This is Part 2 of a series about the questions that were asked during a panel discussion in the recent Manila leg of the Money Summit and Wealth Expo 2011.  This post tackles the question on which way to make money in real estate is recommended. If you missed Part 1 of this series, you can check it out here: The “aha!” moment that made me decide to take action towards financial freedom. Don’t forget to read the comments section where people already shared some very inspiring “aha!” moments of their own.

We now move on to the next question

This was also asked during the Money Summit and Wealth Expo 2011:

“There are different ways to make money in real estate like brokering, flipping, rentals, rent-to-own, buy and hold etc. Which  would you recommend and why?”

Here’s my answer:

“If you have limited funds, maybe you can start with brokering, of course you need to be a licensed broker. If you are not yet a licensed broker, you can work with a broker, you can become an agent, but still you have to be registered by the broker with the PRC, you have to comply with the RESA Law. But you don’t need any capital, you just need to work hard, just like in any other field.

If you want long term wealth, rentals or even rent-to-own would be fine. However, I noticed that with rent-to-own properties, it is finite. Once the tenant-buyer pays in cash, you will no longer have any cashflow.

For rentals, it is continuous. Since I won’t give the tenant an option to buy, since it is purely rentals, I won’t lose my cashflow down the road. For long term wealth, I would recommend rentals.”

 

More insights…

On becoming an agent

When you work with a licensed broker as an agent, this means you will be a licensed real estate salesperson who is registered under that real estate broker.

Section 3 (g)-5 of the RESA Law Implementing Rules and Regulations has a definition for  Real estate salespersons as follows

“(5) Real estate salesperson – a duly accredited natural person who performs service for, and in behalf of a real estate broker who is registered and licensed by the Professional Regulatory Board of Real Estate Service for or in expectation of a share in the commission, professional fee, compensation or other valuable consideration.”

The full text of the RESA Law IRR can be found here.

Whether you are a real estate broker or a real estate salesperson, you need to work hard, even if technically you do not need capital to acquire properties to sell or rent out. You still need to build your network, build your buyers and sellers database, you need to market properties well, you need to be a able to find properties that match the requirements of your buyers, etc., along with all the other duties and responsibilities of being a real estate broker or salesperon.

Obviously, this entails a lot of hard work, but it can be the start of something big!

It can be done!

I once met someone who used to work for a government agency and his salary was just a bit higher than minimum wage. He told me that he realized back then that even if he combined his salary with the salary of his wife (who was also working with a government agency), they would never have had enough money to buy their own home, no matter how hard they tried to save.

One day however, a friend of his who worked for a real estate company invited him to work as an agent as his “sideline”. With patience and hard work, he eventually bagged his first sale. This made him realize that real estate can really be a better way to earn money. According to him, this happened decades ago.

Fast forward to present day, he already has his own real estate company which according to him is one of the top sellers of a big developer and they also handle the selling of their repossessed properties. (I met him when I checked out some of these repossessed properties).

Yes it can be done!

More on rent-to-own

Yes, you do get your profits early in the form of capital gains if your tenant-buyer decides to pay in full in advance either through cash or through a loan take out. Don’t get me wrong, I’m not saying this is not good. Personally however, I would prefer long term cashflow over capital gains.

For example, in one of my deals, my passive income and cashflow stopped when my tenant-buyer decided to take-out a loan with Pag-IBIG which they used to pay me in full. Now I need to find another deal to replace the passive income that I had before from this particular deal.

Even if the tenant-buyer decides not to pay in full in advance, and decides to finish the whole rent-to-own term, your cashflow will still end, when it is fully paid. In the end, you won’t have an asset because that asset is no longer yours. It’s like flipping properties on installment.

Still, rent-to-own has its advantages like less property management hassles, and the monthly payments can be bigger which can translate to more positive cashflow and passive income, as mentioned here. You just need to ensure that you have more properties in the pipeline to sustain your cashflow.

More on rentals

With rentals, I believe that as long as you have tenants, and you don’t have tenants from hell, assuming you have a nice positive cashflow and good property management in place, then you have a real asset that can put money in your pocket for the long term.

That passive income generating asset remains to be yours as long as you don’t sell it. If your goal is to be financially free, then you just need to buy enough rental properties to accumulate more than enough passive income for you and your family!

How about buy and hold?

If you want to learn more about my thoughts about buy and hold, please checkout what I have previously written about it in my article entitled 9 ways to invest in foreclosures and earn money.

Up next

In the next part of this series, let me share my answer and additional thoughts about the question “Why choose real estate?”. See you next week.

In the meantime, what are your thoughts on becoming a real estate broker or agent?

Would you rather go for flipping, rent-to-own, or rentals?

Please share your thoughts by leaving a comment below. Thanks!

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Photo credit: WoodlyWonderWorks via Flickr

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To our success and financial freedom!

