About Real Estate

It is well documented, that purchasing a house or a condo is a major contribution to building wealth. It’s a large and serious investment that requires commitment over a long period of time (typically anywhere between 10-30 years), and one which offers several benefits, financially and personally. For most people this is also what they would consider a “safe” investment which they feel comfortable with.

Phrases like “real estate never looses value”, or “when all things go down, I will still have my property” are pretty common, especially when it comes to discussions about whether you should invest in real estate, or in stocks.

It’s more complicated than that

I have diversified my investments across several segments, including real estate. However I have not purchased a house or condo. I have bought land. 1,2 ha of agricultural land, and another 0,54 ha of land that is destined for future housing. The agricultural land is currently being leased out to a neighbor of my parents, with a very simple arrangement that doesn’t really provide me any money, but instead supports my parents with agricultural goods for daily use (think of potatoes, lettuce, cucumbers, onions, etc.), and it covers any involved taxes for that land. The other 0,54 ha I bought 6 years ago on an auction. It’s a piece of land right across the land of my parents, and I bought it with the idea of building a vacation home out there.

After a couple of years I realized that this vacation home will never happen, so I decided to evaluate the market and to see if I can sell that land. Lucky enough, prices have increased greatly and I expect to come out of this investment with a good deal.

What largely contributed to the price increase is the great location of the village, the diversified and international folks there (we got people from Poland, Germany, Switzerland, France, and Italy) and the fact that people who live there care about their properties and their houses, contributing to a good look and comfortable atmosphere of the entire village. The next small town is only 5 km away, the next larger city only 30 km, and if you want to go international: It’s only some 120 km to Berlin in Germany. Great for a weekend trip.

All this contributes greatly to the location, but there are tons of other examples where things can go very wrong. Mismanagement of land, houses and condos can significantly contribute to a depreciation in value. Having the “wrong” neighbors can diminish the reputation of the location and drive prices down, rather than up. And building “on-the-cheap” can create early deterioration of look and shape of a house or condo, requiring additional investments not only from yourself, but also from all those around you in order for a location to gain value.

When things go wrong, real estate can turn out to be not the dream package that your parents were always talking about. There are several and significant risks involved, which are largely out of your control. Putting money into a piece of land, a house, or a condo, is surely not risk-free and real estate doesn’t always gain in value.

Do your research

Similarly with stocks, you need to do some research before you put money into this sector. Check and evaluate the location, visit the place, say hello to some neighbors. If it’s a country-side village, take a look at the condition of other houses nearby, the roads, bridges, public transport, water supply and electricity. Where is the next restaurant? How are small businesses doing there? Is it a family or a single place? Is there a school? A church? Wha’ts the median age of the population, and where is the next doctor or hospital?

Tick off some of these boxes, do the due diligence, and see your odds of putting your money into the right place increasing dramatically. Of course there is still no guarantee, but there never is. After all, it’s all not about guaranteeing anything, but only about increasing the odds to do the right thing.

Oh, and don’t get into the discussion whether stocks or real estate is better. It’s pointless. If you can, just do both.

About paying taxes in Thailand

I got to admit, I don’t like to talk about taxes. Depending on where you live it is either a complicated, or very complicated topic with lots of things to know, to consider, and plenty of pitfalls. But of course, this is only the case because taxes are so important. Taxes can make all the difference when it comes to building wealth, and like it or not, it’s worth spending some time to learn about the challenges and opportunities that come with the tax code in your country.

I am living in Thailand and the tax code here is rather simple. For investors, it is a paradise. There is no capital gains tax, meaning that no matter when and how much I profit from trading equities, there are no taxes due at any point. Not today, nor tomorrow. There is a withholding tax on dividends in the acceptable amount of 10%. There are no loopholes or exceptions to avoid it, so the bank will deduct it automatically upon pay-out. There is no need to declare or report anything when you do your tax declaration. Simple and fast.

But there are hidden opportunities

I am mostly trading regular equities and ETFs and since the regulations are so easy, the tax part was never really on my radar. But I certainly should have invested more time to learn about it much earlier on.

I have learned by now that the government is actually actively supporting investors in building wealth through retirement funds. As an employee with regular income in Thailand, I can invest in mutual funds designated for my retirement, and receive significant tax benefits for doing that.

The so-called RMFs (Retirement Mutual Funds) can invest in either foreign or domestic equities or funds, and need to be hold for a minimum of 5 years before withdrawal. From your total annual investment, up to THB 500.000 per year can be deducted from your total taxable income. The tax code for personal income in Thailand in 2021 looks like this:

Taxable Income
(baht)
Tax Rate
(%)
0-150,000Exempt
more than 150,000 but less than 300,0005
more than 300,000 but less than 500,00010
more than 500,000 but less than 750,00015
more than 750,000 but less than 1,000,00020
more than 1,000,000 but less than 2,000,00025
more than 2,000,000 but less than 4,000,00030
Over 4,000,00035

Now here is how this works. Let’s say you have an income of THB 2,600,000 per year.
You will then pay:

THB 0 – on the first THB 150,000 (total 150,000)
THB 7,500 (5%) – on the next THB 150,000 (total 300,000)
THB 20,000 (10%) – on the next THB 200,000 (total 500,000)
THB 37,500 (15%) – on the next THB 250,000 (total 750,000)
THB 50,000 (20%) – on the next THB 250,000 (total 1,000,000)
THB 250,000 (25%) – on the next THB 1,000,000 (total 2,000,000) and finally
THB 180,000 (30%) – on the last THB 600,000 (total 2,600,000).

Your total tax will be therefore: THB 545,000 or 20,96%.

If you now max out your RMF contribution up to THB 500,000, you can deduct this investment from your total taxable income. This would reduce the total amount from THB 2,600,000 to only THB 2,100,000. Therefore your tax obligations for the last 30% bracket would also shrink, from THB 180,000 down to only THB 30,000. After your tax declaration you will get a refund of THB 150,000.

So on the one hand you get a tax benefit. But as an investor, I look at it another way: I receive effectively a guaranteed 30% annual return on my investment.

Do some reading

Every country has its own rules and regulations, but since we are all part of the same system, there are similar opportunities everywhere. Whether it’s the 401k in the US, the RMF in Thailand, or the “Arbeitnehmersparzulage” in Germany. Chances are that the tax code in your country offers you opportunities to boost your savings and investments. These can be quite significant and strongly support you in reaching your financial goals. So don’t be lazy. Do some reading, educate yourself, and grab the opportunities which have been designed for you to get the most out of the system.