou for your input, and this business is then way overpriced.

It was more of a curious question, to which I seem to have spent far too long gathering information already and not spent enough time dilly dallying with the delights that Pattaya has to offer

 

Location is Pattaya Klang (Cental Road), Carrefour, by the way.

 

ChesireTom:

 

I am totally unaware of facts about the work permits / minimum salary, so whatever the figure is, it seems it would make this a non starter anyway.

And I see what you mean regarding the wages thing, thanks.

I'm happy to pay 600 baht especially peak season.

 

---------------------------------------------------------------------------------------------------------------------------------------------I just wondered if this could work as a business and was asking you guys your thoughts, and by the sound of it there are alot of additional costs which I did not state, and thankyou for highlighting them.

Like I said on an earlier post, I, IMHO I think that the only 'winners' in these businesses here in Thailand are the Thai landlord, it's no wonder I see so many places for sale or rent as I wander these streets.

[Fondles 94]

Is the place for free or is the purchase price hidden in there somewhere ???

[lovedog100 1,372]

First rule of business. Location, location, location. The place in question is not a good location. It is hard to find, and inconvenient for tourists. Just to go to walking street for example, your customer will have to get on a motorbike taxi, or flag down a baht buss. Many farang are uncomfortable on motorbike taxi's. That will give them a 100 bht ride on a baht bus each way just to go see walking street. Take that 200 bht, add it to your 600 bht a night, that is 800bht that they could use to find a hotel with in walking distance of walking street, beach road, or second road that has internet, and maybe even a pool.

 

I'm not, nor have ever been a hotel owner, so I'm not an expert, however I've talked with owners, and I believe 70% occupancy is considered successful, 50% failing. Check on that yourself, some times I have problems remembering details that are unimportant to me. Threw advertising you could increase business, again, that's an expense not listed in your costs. Monthly rentals to ex-pats and sex-pats could increase occupancy. That area is more ex-pat than tourist.

 

The Thai system of "Selling" a business is stacked in their favor. Farang should get it out of their head that they are buying anything. They are renting. In your hotel, the only thing that you will own will be your computer, toilet paper, soap, and your cleaning supplies. Everything else is owned by the landlord.

 

The key money system is a scam by the owner, and almost dooms you to failure from the start. Key money is typically 40-50% of the rent the owner wants paid in advance. If you fail as a guest house owner, the owner having 40% of ten rears rent paid in advance has years before he has to re-rent the building, and still not lose one bht. If you fail in 6 months, he has 3 1/2 years to find someone else to "sell" to. If he isn't on a beach sipping on a corona, he could rent it again in a year, to someone else that fails in 6 months. Now, he has made double the money on the building for several years. Good deal for him huh?

 

Five million bht represents the life savings of most people. If it is yours also, you are left with out operating capitol during a slump in business. What if the crappy Thai plumbing brakes and floods a floor, making that floor un-rentable, and damaging furniture, not to mention the cost of repairs. You may not have the money to advertise, or to make needed upgrades. If a couple of drunk young men trash one of your rooms, will you have the money to make repairs?

Things like air-con units, and refrigerators, TV's were all bought at the same time and are of the same brand. When one fails, you can expect to start repairing, or replacing them all.

Second rule of business: Have capitol available to run the business for one year, without it turning a profit.

Third rule of business: see number one.

My own fourth rule of business. If I have to work longer hours, have more stress, and make less money than I would working for someone else,,, Well you can see the obvious answer there.

Edited January 19, 2010 by lovedog100

[googlep 0]

First rule of business. Location, location, location. The place in question is not a good location. It is hard to find, and inconvenient for tourists. Just to go to walking street for example, your customer will have to get on a motorbike taxi, or flag down a baht buss. Many farang are uncomfortable on motorbike taxi's. That will give them a 100 bht ride on a baht bus each way just to go see walking street. Take that 200 bht, add it to your 600 bht a night, that is 800bht that they could use to find a hotel with in walking distance of walking street, beach road, or second road that has internet, and maybe even a pool.