Jay Castillo

Real Estate Investor
PRC Real Estate Broker Registration No. 3194
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter: http://twitter.com/jay_castillo
Find us in Facebook: Foreclosure Investing Philippines Facebook Page

Text by Jay Castillo and Cherry Castillo. Copyright © 2011 All rights reserved.

Full disclosure: Nothing to disclose.

Which way to make money in real estate would you recommend? is a post from: Foreclosure Investing Philippines

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It depends! Obviously not all foreclosed properties are good deals.

It’s common sense that not all properties are good investments, foreclosed or otherwise, you don’t need to be a real estate investing guru to know this. However, based on the number of times I’ve either heard people ask or get asked this very same question, I feel that a significant number of people out there either have a misconception about foreclosed properties, or they are simply clueless.

Let me make it clear, NOT all foreclosed properties are good deals, and it would be foolish to think all of them are.

Don’t ever expect all foreclosed properties to be good deals because if you do, you are setting yourself up for frustration, disappointment, and failure, especially when you start finding foreclosed properties that turn out to be horrible deals. More on this later.

“Hey Jay, are you saying foreclosed properties are no good?”, you might be asking.

As I said, it depends. No, I’m not discouraging you, I’m just trying to help with managing expectations. Admittedly there are more bad deals out there than good deals, but there are still more than enough hidden gems out there that can make worthy real estate investments, and the key is finding them. One needs to look at a lot, and when I say a lot, I mean a lot of properties, to find those hidden gems, after all, investing in foreclosed properties is a numbers game.

Investing in foreclosed properties is a numbers game

I’ve said it before and I’ll say it again, investing in foreclosed properties is a numbers game.

The greater the number of foreclosed properties you look at, the greater the chance that you will find those good enough deals, and even some great deals. However, you will find a lot of bad deals in the process, but that’s just part of the game. It’s okay to find horrible deals, as long as you find out before you bought the property, and move on.

Keep in mind that one cannot just give up after looking at a few properties. I often hear people get frustrated with foreclosed properties after looking at just one or a couple of properties, or even with just one listing that really did not have many properties to begin with. And then they give up and say things like “I’ll never find any good deals…” or “The numbers will never work…” or “This is too hard…” or “I’m just wasting my time…”. Sorry, nobody said foreclosed real estate investing is easy! It may sound simple, but it isn’t easy.

The 100-10-3-1 Rule

You basically need to look at a significant number of properties to find those properties that are worth a second look.

How many would that be? The general recommendation would be to find about 100 properties worth a second look, after doing initial shortlisting. Out of those 100 properties, you will probably find 10 worth inspecting. Out of those 10 worth inspecting, you might find 3 properties that are worth giving offers for or bidding for, if they were for sale through a public auction. Out of the 3, you may end up buying 1.

That’s a brief overview of the 100-10-3-1 rule. I’ve read many variants of this rule from books and also from some of my mentors but they are basically the same. You analyze 100 properties, inspect 10, submit offers on 3, and end up buying 1. These are just average numbers, but you’d be surprised how accurate this average can be in real life. Been there, done that!

Other numbers to consider

Of course there are other numbers to consider when applying the 100-10-3-1 rule and when “doing the numbers”.

Numbers like After Repair Value (ARV), projected repair costs, target profit, Maximum Allowable Offer(MAO), Cash on Cash Return (CCR), Return-On-Investment or Return Of Investment(ROI), Net Operation Income(NOI), Cashflow, etc., to name a few, also need to be considered. For each of these numbers, you as the real estate investor will ultimately have to decide what is acceptable for you. These numbers will determine if a foreclosed property is a good deal or not.

If this sounds too daunting and tedious for you, I would be the first to say that this might not be for you. But there’s no harm in trying right?! Imagine what could happen if you consistently did this until doing the numbers became a habit and you actually became good at it!

No, I won’t have time to explain all of these numbers now, but one by one, they will be covered here soon.

Sometimes it’s all in the mind

I still remember during the early part of 2008 when I found myself unable to find any good deals in any of the listings of foreclosed properties that came my way.

I was still recovering from feelings of being betrayed after how Dinna Revilla, a former real estate mentor, got arrested and became a “fallen real estate guru”, and in disgust of what she allegedly did to those who trusted her(as far as I know, the case is still pending), I just decided to invest in mutual funds instead of real estate.

My respite from real estate investing however was short-lived because I eventually met another mentor, Doctor Jon Abaquin, who was also featured in Larry Gamboa’s book “Think Rich Pinoy”(see page 155), who later challenged me and a couple of my friends to each buy a property within 90 days.

Lo and behold, from the same listings lying on the table in my bedroom where I could not find any suitable properties, all of a sudden I was able to pinpoint at least 3 very promising foreclosed properties from 3 banks and I ended up submitting an offer for the most promising one. Later, that one offer got accepted. That experience opened my eyes and from that point onwards, I truly believed that there were good, and great deals out there, I just had to look a little bit harder!

But what if I do find a good deal but have no money to invest?

