Less than 10% of the population in the Philippines owns at least one investment property. Chances are, if you’re reading this, you’re either thinking about starting that, or have already started.
Hi there new investor!
A key to success is to get pointed in the right direction and then executing quickly. But, often, new real estate investors get one or both of these wrong.
You’ve heard of plenty of stories, where someone got pointed in the wrong direction and ended up buying the wrong asset. Or another who had to buy the right asset but waited to long, and bought it at a price point that was too high.
There are plenty of pitfalls when starting real estate investment, that can vary, and be difficult to see. It can be a massive learning curve, and even researching a lot can only take you so far.
But, by answering these questions you CAN form a solid base that will save you a lot of money, and also make you a lot of money. Right away. Here’s how you can start becoming a Master Real Estate Investor:
1. What are your goals?
No amount of research will answer this for you. Every investor invests for their own reasons, the reason why you will invest will be unique to you.
“Getting rich” is not real answer, as money is only a means to an end. You goals have to do with what you want in life. Do you want to give yourself the freedom to study? Do you want to pursue a startup business? Do you want to leave something for the kids?
Find some time to think on this matter, as it gives you a driving reason to sacrifice, as that is what investment is. Sacrificing today, for a more enjoyable tomorrow.
This will be your guiding mantra. When there are hard choices to make this will be what you go back to, and it will be what you want. Think hard on it because this must be a reason that you will stick to.
2. Do you know the laws and costs of buying?
While self-evident, this is a complex thing to understand. The Philippines is not easy to operate in. That said, nothing good ever came easy, and the Philippines can be a lucrative market.
The first thing to understand is that Philippine property has foreign ownership restrictions. Foreigners cannot own land. Foreigners can only own standing structures and condominiums. That said, for every condominium project foreigners can only own up to 40% of the whole project. That means, if there are 100 units, only 40 are for someone not of Philippine citizenship. Usually this is not an issue as foreigners only make up a tiny percentage of all buyers. But, with increasing foreign investment, this restriction may start to come into play.
The second thing to understand is that Philippine property transactions have lots of taxes and fees, some, confusingly named. Seller’s are responsible for a capital gains tax of 6% on the entire value of the transaction, regardless of whether it made a capital gain or loss. Buyers are responsible for a documentary stamp tax of 1.5%, a transfer tax of no more than 0.75% and a tiered registration fee that goes up to P8,796 when the property is worth of P1,700,000 with an extra P90 for every P20,000 there after. Seller’s are also responsible for payment of service fees such as an agent fee of usually 5.0% and a notarial fee for the facilitating lawyer that is often calculated as up to 1%. The fee for processing (unless you’re willing to run the gauntlet yourself) can cost P30,000 or more. Of course, who pays these fees is between the seller and buyer as governments often don’t care who pays as long as it is.
Finally, real estate buyers have protections, although you won’t be told about them.
Firstly, if you have bought from a developer on a payment plan, you are subject to the Maceda Law, which allows one of two rights depending on how long you have been paying for. If you had paid 2 or more years worth of installments and you happen to not pay one month you have a 1 month grace period per year of payment every five years, or, in the case you decide you no longer want to buy the property, a refund of 50% of your payments. If you haven’t paid 2 years of installments yet, not to worry, you still get at least 60 days to pay what’s owed. This, of course, means, if you have been paying for over a year, but you want to backout, it’s more logical to withdraw after 2 years and seek a refund under the Maceda Law.
Secondly, developers are also subject to the Presidential Decree 957, which allows the government to revoke a developers business registration and license to sell should it be dodgy enough to fall under the following conditions:
- Is insolvent; or
- has violated any of the provisions of this Decree or any applicable rule or regulation of the Authority, or any undertaking of his/its performance bond; or
- Has been or is engaged or is about to engage in fraudulent transactions; or
- Has made any misrepresentation in any prospectus, brochure, circular or other literature about the subdivision project or condominium project that has been distributed to prospective buyers; or
- Is of bad business repute; or
- Does not conduct his business in accordance with law or sound business principles
This can seen in a pretty flexible way, but often it applies to late turnover, where a developer cannot forfeit your payment in favor of themselves if a project is not completed at it’s stated completion date; as well as misleading advertisement.