 

I'm not, nor have ever been a hotel owner, so I'm not an expert, however I've talked with owners, and I believe 70% occupancy is considered successful, 50% failing. Check on that yourself, some times I have problems remembering details that are unimportant to me. Threw advertising you could increase business, again, that's an expense not listed in your costs. Monthly rentals to ex-pats and sex-pats could increase occupancy. That area is more ex-pat than tourist.

 

The Thai system of "Selling" a business is stacked in their favor. Farang should get it out of their head that they are buying anything. They are renting. In your hotel, the only thing that you will own will be your computer, toilet paper, soap, and your cleaning supplies. Everything else is owned by the landlord.

 

The key money system is a scam by the owner, and almost dooms you to failure from the start. Key money is typically 40-50% of the rent the owner wants paid in advance. If you fail as a guest house owner, the owner having 40% of ten rears rent paid in advance has years before he has to re-rent the building, and still not lose one bht. If you fail in 6 months, he has 3 1/2 years to find someone else to "sell" to. If he isn't on a beach sipping on a corona, he could rent it again in a year, to someone else that fails in 6 months. Now, he has made double the money on the building for several years. Good deal for him huh?

 

Five million bht represents the life savings of most people. If it is yours also, you are left with out operating capitol during a slump in business. What if the crappy Thai plumbing brakes and floods a floor, making that floor un-rentable, and damaging furniture, not to mention the cost of repairs. You may not have the money to advertise, or to make needed upgrades. If a couple of drunk young men trash one of your rooms, will you have the money to make repairs?

Things like air-con units, and refrigerators were all bought at the same time and are of the same brand. When one fails, you can expect to start repairing, or replacing them all.

Second rule of business: Have capitol available to run the business for one year, without it turning a profit.

Third rule of business: see number one.

My own fourth rule of business. If I have to work longer hours, have more stress, and make less money than I would working for someone else,,, Well you can see the obvious answer there.

sorry, answered the wrong post.

Edited January 19, 2010 by googlep

[Kleyshay 0]

Is the place for free or is the purchase price hidden in there somewhere ???

 

 

5m baht up front to lease the place for 10 years (I called it key money, maybe this is the incorrect term, apologies)

then 65000 baht p/m rent

 

Then by the sound of it, you then walk through the door and start losing money

[lovedog100 1,372]

 

 

5m baht up front to lease the place for 10 years (I called it key money, maybe this is the incorrect term, apologies)

then 65000 baht p/m rent

 

Then by the sound of it, you then walk through the door and start losing money

 

It sounds like you catch on quick The term key money is correct in that it's what the Thai's call it. I call it what it is, nonrefundable rent paid in advance.

[Kleyshay 0]

It sounds like you catch on quick The term key money is correct in that it's what the Thai's call it. I call it what it is, nonrefundable rent paid in advance.

 

I might not be the sharpest knife in the draw, but i did attend the occasonal maths class at school

 

So if after say 5 years you have had enough, regardless of if you are making a profit, could you just not try to 're-lease it' to someone else or do you just have no choice but to walk away with your money done ?

 

Also when one leases a business or even any leasehold property for that matter, anywhere in the world other than Thailand what is the initial payment called then? A purchase price ? Does it not equate to the same thing as key money ?

And what happens when the lease finishes, (in this case, when the 10 years is up), would you be required to pay another lump sum ?

 

I see flats in UK changing hands for an example £1m leasehold, (OK more than 10 years, granted), but is this not just rent in advance? In which case why not just choose another property and pay your rent monthly.

 

Or does this theory only apply to Thailand due to the land ownership issue ? Though I'm not sure how much land, Joe Trader owns with his Docklands penthouse flat.

[MM 6,562]

I might not be the sharpest knife in the draw, but i did attend the occasonal maths class at school

 

So if after say 5 years you have had enough, regardless of if you are making a profit, could you just not try to 're-lease it' to someone else or do you just have no choice but to walk away with your money done ?

 

Also when one leases a business or even any leasehold property for that matter, anywhere in the world other than Thailand what is the initial payment called then? A purchase price ? Does it not equate to the same thing as key money ?