My take on this: Financial literacy is a prerequisite to real estate investing.  Being financially literate leads to proper management of one’s money and finances, which should then help one save enough capital for investing. When that right deal comes, you will be ready. If you think that would take too long, then another option would be to find investors for your deal, although personally, I would recommend that beginning investors do it by themselves, especially on the first few deals.

I believe you should build your track record with your own money first before risking other investors’ money. If you can’t even handle your own money, how do you expect to be able to handle the money of investors?! Sorry if I may sound harsh, but hey, this is just my opinion.

So how many properties have you looked at?

Have you looked at 1, 2, 3… and have given up already? Are you looking hard enough?

Remember, the more you look and do the numbers, the greater the chance that you’ll find that real estate investment for you.

Next time someone asks you, “Are foreclosed properties good deals?”

I’m pretty sure most of you out there will eventually encounter this question once you decide to invest in foreclosed properties and people learn what you do. Well, I hope to help save you the trouble of coming up with your own answer, which can turn out to be a very long one, just like mine. If you want, you can just send them over here, and I hope my answer above will be of help.

Next question please!

Good luck and happy investing!

To our success and financial freedom!

Jay Castillo

Real Estate Investor

Real Estate Broker License #: 20056

Blog: http://www.foreclosurephilippines.com

Follow me in Twitter:http://twitter.com/jay_castillo

Find us in Facebook:Foreclosure Philippines facebook page

Text by Jay Castillo and Cherry Castillo. Copyright © 2010 All rights reserved.

PS. Are you a new visitor? Click here NOW to start learning more about foreclosure investing in the Philippines

PPS. Don’t be the last to know, subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. Inbox getting full? Subscribe through my RSS Feed instead!

Are foreclosed properties good deals? is a post from: Foreclosure Investing Philippines

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Welcome to the third part of this series on the 3 types of income one can get through real estate investing. This was supposed to be the third and last part which is about passive income, but it has turned out to be a huge article in itself (more than 4000 words) , which is why I will have to split it in two. This will be the first half .

Before you begin reading this article, I recommend you review the first two parts about portfolio income and earned income:

How to get portfolio income through real estate investing

Earned income through real estate investing

Next we continue with passive income…

What is passive income?

Wikipedia defines passive income as income from “trade or business activities in which you do not materially participate.” Furthermore, the IRS website defines that “in general, all rental activities are passive activities, even if you do materially participate. You materially participate in an activity if you are involved in the operation of the activity on a regular, continuous, and substantial basis.” These may sound complicated so I would rather stick to the simpler definition that passive income is income that comes in consistently without having to do much physical work.

Examples of passive income are dividends from paper assets like stocks, bonds, and mutual funds, interest income from certificates of deposits, mortgages, income from advertisements  on the internet, income from a business where the business owner need not work in the business, residual income from royalties from the sale or use of intellectual property and multilevel marketing activities, and of course, rental income from the leasing of real estate.

Passive income from real estate investing

In real estate, you get passive income by investing for cashflow. This is when you focus on buying properties whose rental income exceeds all expenses, including taxes, and any payments for loans, if any. Basically, the monthly cashflow would be the monthly rental income less monthly expenses less the monthly amortization you pay to the bank if the property was bought through financing.

Using our previous example again, where I bought a foreclosed property for Php1Million by putting down 20% downpayment or Php200,000, with a remaining  loan principal balance of 80% or Php800,000, let’s assume the balance is payable in 20 years at 8.5% annual interest rate(this is the current rate for Pag-IBIG for a loan of Php800,000).

This results in a monthly amortization of Php6,942.58/month( You can verify this by using our mortgage calculator)

For this example, lets also assume that my monthly expenses as the landlord are monthly homeowners association or condo dues, maintenance, property management, real property taxes(I just divide the annual real property tax by 12 to arrive at monthly figures), maintenance reserves, etc. all add up to about Php4,000/month and the property can be rented out at Php15,000 per month.

My monthly cashflow for the example above would then be as follows:

Monthly Cashflow = Monthly Rent – Monthly Expenses – Monthly amortization

=Php15,000 – Php4,000 –  Php6,942.58

=Php4,057.42/month

Do take note that the cashflow figure we arrived at above is before taxes, more on the applicable taxes later.

Examples of rental income

Rental income can come from the leasing of houses, lots, house and lots, townhouses, condominiums, parking slots, apartments, buildings, hotels, office-space, space used for cell-sites, billboards, or just about any residential or commercial space. Did I forget any?

One can even earn passive income by having a real estate business, more on this later.

Advantages of passive income from real estate

Least taxed – Passive income in the form of rentals is the least taxed among the types of income one can get through real estate investing. Remember, income in the form of capital gains are taxed at a rate of 6%, while earned income is taxed up to a high of 32% in the form of income tax.

For rental income, the taxes range from a low of 3% percentage tax to a high of 12% VAT. Please take note that percentage tax and VAT are mutually exclusive, you pay one or the other, depending on which is applicable.

