Strong Returns on Rentals

One of the reasons to invest in the Dubai/Ajman region is the great return on investment that you get from rentals. The philosophy in Dubai is to provide transparency for all parties and transactions to level the playing field.

The Dubai Land Department created the Real Estate Regulatory Agency (RERA) which monitor's the market, suggests guidelines for doing business, promotes transaction transparency and provides investor security. Ajman is close behind Dubai in enacting similar property laws and governing bodies. Ajman is the new Dubai. New construction and increased demand are in this area close to the Dubai community. Ajman is where the best growth opportunities are today.

An example of business guidelines that the RERA is promoting is the creation of their new Residential Rental Index due out in the next couple of weeks. This index is to provide a guideline of rental rates in the various parts of Dubai so that landlords and tenants alike can see for themselves competitive pricing and practices in the marketplace. There is no law that says a landlord must follow the guideline so they are free to charge whatever they want. In support of the new rental index, RERA says "this index is a quality step to benefit the rental market, which has seen higher returns in Dubai than other real estate markets globally."

One might suspect that a guide like this could actually put a damper on prices, but the real fear is that rents will rise too quickly. Transparency enables all parties to see the elements of the market providing insight to pricing and other business decisions. In comparison, it's much like the laws in the U.S. that govern gasoline stations having to post their prices in a conspicuous place. Everyone sees the price, buyers make informed decisions based on what they see, and competitors set their pricing based on the competition surrounding them. A gallon of gas costing $3.00 twenty miles away at Station "A" has little effect on Station "B's" business, but knowing what the guy down the street from "B" is charging makes a huge difference on "B's" pricing strategy.

Another feature of the Dubai rental market is the rental increase caps put in place over the last few years. Unlike rent control in America where municipalities put caps on rents, and do not increase the rents along with the rate of inflation or other financial factors, this causes a severe negative impact on ROI. RERA suggests caps on rent that appear to be based on prevailing economic conditions. The 2009 annual rental increase cap is set at 5%. This is the same as last year. The year before that, 2007, when things were stronger the cap was set at 7%, and in years 2006 and 2005 when the market was really hot, the caps were set at 15%. This does not give rise to creating New York tenement buildings in Dubai. RERA's hope is that the rental index will eliminate the need for caps in the future.

The typical rent for new units purchased is about 12% of the purchase price. So for a $450,000 unit one can expect to receive about $4,500 per month. Try getting that here in the U.S. Of course you do have management expenses to consider. If you figure 15% in expenses that's still a healthy 10% return on investment.

Another unique factor regarding rentals in the Dubai/Ajman region is that the tenant pays a fee to the real estate broker for finding their unit. This is unlike what we are used to here in the States where the landlord pays the broker a percentage of the rent just to find a tenant. Brokers here often charge as high as two months rent for this service. Then there is management costs on top of that.

It is customary in Dubai and Ajman for tenants to make rent payments quarterly, semi-annually or annually in advance. There are monthly rentals, but most leases are written with the larger payments. As an experienced landlord myself dealing with monthly payments, over the years I have had many tenants bounce checks on me. I am forced to deal with them in collecting the rent, putting them on a cash or money order status or having to evict. In the U.A.E. people do not often bounce checks. Should it happen the person bouncing the check could be jailed for up to three years.

All-in-all I am of the opinion that you cannot find a safer, stronger or wiser bet than to purchase residential units in Dubai or Ajman for healthy ROI. Both of these emirates are pro-investment and have real estate laws that protect buyers and owners of property.

If you would like more information about investing in property or multiple properties, Emerald View Has units that range from as low as $85,000 to $5,000,000. Send me an e-mail and I will be happy to put you on the right track.