How to Invest in Real Estate: A Quick Guide
By: Venus Zoleta
Published on: December 23, 2020 . Last updated: January 7, 2021 Category: Personal Finance
Because shelter is a basic human need and properties are tangible assets, real estate is generally considered safer than other investments like bonds and stocks, even for beginners. Stocks, in particular, are prone to price fluctuations due to changes in market conditions, while real estate tends to grow in value over time.
However, as with anything, it takes practice and knowledge to reap the rewards of a real estate investment. Here’s what first-time real estate investors should know about how to invest in real estate in the Philippines.
Table of Contents
- What is Real Estate Investment?
- Where Can I Invest?
- Types of Real Estate Investments
- How to Make Money in Real Estate
- Is Investing in Real Estate in the Philippines a Good Idea?
- How to Invest in Real Estate in the Philippines
- Final Thoughts
What is Real Estate Investment?
Real estate investment is the ownership of properties such as land, houses, buildings, and other things above and below the land for generating income, as opposed to buying just for residence or occupancy purposes.
Where Can I Invest?
Running a real estate business involves buying and selling or leasing properties to build wealth and diversify an investment portfolio.
Property investors in the Philippines can earn money from any of these three types of real estate:
- Residential properties – House and lots, townhouses, condominiums, and other structures where people live or stay
- Commercial properties – Office buildings, retail stores, shopping centers, hotels, and other structures that are leased out to companies or small businesses
- Industrial properties – Manufacturing plants, warehouses, and other facilities used for research, production, storage, and distribution of goods
Not all investments have to do with physical properties, though. Real estate investors may also buy and sell shares of companies that own commercial properties, as in the case of real estate investment trusts.
Types of Real Estate Investments
Real estate investing takes several forms. You may invest directly in real estate through buying and selling properties as a business or indirectly through real estate investment trusts (REITS). Each type of real estate investment comes with different risks and strategies.
Read on to get a glimpse of each type and determine which fits you best as an investor.
1. Buy and Sell
If you have a large cash reserve and are good at handling your money and turning it around, you can buy depreciated properties, fix them up, and sell at a higher price, then repeat. This real estate investment is also called house flipping.
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 for flipping 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.
2. Buy and Hold
This traditional way to invest in real estate involves buying a property and selling it decades down the road. Such a long-term real estate investment is usually for people who have too much money and need a place to park it.
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 30 years to make a return on your investment.
3. Rental Properties
Especially in university towns and near central business districts (CBDs), you can earn a regular income from leasing your property. Before you do so, 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 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.
4. Real Estate Investment Trusts
Intimidated by the prospect of spending millions on buying a property in the Philippines? You can still invest in real estate without owning and managing a physical property through a real estate investment trust or REIT.
REIT investing works very much like buying and selling regular stocks. The only difference is that you’re investing in publicly listed companies that operate commercial real estate. REITs are dividend-paying stocks, so investors receive regular income from them.
The first REIT in the Philippines (and the only one so far, as of this writing) is the Ayala Land REIT (AREIT), which was listed on the Philippine Stock Exchange (PSE) in August 2020. More REITs are expected to come up in the coming years, such as Double Dragon’s DDMP REIT, Megaworld REIT, Ortigas Land REIT, and Robinsons Land Office REIT.
How to Make Money in Real Estate
Real estate investors build wealth through capital appreciation, regular income payments, or both. Here are the particulars of how to earn money in real estate.
Increasing Property Value
This is the most common way real estate investors make money. Capital appreciation is the difference between the purchase price and the selling price of a real estate investment. It happens when a property or REIT stock you’re investing in rises in value over time.
An increase in property value is driven by these factors:
- Location and development e.g., shopping centers, office buildings, transportation hubs, and other structures near the property
- Home improvements e.g., kitchen remodeling, additional rooms, and other upgrades that make the property more attractive to potential buyers
Regular Income Payments
A real estate investment also generates passive income in the form of rent or dividends.
If you convert your home or commercial space into a rental property, your tenants pay you a fixed amount every month. This ensures a steady cash flow for your real estate business as long as there’s a demand for rental properties in your location.
If you invest in REITs, you’re guaranteed income payments because the law requires REIT companies to distribute dividends to their shareholders. REIT companies make money from business activities (such as consumer spending and BPO operations) that depend on their commercial property. The higher their earnings are, the higher dividends their investors receive.
Is Investing in Real Estate in the Philippines a Good Idea?
Generally, a real estate investment in the Philippines is a good idea given its resilient nature. But like other investments, real estate comes with risks. Here are the pros and cons that real estate investors must consider when learning about how to invest in real estate in the Philippines.