The lease of residential units where the monthly rental per unit exceeds Ten Thousand Pesos (P10,000.00) but the aggregate of such rentals during the year do not exceed One Million Five Hundred Pesos (P1,500,000.00) are exempt from VAT, and shall be subjected to three percent (3%) percentage tax.

It follows that the 12% VAT applies to the lease of other properties not covered by the statement above. Please refer to this article:  Save Money On Taxes: Exemptions From VAT On The Sale And Lease Of Real Estate for more information and a sample computation.

Of course, income tax is still applicable. The good news is you can still lower your taxable income through allowable deductions, thereby lessening the payable income tax. My wife will create a more detailed article about this in the future. I will force her to do this if needed.

Income comes in without the need to sell the property – An obvious advantage with passive income through rentals is you have income coming even if you don’t sell the property. If you don’t have to sell the property, you obviously do not need to pay any of the major taxes like Capital Gains Tax (CGT) for capital assets or Creditable Withholding Tax (CWT) for ordinary assets, whichever is applicable.

Less affected by a recession or financial crisis (at least for residential properties) – If you invest for passive income, I believe that you are less affected when a recession or financial crisis happens, unlike flippers who might get devastated because they will no longer be able to sell their properties at their desired selling prices as property values  plummet.

Even if flippers rented out the properties they could not sell, most may still end up with negative cashflow because the cashflow was not considered at the very beginning. It is easier to find a property that can be flipped for a profit but has negative cashflow, than a property that has both positive cashflow, and can be flipped for a profit. If that were the case however, I would think twice before I sell a passive income generating property as it is like a goose that lays golden eggs.

Without the need to sell a property, investing for cashflow is simply less vulnerable and less risky, in my opinion.

In addition, I believe that demand for residential properties that are for rent would still be pretty high, as people still need a place to live in, even if there was a recession or financial crisis. It would be logical to conclude that the people who would forego buying their own homes would  just rent. On the other hand, commercial properties that are for rent would face less demand in times of a recession or financial crisis and would most probably be greatly affected.

Provides a consistent stream of income – Passive income in the form of rentals of real estate provides a reliable and consistent income stream that can really replace a person’s earned income that comes from having a job.

Money works for you - We often hear about the sayings “instead of working hard, we should work smart” and “instead of working hard for money, money should work for you” and passive income from real estate fits the bill. By finding a good rental property, the work is front-loaded, and the rest is just maintenance, and yet the money just flows into your pocket. Now that’s working smart!

You get to enjoy the fruits of property ownership - As you remain as the owner of the property, you also get to enjoy the fruits of ownership like gaining equity as time passes where part of your rental income is paying off your loan, if any, and you also have the benefit of any future appreciation of the property, if you do decide to sell or refinance the property down the road.

The disadvantages of investing for cashflow

Smaller income as compared to capital gains - The example above illustrates that the passive income we can get from a rental property looks small compared to the capital gains that we can get through flipping. Php4,057.41/month versus Php100,000/property(assuming you can really flip at least 1 property per month with a net profit of Php100,000). However, I still prefer rental income because in the long run it will help you get out of the rat race, more on this later.

Furthermore, you can have bigger passive income by focusing on properties that command higher rental rates, decreasing expenses through better and more efficient property management and maintenance, increasing the loan payment term to lower the monthly amortizations, etc. You can even go for a rent-to-own agreement where the option to own the property justifies higher monthly payments, resulting in bigger positive cashflow.

Requires property management – Property management is not really a problem if you have 1 to 4 rental properties. Beyond that, property management would probably feel like you you are back in the rat race , another 9 to 5 existence where the only difference is you own your job.  This is just my opinion. Again, you can eliminate this by going for a rent-to-own scheme as the tenant-buyer will the one to manage the property as the property owner.

It is harder to find properties that can generate positive cashflow – Like what I mentioned earlier, It is easier to find a property that can be flipped for a profit but has negative cashflow, than a property that has positive cashflow. If you are consistently doing the numbers with the free foreclosed listings that you get from foreclosurephilippines.com, you would know what I am talking about. If you are not doing the numbers, what are you waiting for, Christmas?! Knowledge gained left unused is knowledge wasted!

Rent control – The coverage of the Rent control act of 2009 include all residential units in the National Capital Region and other highly urbanized cities, with a monthly rent for each of which ranges from One peso (Php1.00) to Ten thousand pesos (Php10,000.00) and all residential units in all other areas, the total monthly rent for each of which ranges from One peso (Php1.00) to Five thousand   pesos (P5,000.00).

One can avoid this by investing only in properties that command a rent higher than Php10,000, although this could mean VAT becomes applicable. Another option to avoid rent control is to use a rent-to-own agreement, although in effect you are already selling the property, even if you still get positive cashflow for the duration of the rent-to-own agreement.

