One advantage that real estate can have over other forms of investment is that it will always have value.
So can real estate be a bad investment then? Yes.
In the worst case scenario you will be left with the value of the land minus the cost of removal or demolition. That can quickly lead to negative value.
These red flags come down to more than just what it’s price is. We’re talking about real, structural problems. Some of these will require additional investment from yourself, others will be unfixable short of major remodeling or acts of God.
So what are these red flags?
Is there a large squatter population nearby? Do you hear gun shots in the background? Do arguments arise often and violently? Has the area been recently featured in the newspaper after it’s 20th police raid?
You are in a terrible neighborhood.
These are areas that are high in crime, low in infrastructural investment, and far from access to municipal services. A property in this area may cost less, but you’re going to get low quality tenants, your property is likely to degrade faster, and you will never be able to earn adequate rental returns.
Keep in mind that the costs of maintenance and repair are generally inelastic. Need to repaint or remodel a room? Those costs are fixed, and low rental returns mean that you’re going to take a while before you recoup it’s cost, or, more likely, another repair will have to be addressed before that has happened.
Tenants willing to live in these areas are also usually of a lower quality. They have much less secure income streams, are much more likely to fall behind in rent, and, in our experience, also almost certainly more likely to abuse your property and then become argumentative and destructive when it’s pointed out to them. They simply won’t be worth the effort.
You should never invest in an environment like this. Get out now.
Roads that resemble mountain trails, regular power outages, a lack of industry, and your ISP telling you that satellite is the only form of Internet you can get in the area?
Issues such as these indicate poor infrastructural development. In a few cases this may just be the teething problems of a growing city, but in 90% of cases, they indicate deeper problems.
Take for example one area north of Cebu City. Long ago it lost it’s steel industry and only maintains a minimal port. The reason for this? Entrenched corruption in the local political family.
These are issues that cannot be resolved from the grass roots level as they originate from there. Municipal fees and taxes are more likely to go into someone’s pocket that into roads and schools, and starting a business in this area is asking to get extorted – hence a lack of employment in the area.
Terrible infrastructure? It’s simply not worth the headache
This isn’t really a dealbreaker. It’s probably not even a massive problem, but it is worth noting. Even though Filipinos have begun to embrace smaller living, like the rest of Asia, and there is a real demand for high rise apartments near the business districts due to the terrible traffic we experience, there are some serious downsides to owning investment studio units.
Most studio units are highly restricted in their usage by the property management. Studio units are also usually too small to do any structural changes to, like creating a bedroom. There’s also currently a glut of them, which puts downward pressure on your rental returns. Finally, and possibly the biggest issue, is that studio units almost always attract a transient clientele. Your tenants will come and go on a 6-12 month basis resulting in high turnover, the associated costs with finding a new tenant will eat into your returns, and vacancy will always be an issue. It makes sense, think about it, who in this world sees a studio unit as the ideal living situation? No one, that’s who.
Looks pretty nice, I bet. You’ve been eyeing off that 1000 SQ.M. property with cavernous rooms, a huge backyard, a dining room and cinema room, and a pool?
Unless you’re planning to live there yourself you can forget about it.
In our experience, less than 10% of our clientele can even afford to rent a property of this scale, and even fewer still find it convenient. They’re usually limited to the overseas client, who has brought their whole family and has a time limited contract as an executive of the local branch of a multinational giant. How many of these guys do you know? Yeah, I thought so. Not so many.
Finally, huge properties are onerous to furnish and maintain. If they aren’t properly furnished they can look a too spartan. That costs money. A lot of money. And cleaning and maintaining the floors and rooms can take hours if not days.
Wide Open Spaces
Think you’re getting ahead of the game when you’re buying a huge lot in the provinces, hours away from anything significant and constructing a little house in the middle of it?
Seriously. Would you rent that?
Your tenant is also unlikely to take care of the lot itself, so it’s going to degrade over time. You’re also likely to be hours, and so will your real estate professional, so managing it is going to be a chore.
This is probably a no brainer, but you probably don’t want to buy anything near an open cut mine or toxic dump. These kind of environmental problems don’t fix themselves overnight.
For an up to date overview of environmental issues in Cebu check the Department of Environment and Natural Resources website.
Tiny Bedrooms and Kitchens
I don’t know why this is the case, but a lot of developers, both high and low end, attempt to squeeze as many bedrooms and amenities into as small a space as possible.
The result is kitchens that are un-cookable in, and bedrooms that are impossible to sleep in. You could go ahead and remove some walls to open up spaces, or fake it by adding lighter materials and using mirrors, but that doesn’t fix any structural problems. Simply put, there is no easy way to improve tiny bedrooms and kitchens once they’ve been built, this is especially so when the material of choice is often poured concrete.
Tenants usually rent based on need and emotion. Even if a property fits a person’s need, unless it also checks the emotion box, they’re going to continue looking and put your property on the backburner. Closet sized bedrooms and cramped spaces simply don’t excite people.
Illogical Floor Plan
Master bedroom next to the front door? Kitchen separated from the dining room by a long hallway? Bedrooms completely enclosed and windowless? A load bearing column in the middle of the living room?
Stupid layouts can kill an otherwise promising property. While you may be able to get a few people to look at it, if a unit or a house is going to be inconvenient to live in, no one is going to jump for it.
This is actually quite common in the Philippines. Developers will often turn over property completely devoid of wardrobes and shelving. Not really a dealbreaker, all it requires is a bit of initiative on your end.
Floating shelves and embedded and modular cupboards are excellent additions to any rental property, and often add more value than they’re worth. Make sure to get simple, neutral and durable pieces. They may not wow any one person, but they’re unlikely to offend anyone either.
A hateful local government
Sometimes government officers are just out to get you. Dealing with this on a daily basis is just a part of life in the Philippines. However, there are places that are worse than others. Unfortunately, Cebu City is one of those places.
Not so much a red flag, but be prepared for strict adherence to taxation and valuations. The best way to counteract this is to get yourself a well-connected real estate professional such as Jobelle and pay things early, so as not to attract onerous and compounding penalties. Government agencies will often “forget” to tell you when taxes are due or be exceptionally slow processing them, thereby attracting penalties. The rewards of being in the Philippines fastest growing market outweigh the costs of compliance.
The motto to live by is that it’s better to be safe than sorry