Real Estate Investment Advantages
Stable Demand for Properties
Contrary to what you might expect, Philippine real estate has shown resilience despite the COVID-19 crisis. In fact, the pandemic has resulted in favorable market conditions, such as lowered interest rates and extended payment terms.
There’s a stable demand for pre-selling condo projects in Metro Manila even during the pandemic, according to Colliers International Philippines. The global real estate investment management company noted that from January to September 2020, more condo units were sold (25,000) than launched (16,000).
Steady Property Price Increase
Property value growth has not slowed down amid the pandemic, based on the Residential Real Estate Price Index by the Bangko Sentral ng Pilipinas (BSP).
Prices of residential property prices in the Philippines increased by 27.1% in the second quarter of 2020—the highest year-on-year growth rate since 2016. Among the biggest contributors to the housing price increase were home loans for buying condos and single attached/detached houses.
The steady price appreciation makes investing in real estate less risky than stocks. Real estate may not offer the same earning potential as stocks, but it isn’t as prone to price fluctuations.
If your investments consist mostly of stocks, adding a real estate investment to your portfolio can lower its volatility and your risk of losing money.
Real Estate Investment Disadvantages
When you invest in physical properties, you need a significant amount—whether your own money or loaned—for acquiring, maintaining, and improving a property.
Lack of Liquidity
Turning a property into cash is not as quick and easy as when you sell stocks. That’s not how a real estate investment works. It takes time to find the right buyer who’s willing to buy at the right price. If you have to cash out immediately, you might end up selling the property below its market value or at a loss.
Negative Cash Flow
There’s a risk of losing money due to various problems with owning and managing a property, including the following:
- Hidden structural defects e.g., leaky roof, foundation issues, etc.
- Property requiring too much maintenance
- Bad location
- High vacancies (for rental properties)
- Not charging enough rent
- Problem tenants i.e., pay late or don’t pay at all, damage the property, etc.
How to Invest in Real Estate in the Philippines
“How to invest in real estate in the Philippines?” Here are the steps to take to kickstart your journey as a real estate investor.
1. Determine If You’re Financially Ready
Here’s a checklist you can use to find out if you’re ready to be a real estate investor.
You Can Afford the 20% Down Payment
“Am I ready to buy real estate?” This is among the first things to ask yourself when deciding whether buying a property in the Philippines makes sense for you.
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 1 million. That means a PHP 200,000+ down payment. If you have the cash reserves to make a down payment, that’s one sign you’re ready.
You Can Afford Investing in REITs
Is the down payment for a property purchase out of your budget? If so, most banks won’t approve you for a home loan. However, you can still enter the real estate market without shelling out millions of pesos through investing in REITs.
You Have an Emergency Fund and/or Disposable Income
Maintenance and repairs are among a property owner’s responsibilities, and that costs money. Also, if you’re a landlord and your tenant’s contract ends, you’ll be shouldering the mortgage and other associated costs until the property is occupied again.
Many fail to include additional costs such as homeowner’s association fees, utility payments, and maintenance costs when computing if they can afford a 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.
2. Study the Philippine Housing Market
To get the most out of your investment, it pays to do your research, whether you’re interested in buying a property or a REIT stock.
Talking to real estate brokers, for example, will give you deeper insights into how the market is working, where to focus on, and what to buy.
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.
This is why it’s important to talk to brokers and landlords in nearby properties to get a more realistic perspective of the real estate market condition.
3. Decide How Much You’ll Want to Invest
Before you actually start investing in real estate, set a realistic budget first. Never invest money you can’t afford to lose. If you have cash on hand or can loan enough funds for buying a property, then go for it.
However, if you can spend only at least PHP 3,000 monthly for a real estate investment, buying REIT stocks is the next best thing.
4. Pick and Buy Your First Investment
When is the best time to invest in real estate? Not tomorrow or next year, but now—as long as you’re financially capable and sure about where to invest your money.
If you’ve decided on buying your first property, start looking at property listings online. You may also know your options in the market and purchase through a real estate agent.
Want to invest in REIT stocks instead? Open an account with stockbrokers like COL Financial, BDO Securities, BPI Trade, or FirstMetroSec. Using a stock trading platform with any of these online brokers enables you to buy and sell REIT shares in the Philippines.
If you’re investing in stocks, which means you already have a stock brokerage account, all you have to do to start buying REIT stocks is to place an order as you would with a regular stock.
Real estate is a great long-term investment everyone should consider; however, entering this market differs from person to person. You always need to do the math to see if you must go for it. And when you do, knowing how to invest in real estate just won’t cut it—you still need to do calculations to create a sound strategy and minimize risks.