You get all the expenses related to property ownership – Expenses like maintenance, cost for fire and acts of nature insurance, real property tax, property management, and other expenses that cannot be passed on to your tenants, remain to be your responsibility as the property owner, unless you enter into a rent-to-own agreement. Monthly dues, utilities, and other miscellaneous expenses can be passed on to the tenant.

You might encounter tenants from hell – Tenants from hell are probably the most dreaded thing that would-be landlords are afraid of. Yes, it happens to the best of us, it even happened to Larry Gamboa, which he shared during the recent Think Rich Pinoy Seminar. The only way to get around this is to pre-qualify your would-be tenants or tenant-buyers.

Things to remember about passive income from real estate investing

Each passive income generating property is like a goose that lays golden eggs – If you remember Aesop’s fable “The Goose That Laid the Golden Eggs”, the goose laid a golden egg consistently each and every day. A rental property is just like that as it lays “golden eggs” in the form of passive income every month.

Passive income generating real estate still needs maintenance and some work; you still need to take care of your “goose”

• You need to have property management which can be done by you if you have 4 rental properties or less, or you can just outsource it to other competent people who can do it better than you if you already have more than 4 properties. Take note that the 4 properties is just my own estimate. You may even start outsourcing property management with your first rental property, as this will make it truly passive, and avoid those things that go with property management that might turn you off, like fixing toilets at 3am.
• If you don’t take care of your property and your tenants, either the golden eggs will become smaller and smaller as expenses begin to pile up because of deferred maintenance that eventually catches up with you, or the eggs will just stop when the goose dies as you lose your tenants or when your property becomes unlivable, whichever comes first.

Don’t sell the goose – If you sell your property that lays “golden eggs”, then you will obviously have no more eggs, just like when the farmer decided to kill the goose to get all the golden eggs inside of it. But unlike the farmer who found no golden eggs inside the goose when he killed it, you might end up with a big golden egg in the form of capital gains if you sold the property, but that would be the last golden egg, and you will have to find another goose. It is always tempting to make a lot of money quickly. Don’t be too greedy!

How to turn earned income to passive income – There are actually ways to convert earned income into passive income. Here are a few of my ideas:

A. Treat real estate investing as a business – The key is to set it up like a business where you are the business owner who works on the business, and not in the business. You need to systematize your real estate business and delegate as much as possible, among a number of things, that would help make a business like this succeed, and this will turn you into a true business owner, not just someone who owns your job.

It would be like setting up your real estate business to function like it was a franchise of McDonald’s or Jollibee, where the least skilled can do most of the work, which lets you, the business owner, work on the business. Some aspects can even be outsourced like internet marketing for example, which can go for as little as USD2.00/hour, right here in the Philippines, as mentioned here by Yaro Starak. A working system used for such a real estate business can be easily replicated and can even be turned into a turnkey operation like a franchise, as described in the book “The E-myth revisited” by Michael Gerber. I believe this is also Larry Gamboa’s goal when he started his Think Rich Pinoy Franchise.

B. Setup a passive “residual” income stream – Another way to turn earned income into passive “residual” income would be to set it up like a legitimate multi-level-marketing (MLM) company. For real estate brokerage, what if it was setup in such a way that real estate agents are assigned the bulk of the offline tasks and leg work? They do this for the licensed real estate broker they are registered with, who in turn earns a small override for each sale. Lets say the agent and the broker split the 6% commission(now referred to as professional fee as real estate brokers are now under the PRC with the RESA Law) with 4% for the agent and 2% for the broker. The agent will do a lot of legwork but this will justify the additional 2% they will earn, which results in twice the earnings of what they usually get. You as the broker earn the 2% passive “residual” income. Do you think this idea of mine would work?

Devote time and effort in finding properties that generate cashflow – If you just focus on flipping properties, it would still be like a 9 to 5 existence because you will always have to flip a property to have cash coming in. If you invest for cashflow however, those small income streams in the form of rental income will eventually become as big, if not even bigger, than the income flipping can generate, as the number of rental properties increase.

The only difference is, if you reach your passive income monthly goal, you have a choice of stopping and yet the monthly cashflow still comes in. If you only have earned income, even if through real estate, you won’t really be out of the rat race.

Coming up next: Financial freedom and how it can be achieved through passive income from real estate investing

Now that you have a general idea of what passive income is, along with its advantages and disadvantages, I will next share my thoughts on what financial freedom is from my own perspective, and what it would take to become financially free through real estate investing.

I will also try to answer questions and statements like “Can it really be done?”, “Where do I start?”, and “In reality if it was easy, everyone would be doing it…”

See you next week for the second half about passive income which would be the series finale on the 3 types of income one can get through real estate investing.

*Click here to read the final part of this series!

To our success and financial freedom!

Jay Castillo

Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Mobile phone (Call/SMS): +639178843882
Follow me in twitter:http://twitter.com/jay_castillo
Find us in Facebook:Foreclosure Philippines facebook page

Text by Jay Castillo and Cherry Castillo. Copyright © 2010 All rights reserved.