And what happens when the lease finishes, (in this case, when the 10 years is up), would you be required to pay another lump sum ?

 

I see flats in UK changing hands for an example £1m leasehold, (OK more than 10 years, granted), but is this not just rent in advance? In which case why not just choose another property and pay your rent monthly.

 

Or does this theory only apply to Thailand due to the land ownership issue ? Though I'm not sure how much land, Joe Trader owns with his Docklands penthouse flat.

 

I think lovedog's description is quite apt. What distinguishes this from a purchase price is that it is a recurring amount (that can increase at lease end) that is paid whenever a lease commences. It really is prepaid non-refundable (and non-fixed) rent, paid each time you re-sign a lease.

 

Now, key money is not a requirement for all leases. Many landlords still charge a monthly full rental amount for the lease term without key money being required. Key money is just a way for the landlord to put all the risk on you while reaping the rewards of your going out of business before the lease ends. He still keeps a large proportion of the rental that would have been paid had you made it to the end of the lease period.

[lovedog100 1,372]

I think lovedog's description is quite apt. What distinguishes this from a purchase price is that it is a recurring amount (that can increase at lease end) that is paid whenever a lease commences. It really is prepaid non-refundable (and non-fixed) rent, paid each time you re-sign a lease.

 

Now, key money is not a requirement for all leases. Many landlords still charge a monthly full rental amount for the lease term without key money being required. Key money is just a way for the landlord to put all the risk on you while reaping the rewards of your going out of business before the lease ends. He still keeps a large proportion of the rental that would have been paid had you made it to the end of the lease period.

 

Looks like MM explained it better than I did. The lease sometimes can be sold to another party, if you have that clause put into the lease agreement. The lease terms are negotiable just as is the rent / key money amounts. I had a place that I was extremely interested in. The landlord agreed to a transferable lease, however she had to approve of the person taking over the lease. I thought I could end run around this by having the lease in a company name, and if things went bad, or it became very successful, I could just sell the company, then they got the lease with out having to be approved. She countered with her having to approve a change in officers or share holders in the company. That became a nonnegotiable sticking point with the both of us. I absolutely would not sign a lease that I could not sell with out her approval. I walked away from the deal. Here is why.

 

Take your case, 5 million key money up front. Then in 6 months or a year you find that you can't make money, or have to return home for what ever reason. If you could sell your lease, you could recoup some of the loss if not break even. Say you find someone to pay you 3 million for the lease, a 2 million loss to you is still better than a 5 million loss. You walk away with something. Now, if you find someone willing to pay you 3 million, and the landlord does not approve of the transfer, you are stuck, and going to lose your whole 5 million. It's in the landlords best interest not to approve of the transfer, and send you home bankrupt. The landlord is then free to contact the person that was interested in your lease and negotiate a deal on their own. Or just rent to someone else and get another 5 million key money.

 

This is where a good attorney earns their money, have one look over your lease before you sign. Do not use the good attorney that will save you money that is recommended by the landlord. The landlords recommended cheap attorney will cost you in the end. With out a doubt, that attorney will be the landlords attorney, a family member, or a business partner of the landlord.

[Bullfrog 2,224]

First rule of business. Location, location, location.

 

Yep agree..but my opinion to the OP is get yourself a TW,TG or thai friend that lives in a university city...buy student accommodation and rent that out.....That is the ONLY guaranteed money earner in the accomodation rental business....but you need a local that you can trust with his/her ear to the ground for any sign of financial weakness of any of the existing property owners...it can take years...In the meantime keep your money in the bank!!

[mrlasvegas 124]

I would never lease a guesthouse. For a building of this scale buying is really your better option. You have way too little control over the future of your establishment. Plus the owner can always sell to someone with other plans. Voiding your contract. In this current market, interest rates are way too good to be stuck in lease mode. If you have a small amount of base capital, look to buy. And remember to end up paying about 60% of asking price based on P/L sheets and a valuation. If you are not familiar with commercial real estate venacular, P/L are profit and loss. Valuations are done by looking at market room rates times number of units. Then there is a yearly adjustment factored in along with a multiplying factor of 10 or less. You would be good to get a Thai (absolutely NO FARANG)

real estate specialist to consult. Should be certified for commercial real estate.

