August 25, 2015
70% of Filipinos own their homes, a much larger percentage than the less than 1% who invests in stocks. Because properties are tangible and concrete, as compared to stocks and bonds, Filipinos prefer to invest in real estate than other instruments. However, as with anything, it takes practice and knowledge to reap the rewards of property investing.
We interviewed Giacomo Puccini, president of Embrace Realty, to explain the particulars of real estate investing – from renting, flipping, and buy-and-hold investing. But first, here’s a checklist you can use to determine if you’re ready to be a real estate investor:
1. I can afford the 20% down payment.
Browse through property listings online and you’ll see that it’s hard to find a house and lot for sale (in the city) below Php 4 million. That means a Php 800,000 down payment – and most banks won’t approve you for a house loan if you can’t afford the down payment. On the other hand, if you have the cash reserves to make a down payment, that’s one sign you’re ready.
2. I have an emergency fund and/or disposable income.
“Whether you’re renting out your property or living in it, you, the owner, are in charge of maintenance and repair costs,” Puccini says. “Also, if you’re a rentor and your tenant’s contract ends, you will be paying the mortgage and other associated costs until the property is occupied.”
Many fail to include additional costs (homeowner’s association fees, utility payments, and maintenance costs, etc.) when computing if they can afford the property. Having an emergency fund and/or disposable income prepares you for when you need to repair your floor tiles or hire a repairman to fix plumbing leaks.
3. I am knowledgeable about the market.
“Talk to real estate brokers. You’ll get better insight on how the market is working and where to focus and what to buy,” Puccini continues.
Some advertisements for pre-selling condominiums promote buying at X price and selling at a 50% profit margin (or more). Many grab the opportunity to buy at a discount during pre-selling, but once the property is ready for occupancy, they have a difficult time renting the unit out at the price advertised.
“Talking to real estate brokers and even current renters in nearby properties gives you a more realistic condition of the market,” he advises.
It pays to do your research when you’re interested in buying property to get the most out of your investment.
“Renting, buying-and-selling, and long-term property investing are three ways to earn in real estate. There are different risks and strategies for each one,” Puccini says. Read the sections below to get a glimpse of each type and determine which fits you best as an investor.
17% of Filipinos own real property other than their homes. Especially in university towns and near central business districts (CBDs), you can make good money renting your property. Before you rent out, calculate your return on investment (ROI) based on how much you’ll rent out the property and your monthly amortization. If you’re renting out the property for Php 20,000, but you’re paying the same or even more on your mortgage, then your investment is not profitable.
What to look out for
As mentioned above, as the landlord, you’re in charge of repair and maintenance costs. It’s your tenant’s responsibility to report any property-related issues, but you’ll be covering the expenses. That’s why it’s important to have disposable income or an emergency fund.
If you have a large cash reserve and are good at handling your money and turning it around, you can buy depreciated properties, fix it up, and sell at a higher price, then repeat. Not only does this take a lot of work, but you need to have a good eye for finding properties that are promising and profitable after a bit of fixing.
Some factors to consider when buying a property are your target market’s needs (commuter versus car owner), surrounding developments (distance to schools, hospitals, etc.), and future growth (future roads and commercial establishments). When you consider these factors, it will be easier to profit from the property with minimal renovations on your part.
What to look out for
When it comes to fixer-uppers, calculate how much money you can spend on renovations and still make a return. Don’t make the mistake of spending too much on renovations and later on having difficulty selling the property. Always do the math.
This is when you buy a property and sell it decades down the road. This is usually for people who have too much money and need a place to park it. “It’s a forced savings account,” says Puccini. “If you let the property sit and sell it after 30 years, you cash out with a large reserve; however, if you’re wise about real estate, you’ll use your long-term investments to generate income regularly instead of decades down the road.”
What to look out for
Instead of letting your property sit for decades not generating income, monetize it. Remember that you’re still paying for fees such as amortization, utility payments, maintenance costs, and homeowner’s association fees to name a few, so let your property work for you. Rent it out if you’re not living in it. You’ll be generating income at regular intervals instead of waiting for thirty years to make a return on your investment.
Real estate is an investment everyone should consider; however, entering this market differs from person to person. An OFW, since he’s earning in a stronger currency, can invest in Philippine properties earlier than someone earning less, while a person starting a business might hold off buying real estate since his business also requires a continuous injection of capital until it becomes profitable.
Real estate investing is open for everyone, but it is not for everyone. “Aside from the large cash reserve and disposable income, you always need to do the math,” stressed Puccini. Some calculations to consider are a cost-benefit analysis and a break-even formula. “If the math works out, go for it.”