PS. Are you a new visitor? Click here NOW to start learning more about foreclosure investing in the Philippines

PPS. Don’t be the last to know, subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. Inbox getting full? Subscribe through my RSS Feed instead!

Passive income through real estate investing – the path to financial freedom (Part 1) is a post from: Foreclosure Investing Philippines

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This is part one of a 3-part series on the types of income one can get through real estate investing.  Rather than write another 3000+ word nosebleed article, I’ll break it down into three parts which should be more manageable and easier to digest.

Through this series, I hope to help beginning real estate investors by sharing my thoughts and ideas for each type of income, based mostly on actual experiences as a real estate investor. Part one tackles portfolio income through real estate investing.  Here goes…

Obviously, real estate investors get into real estate investing because of the income that real estate investing can generate. But what types of income can one get from real estate investing? What are the advantages/disadvantages for each type of income?

There are basically three types of income that one can get from real estate. These are:

• Portfolio income
• Earned income
• Passive income

Let me first try to explain portfolio income.

What is Portfolio Income

Portfolio income in a nutshell is the income or the gain you get in the form of an increase in equity.

What is equity?

Equity is basically the difference between a property’s current appraised value/market value and the loan principal balance as of a particular point in time.

For example, I bought a foreclosed property for Php1Million by putting down 20% downpayment or Php200,000, with a remaining  loan principal balance of 80% or Php800,000. Assuming the property’s current market value at this point in time is really Php1 Million, then my equity can be calculated as follows:

Equity=Php1 Million – Php800,000 = Php200,000

In this example, my equity is equal to my downpayment because I bought the property at market value.

For the example above, there really is still no portfolio income as I still have no gain in equity.

Portfolio Income from properties bought below market value

What if for the same foreclosed property above, which I bought for Php1Million pesos by putting 20% downpayment or  Php200,000, with a remaining loan principal balance of 80% or Php800,000, I had it repainted and got it ready for occupancy. I then had it appraised afterwards and the new appraisal is Php1.5 Million. My new equity can be computed as follows:

Equity = Php1.5 Million – Php800,000 = Php700,000

From an original equity of Php200,000, it increased to Php700,000.  In effect, I now have a portfolio income of Php500,000 in the form of equity that I have gained.

By the way, sometimes the equity can increase even without the introduction of improvements like painting or fixing up the property. This happens when the property was simply sold below market value because the appraised value or market value used by the seller was outdated.

The problem with portfolio income

There is only one problem with portfolio income. The income is just on paper! One still needs to do something to get the income out. In other words, I still need to turn my portfolio income into cash or realized income. Otherwise, it is just on paper and I cannot make use of it.

I also believe that portfolio income is still just an assumption and can be looked at as a form of speculation until the portfolio income is actually turned into cash.

How to turn portfolio income into cash

In order for one to turn the portfolio income into real cash, one would have to either sell the property at a price equal to the appraised value/market value or have the property refinanced at the new appraised value/market value.

1. Sell the property to get cash

For example, I decided to sell the sample property above and it got sold for Php1.5 Million cash. I would then have to pay off the loan principal balance of Php800,000 with the bank. That would leave me with Php700,000 cash on hand. I have already recouped my downpayment of Php200,000 and made an additional Php500,000 in the process, which was the equity I gained or portfolio income.

Of course one should also consider the taxes(Capital gains tax, etc.)  and other closing costs when a property is sold.

By the way, if one just keeps on selling properties, one is really just investing for capital gains. He/she would lose the cashflow the properties would generate, if any.

2. Refinance the property to get some cash out

On the other hand, if I had the property refinanced at the new appraised value/market value, I would be able to get a big chunk of my portfolio income if the new loan is approved.

Let’s say I went to a second bank, applied for a new loan to refinance my existing loan, and they had the property appraised. The new appraised value turned out to be Php1.5 Million as expected and the bank granted me a new loan based on this new appraised value, and they are willing to loan me 80% of the appraised value which is Php1.2 Million. The second bank would then pay off my loan with the first bank, which is Php800,000 and that would leave me with Php400K. This means I pocketed Php400,000 in cash by refinancing the loan.

Sure it was smaller than what I would have gotten if I had just sold the property, but that’s okay for 2 simple reasons:

(1)    I didn’t have to sell the property which means I don’t have to pay taxes related to properties getting sold like capital gains tax, documentary stamps tax, etc., and

(2)    The property remains to be mine and I get to continue enjoying the cashflow it generates(if any if it is tenanted) and any appreciation in its value, just in case I do decide to sell it down the road.

Of course, with refinancing, the new loan amount will translate to an increase in monthly amortization payments, etc. which should always be considered to determine the cashflow a property generates. At least I have taken out some of the cash which used to be portfolio income and I can use this to buy another income generating property, etc.

My thoughts on portfolio income

From my examples above, you will see that one cannot make use of portfolio income unless one takes steps to get the cash out. It looks good but the income is still just on paper.