[jacko 8,778]

It sounds like you catch on quick The term key money is correct in that it's what the Thai's call it. I call it what it is, nonrefundable rent paid in advance.

Yeah, 10 years in advance, where else could a renter get that deal?

[Kleyshay 0]

Looks like MM explained it better than I did. The lease sometimes can be sold to another party, if you have that clause put into the lease agreement. The lease terms are negotiable just as is the rent / key money amounts. I had a place that I was extremely interested in. The landlord agreed to a transferable lease, however she had to approve of the person taking over the lease. I thought I could end run around this by having the lease in a company name, and if things went bad, or it became very successful, I could just sell the company, then they got the lease with out having to be approved. She countered with her having to approve a change in officers or share holders in the company. That became a nonnegotiable sticking point with the both of us. I absolutely would not sign a lease that I could not sell with out her approval. I walked away from the deal. Here is why.

 

Take your case, 5 million key money up front. Then in 6 months or a year you find that you can't make money, or have to return home for what ever reason. If you could sell your lease, you could recoup some of the loss if not break even. Say you find someone to pay you 3 million for the lease, a 2 million loss to you is still better than a 5 million loss. You walk away with something. Now, if you find someone willing to pay you 3 million, and the landlord does not approve of the transfer, you are stuck, and going to lose your whole 5 million. It's in the landlords best interest not to approve of the transfer, and send you home bankrupt. The landlord is then free to contact the person that was interested in your lease and negotiate a deal on their own. Or just rent to someone else and get another 5 million key money.

 

This is where a good attorney earns their money, have one look over your lease before you sign. Do not use the good attorney that will save you money that is recommended by the landlord. The landlords recommended cheap attorney will cost you in the end. With out a doubt, that attorney will be the landlords attorney, a family member, or a business partner of the landlord.

 

OK, thanks, MM & Lovedog, I see what you are saying. Although could it be the 'key money' isn't the issue, it's what's written in the leasehold contact, that matters, as that could possibly provide a way out if need be, which judging by the replies, is want the majority of people require.

As there seems to be so much negativity against this so called 'key money', I am surprised ANYONE actually pays it, and therefore it still exists.

Keeping with the original case, change the figure to 1.5m as was suggested would be a more appropriate sum, surely everyone would be still be saying "Yes, but it's 10 years rent in advance", because the above theory would still apply.

It seems the general opinion is that to aquire the ideal business, no key money should be paid and just a higher rent each month handed over, that way if the person has to, or wants to, could, easily just walk away, so the advantage, for want of a better word, would then be handed over to the renter, but then you could ask why would the landlord put himself in such a position either. Does this actually happen ? He would still own the building agreed, but would then be forced to try and find another renter, while his property sits idle not making him money.

I guess a fine balance of what the guy is prepared to 'lose' and what the landlord is prepared to 'win' has to be found.

I hear many people refer to Thailand by saying only spend what you are prepared to lose, surely that applies to everyday life thoughout the world. Whatever you decide, be it buying a car, getting yourself a wife or whatever, there is always a potential for things to go wrong and you have to throw money at it to make it work or try and sell at a loss, or even walk away from it totally losing everything.

Although in no way am I trying to condone selling the wife at a loss.

[torrenova 644]

And also because a lease of more than 3 years has to be recorded on property, the rent is listed and taxes accrue from that. Now if half the rent comes in the form of a bag of money not listed on the property paperwork (other than some contract), then no taxes are paid. Thus, the true value of the "rent" being paid up front is vastly increased as it is not taxed and massively improves the landlord's up front cashflow.

 

If achievable interest rates were 10% then the 5m invested would give 500k per year without touching the capital and yet the landlord gets this. He then invests it at 10%pa and (without using NPVs etc.) he gets about 10m extra !