Reader Q and A #1: How can I apply for a loan to finance my first deal?

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I recently answered an e-mailed question from a reader of Foreclosure Philippines who was also an attendee of the Think Rich Pinoy seminar held last November 21, 2009, where I was a guest speaker. Actually, our featured reader sent her e-mail last November 25, 2009, a few days after the Think Rich Pinoy seminar, but I was only able to answer her e-mail a few days ago… me bad!

Anyway, I noticed that I often receive very similar questions not only from other readers but also from people I meet who find out that I invest in foreclosed properties which is why I believe that it would be a good idea to feature it here, please continue reading below.

Questions and Actions

I intend to share my answers and some actionable items, as inspired by the book “The 4-Hour Work Week” by Tim Ferris, one of the books that inspired me to take a leap of faith (more about this in a future post). Tim’s book has a number of “Questions and Actions” at the end of each chapter.

Beginning with this post, I intend to feature questions from readers from time to time as a way of helping real estate investors in the Philippines.

Of course I will not disclose our reader’s name and e-mail address to protect her privacy and her questions are as follows:

“Hi Jay. I am currently looking for properties and try real estate. (I was an attendee from the Nov. 21, 2009 TRP seminar.) However, most banks have limits like income if you are an employee you must have 25k + salary. I only have 12K. Or must have a steady business. Or must be 2 years or more in a company. How can I start early with all these limitations? How can I apply for a loan and thus finance my first deal? Thank you very much…” – Miss MJ

Thank you for the excellent question Miss MJ. Let me try to answer your questions to the best of my knowledge and also share some of my thoughts as follows.

Your capacity to pay

Assuming that Php12,000 is your take home pay, let us first try to determine what is the maximum loan amount you can get based on your capacity to pay. I believe most banks and lending institutions look at a person’s net disposable income or NDI to determine a persons capacity to pay and the corresponding maximum housing loan they can get.

The rule of thumb is the monthly amortization should be no higher than 40% of the NDI. In your case, If you have no existing obligations like loans, etc, and assuming Php12,000 is already your take home pay after taxes and monthly contributions like SSS, etc., then 40% of your monthly salary of Php12, 000/mo would be the maximum monthly amortization that can be allowed for you, which is Php4,800.

Foreclosed properties you can afford

Using the payment terms from Unionbank as an example, Php4,800 would be more than enough as the monthly amortization for a foreclosed property priced at Php350,000 with a downpayment of 10% or 35K, and the balance financed with an interest of 15% per annum for 15 years. With these terms, the resulting monthly amortization would be Php4,408.69, well within your maximum of Php4,800/month.

Obviously, there are other banks and lending institutions that offer lower interest rates and longer terms so you can definitely still get your first deal through bank financing. That is assuming you can come up with the minimum downpayment required.

How can I come up with the downpayment?

Yes, you will still need to save for the downpayment. I suggest that you start managing your money NOW! I believe learning how to manage money is a prerequisite to starting to invest in foreclosed properties. I would like to reiterate my belief that anyone who wants to get out of the rat race really needs to learn how to manage money and finances and this remains true whether you intend to invest in foreclosed properties or other investments.

Moving forward, let’s assume you manage to consistently save 15% of your salary each month or Php1,800, you will be able to save enough for the downpayment in less than 20 months. If you think 20 months is long, remember the requirement you mentioned that you must be working for a company 2 years or more in order for you to be able to qualify for a housing loan?

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Don’t bite off more than you can chew!

You might be asking why you should limit yourself to foreclosed properties worth Php350,000 and below? Well, I believe there is wisdom in starting small so that in case you do make mistakes (we all do!), you also make small mistakes and failures from which you can easily recover.

You still learn from the entire process but you start gaining knowledge and experience that would help you to get ready to take on bigger deals and bigger success.

What about Other People’s Money or OPM?

I know the subject of OPM is always in the mind in beginning real estate investors but I believe that if you are just starting with your real estate investing career, you should not even consider using other people’s money unless you are already able to prove your worth in managing your own.

How the heck would you be able to make good use of other people’s money if you cannot even manage your own?!

Your own money might be small but it should be good enough for one to start. As mentioned in Luke 16:10(NIV), “Whoever can be trusted with very little can also be trusted with much…”.  Makes sense right?!

Investing in foreclosed properties is a numbers game

Obviously, it may take some time for a lot of people to save enough money to start investing. I know I did as it took me 3 years before I was able to buy my first property. But that should never stop anyone from consistently analyzing properties to find deals worth pursuing.

You do not need any money to analyze deals as you are investing your time. So go ahead, start analyzing deals NOW, even if you still have no money to invest. Save money while  consistently analyzing properties and make the most of your precious time!

The more foreclosed properties you analyze, the sooner you will begin to see those deals worth pursuing. I’ve read a number of books about real estate investing that mention that on the average, you may have to analyze a hundred properties to end up buying one and I for one believe that these numbers are accurate. The key is to keep on analyzing as much foreclosed properties as you can.

Don’t listen to the little voice in your head that may say “These numbers just won’t work… foreclosed properties are too expensive… I will never find one that is worth investing in… ” after looking at just a few listings or just a few properties. Remember, that’s the voice of the loser inside of you.