However, portfolio income gives a good indication as to the potential of a property in terms of capital gains. It can help one see if you are really following the well known advice from Robert Kiyosaki and his Rich Dad which is

“You should make money when you buy, not when you sell…”

because the portfolio income is basically the money you can potentially make the moment you bought a property at a price below market value.

As stated earlier in this article, until you can turn portfolio income into cash by actually selling the property at a price equal to the market value or refinancing it at an appraised value higher than your purchase price, you are just speculating. Remember, we are supposed to be real estate investors, not speculators.

Since portfolio income is only on paper, having a large portfolio of properties that look good on paper is useless if you can’t get any cash out. Instead of being real assets, they are just liabilities that take money out of your pocket, unless these properties are generating passive income through rental or rent-to-own income.

In hindsight, I also believe that by selling a property, one is converting portfolio income into earned income. Earned income will be tackled in the next part of this series on the types of income one can get through real estate investing.

What do you think?

Coming Up Next: Earned income through real estate investing

Coming up in the next part of this series, I’m going to tackle how one gets earned income through real estate investing, how it can make you feel like you are back in the rat race (this should be interesting), and what can be done about it.

If you want to know more about earned income, head on over to part two of this series – Earned income through real estate investing

To our success and financial freedom!

Jay Castillo

Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Mobile phone (Call/SMS): +639178843882
Follow me in twitter:http://twitter.com/jay_castillo
Find us in Facebook:Foreclosure Philippines facebook page

Text by Jay Castillo and Cherry Castillo. Copyright © 2010 All rights reserved.

PS. Are you a new visitor? Click here NOW to start learning more about foreclosure investing in the Philippines

PPS. Don’t be the last to know, subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. Inbox getting full? Subscribe through my RSS Feed instead!

How to get portfolio income through real estate investing is a post from: Foreclosure Investing Philippines

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*Update dated June 2, 2011 – After much thought, I have decided to leave Trace Trajano‘s local coaching program and my role as one of the local coaches. I would also like to inform everyone that I am not part of Trace’s other programs.

For those who don’t know, I was once a student of Trace, and I was also part of the team that won his first apprentice challenge, although I decided to leave the RYP team last September 2010. I became one of the local coaches as part of the now defunct Terrific Trio University. I also helped promote his seminars in the past including TRQ 1.0, TRQ 2.0, TRQ Cebu, his quick cash seminars, and the last one was TRQ 3.0.

It has also come to my attention that some materials that Trace used in marketing some of his seminars might make it appear that I am one of his partners. I would like to make it clear that I am not a business partner of Trace Trajano.

Things did not turn out as planned, but lessons have been learned, and I feel it is time for me to move on. ~ end of update ~

Are you broke, with no rich friends…

and no banks will lend you money?

You… yes, even you can invest in real estate!

I am very excited to announce that Trace Trajano is coming to Manila and will give the first ever Think Rich Quick Seminar on March 27, 2010. If you have not read his book “Think Rich Quick”, you should. It has changed thousands of people’s lives and it can change yours.

What is the Think Rich Quick Seminar and book about?

People have the misconception that you need a lot of capital to get started in real estate (up to a certain extent, that includes me because I advocate being financially literate enough to be able to at least raise the 10% or 20% for the downpayment). “NOT true”, Trace says and he has a right to say this after having acquired and sold over $13 Million worth of investment properties, mostly with no money down. That’s P1 Billion worth of properties acquired without any money down.

Trace continues, “You can also get started investing in real estate without borrowing money from banks.” For example, in his book, he mentioned a deal he did by taking over the mortgage payments and then he turned around and sold that property via rent to own. It’s an amazing strategy and I believe you should learn about it.

Lastly, Trace dispels the misconception you have to wait years before you can make money in real estate. Trace says, “You can make money in real estate in a few months, a few weeks, sometimes, even in a few days.”

Trace says, “But rather than boast about what I have done, I’ll just show you what my students have done…specially my students in the Philippines. I want to show you that this can be done anywhere, even in the Philippines.” Here are some of Trace’s students and what they have done (NOTE: they are all based in the Philippines!):

Thea Santos – made P260,000 selling a house in just 2 weeks using a strategy called Wholesaling. She sold the property quickly using one of Trace’s marketing strategy.

Gia Garcia – she bought a condo using other people’s money, she fixed it, then sold it. This is a strategy called Retailing. Gia said, “Trace’s advice on how to rehab the property saved me a lot of money!”

Julius Bernard Lopez – made over P300,000 by “syndicating” a deal. He found an investor who managed the renovation…he found another investor to put up the money and the only thing he did is find the deal. Here’s the thing… Julius did this AFTER reading the book “Think Rich – Quick”. Julius is not even officially Trace’s student or franchisee!