3. Have you done your Due Diligence?
This is a given. But it’s funny how often it’s ignored. The Philippines is not kind to the fool-hardy.
For example, there was the story of an Australian investor. He had found a fantastic apartment for a cheap price in a central part of Cebu City. The owner had the original owners copy of the title to show him when he went to inspect the property. But it was only the first page, and the title didn’t show the owner’s name. She said it was under the original owner’s name as way of avoiding tax and that it would transfer directly from that person to him. He agreed, and the property was sold. It wasn’t until three months later, when the Australian man went to check on how the title transfer was going did he realize that he had been duped. The supposed owner had borrowed the title from her friend, and ran with the money. She was nowhere.
While this is an extreme case, it’s not an uncommon occurrence. Almost all property transactions are still done on paper by hand, which leaves loopholes a plenty, not to mention human error (which you will end up paying for anyway).
After inspecting a property for damage, the first step is to do a title search. You could do it yourself, it takes a week, but if you want it faster talk to someone like Jobelle.
After that, you will need to engage a trustworthy real estate specialist (again, like Jobelle), who will be able to advise on the required documentation, and will let you know if anything seems wierd.
The second form of due diligence that is not done is this: is the real estate investment actually an investment? To know this you need someone with strong market knowledge and the developed tools of analysis to take emotion out of the transaction. Is there a high likelihood it will provide you what you want? Does it fit within your goals? You can contact us at Li & Hungerford to find out yourself whether it meets your criteria. Remember to always ask questions and be observant. A true professional will be happy to answer and provide solutions for you.
4. What’s your plan for managing it?
When buying real estate, property management is often the last thing you’re thinking of. Who cares who manages the property as long as it makes money, right?
In our analysis of properties, particularly condominiums, that maintained their value in real terms over a long period of time, high quality property management was the determining factor.
High quality property management teams are able to maximize your property’s occupancy rate and rental return. High quality property management teams preserve the condition of the building elongating the useful life of your property. Finally, high quality property management teams are communicative and always remit your money.
Getting the best property management for your property is a smart idea. In investment terms, it is a small premium every month that gives much larger returns down the track.
So the key take away is high quality property management protects your asset and adds lots to it’s value. Would you forgo this to save a few pesos?
5. Do you understand the ongoing costs involved?
So many people forget this part. After buying many only look at the cost and measure it against the rent.
While you can redirect the cost of utilities to the tenant, and sometimes the condominium dues (which can eat into between 5-20% of your rental returns if not), you will need to account for fixing or replacing things that break (another 5% of your rental returns) that aren’t part of the condominium corporation’s responsibility.
You also need to pay real property tax every year. It’s 1% per annum in Cebu City, but if you miss paying it, you will get a hefty bill from the Bureau of Internal Revenue.
6. Do you have a good tenant?
Tenants always present themselves in the best light, and there is no process of application for tenancies in the Philippines. So how do you know if you’re onto a good tenant or not?
Ask a lot of questions about their background, their sources of income and their jobs. Also get the help of a real estate specialist such as Jobelle. With their years of experience, they can predict the behavior of tenants, based on whether they’re being evasive, vague, or difficult to negotiate with. These behaviour’s should ring alarm bells, and your real estate specialist will be the one best able to answer them.
A bad tenant can destroy your unit; be difficult to collect from resulting in unstable cash flow; and cause arguments with neighbours that could lead to legal action.
7. Are you ready?
As a new real estate investor, these questions can induce analysis paralysis. It can be a scary market out there. But one thing to remember is that while there’s a 5% chance of loss when everything is right, to not do anything would mean an 100% chance of loss, not least to inflation.
The easiest way to dip your toes into the market is to start with a lower cost property, with plenty of funds as backup. Surround yourself with a trustworthy real estate professional, such as Jobelle, solid research, like what we provide at Li & Hungerford, and a top property management team, one which Jobelle manages. That way you place yourself in the best position for success.
Then all you need to do is jump in!