Just keep it up and you will eventually begin to see those great deals that you were unable to see before. When that time comes, I have a feeling you will already have the money to invest.

Happy investing!

To our financial freedom!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 3194
Blog: http://www.foreclosurephilippines.com
Follow me in twitter:http://twitter.com/jay_castillo
Become a Fan in Facebook: Foreclosure Philippines fan page

Text by Jay Castillo. Copyright © 2009 onwards. All rights reserved.

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About Jay Castillo

Jay is the founder of Foreclosurephilippines.com where he shares real estate investing tips and foreclosed property listings. He quit his job as an I.T. Manager to focus on Real Estate Investing and Internet Marketing. He is a PRC licensed Real Estate Broker (REB License # 3194)... [Read more]

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  • Abel

    Your advise is very encouraging and very sound, Jay. For starters, raising my own investment fund (instead of sourcing OPM) would result to discipline and sharper skills to weigh deals.

    I attended Noel’s seminar yesterday thanks to your post promoting it. :)

    Btw, we met in Anton’s Maven group while back but it was not until a few weeks ago that I started reading your blog to learn about real estate investing in our local setting.

  • ram

    a very inspiring site! thank you Jay and Atty. Cherry.

  • Carlo

    Hi sir Jay,

    I just want to say first that I am learning a lot from this blog – not only about real estate investing but also on financial freedom. I now see a clearer direction that i can take after i had begun investing and saving.

    I am currently checking possiblity of availing a home loan but bank websites reveal that there is a need to turn in a property collateral. I do not have yet a property under my name. Is there a way to avail of a home loan without turning in a property collateral? What banks offer this?

    Thank you in advance for your response.

  • http://www.firaapublishing.com jun

    Hi Jay, with reference to Angie’s post, I am also unemployed right now and anxious about how I can qualify for a bank loan. I haven’t applied for any bank loan in my life so I would really appreciate if you can give us some info on how an unemployed can qualify for a bank loan to buy and sell a foreclosed property. Looking forward to your reply. Thanks Jay.

    • http://www.foreclosurephilippines.com Jay Castillo

      Hi Jun, I think there’s a lot of people who visit here that have the same question so I’ll answer it in another post for more details. At the moment I believe that the only way to qualify would be for you to have a business with steady income and/or some assets that can serve as collateral. Let me get back to you on this. Thanks for visiting!

  • joseph_coronpalawan

    great advise! really helpful to newbies in real estate. more power!

    • http://www.foreclosurephilippines.com Jay Castillo

      Hi Joseph, thanks! Thank you also for the call, will send you an email shortly. Thanks for visiting!

  • Angie

    Hi Jay! Your website is very informative and interesting.

    I was looking for a property that we can use for a small piggery business that we would like to start (that’s how i can across your website). Most properties that i saw are quite big for the budget that we set. But when i read your article on investing in foreclosed properties, i had a lightbulb moment! The budget we have for buying the land can be used as downpayment for a much bigger property…or what you have called “leverage”! What a great idea!!

    My husband and i are both unemployed…He is an ex-OFW and we would like to start a small business with the savings that we had accumulated. That is why we need the property. But, can we qualify for a loan? Thank you very much and hope to hear from you soon

    Regards, Angie

  • Gladis

    Hi Jay,

    I have just discovered your website after reading the book Think Rich Quick and Cashflow Quadrant. This particular article is very important for me as 1st time investor. Thanks to you for posting your answers to the questions.

    I hope to join your seminar soon.

    Gladis

  • vladie

    Sir:

    It is my ultimate dream of having a mango orchard for I believe that it is s great investment. Fortunately, a bank offered me a foreclosed property from the, a 6.1 mango orchard with 288 25 year old mango fruit bearing trees amounting 7.5M. I can comply with their required downpayment which is 2.5M. I am a simple business man earning a net of 10,000Php monthly. Could you please advice me if I can be able to pay my remaining balance together with its accumulated interest. Or atleast advice me what wise steps should I ill be doing regarding this matter. Thank you very much. I hope to here from you very soon.

    • http://www.foreclosurephilippines.com Jay Castillo

      Hi Vladie,

      May I know what terms the bank is willing to offer for the balance of Php5 million? If we used an interest rate of 12% per year and payable in 15 years, that would mean a monthly amortization of Php60,008.40 (I arrived at this using the mortgage calculator that you can find here: http://foreclosurephilippines.com/wp-content/uploads/2009/06/mortgagecalculator.html ). I believe the monthly amortization is quite steep, unless the mango orchard can produce a monthly cashflow that is at least equal to that. Of course you will also have to consider other expenses like real property tax, cost to maintain and operate the orchard, etc to determine if the property is really going to be an income generating asset or will be a money pit for you.

      Another option that comes to mind would be for you to find a partner or investor with whom you can have a joint venture agreement so that you can split the capital needed to buy the orchard.

      Let me know what terms the bank is offering so we can make a more accurate analysis. Thanks for visiting and it’s nice to know that you are actually taking action to pursue your dream!