Eden April Alemania – she became a millionaire at age 26 (she’s now 27). This is after just 9 months after hearing Trace speak. Watch her video below:

Jessie Raquel and Apple Raquel – Jessie is an OFW struggling with a 10-door apartment he bought as it was only 30% occupied. At a seminar that Trace gave to the franchisees of the Think Rich Pinoy Millionaire Network, he gave Jessie a marketing plan. He implemented this plan and in just 2 weeks, he got his 10-door apartment 100% occupied. As a result of this, Jessie and Apple are now real estate millionaires. Trace even helped them raise capital from private lenders (not from banks!). Here’s the proof:

Ronald Cagape and Weng Cagape – also a husband-and-wife real estate team and now millionaires said, “Trace’s negotiation advice on one deal we were working on saved us P400,000!”

The list goes on and on.

What about you? Do you want your name to be included amongst Trace’s success stories? Then click “I want to be Trace’s next success story” to register for the seminar…

Yes, I want to be Trace’s next success story!

You might be asking, “SO how much will this seminar cost me?” Let me you ask you this…

“What amount of money will you pay to learn how to make millions in real estate?”

I don’t know the tuition fee you need to pay to become a good doctor or nurse or have a high paying job. Say the tuition fee is P50,000 per semester – so we have 2 semesters per year and then multiply that by 4 years…or P400,000. That’s a lot of money but it’s worth it because you can recover that money in just 1 year working as a nurse abroad. Right?

Here’s the good news: once you learn what Trace will reveal during this seminar, you can literally know how to develop a million-peso per year real estate business right here in the Philippines. Jessie Raquel for instance made P500,000 on just one deal. Eden April Alemania routinely makes P200,000 to P400,000 per deal.

The even better news is that you will not spend P400,000…not even P40,000…or even P4,000 for your tuition fee. Trace though can easily charge that amount or more. In fact, one student paid Trace P11,500 to have lunch with him for one hour. That’s right: one hour with Trace can easily set you back by more than P10,000. But at this seminar, you get to spend the entire day with him for less than half that amount.

Alright – I want to make millions…so sign me UP NOW.

In fact, it gets even better. Trace told me that he wants to give people a lot more value than what they’re paying. Trace is giving you not just one seminar but a series of online seminars (one every month – January, February, March and a follow up online seminar in May) as well.

In fact, the January webinar (online seminar) is already over and you might miss out on the February webinar as well (Trace told me though that if you register on or before February 14, he will give you the recording of the February webinar absolutely free!). The February seminar is about having “Millionaire Systems”.

I want the February webinar so let me in!

One more thing… this seminar is more of a workshop. You will learn how to talk to banks (and learn how to buy foreclosed properties from them), sellers, buyers, renters and lenders (or potential money partners) using scripts that Trace and his students used successfully in negotiating a lot of deals.

I want to attend the workshop!

Lastly, Trace told me he wants to limit the attendance to this seminar. Why? He wants to interact with the audience more and he wants to get to know you. He told me “I really don’t make money when you buy my book or even attend my seminar. I make the real money when I get the student to partner with me.” Shhhh….don’t let Trace know that I told you that. It’s supposed to be a secret. At the end of the seminar, he will announce a way for you to apprentice under him and even become his business partner as he puts up a real estate company in the Philippines.

I want to become Trace’s apprentice!

Sorry I digressed… Trace wants to limit attendance to only 100 people – 43 have already registered so there are only 57 slots left. The Think Rich Quick Seminar is being promoted by seminar promoters, wealth coaches, and Trace’s students and franchisees. Literally, this sales letter is going to be read by over 100,000 people and so you don’t want to be left out.

Let me in! I don’t want to be left out.

Just realize the price of admission (which is only $55 or its peso equivalent) is a small fee to pay to know powerful real estate techniques that will put money in your pocket. The seminar is also a good way to become Trace’s apprentice and partner. Take advantage of this opportunity NOW by clicking HERE!

—

Personally I look forward to learning more about wholesaling and how to invest in real estate without borrowing money from banks. I hope to see you at the seminar!

—

To our financial freedom!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Click here to contact me via E-mail
Mobile phone (Call/SMS): +639178843882
Follow me in twitter:http://twitter.com/jay_castillo
Become a Fan in Facebook:Foreclosure Philippines fan page

Text by Jay Castillo. Copyright © 2010 All rights reserved.

P.S. You need to sign up before February 14 in order to get access to the online seminar (webinar) for February.

P.P.S. Right now there are 43 registered attendees so there are only 57 slots left. Register NOW to get IN. Once all the slots are filled, Trace will close this and you might need to wait 1 year to attend the next one! I don’t want to wait a year so SIGN me up NOW.

*Update – Other payment options:

1) Pay through Western Union. Here are the details:

Send $55 to TRACE through Western Union.
complete name: Trace Trajano
address: 9647 Cedar Knoll Dr., Mason OH 45040, USA

Email him here – moneyyoda@gmail.com and send him the Western Union tracking ID or number.

2) If you don’t have a paypal or credit card, you can also deposit your payment ($55 or peso equivalent) in this BPI account:
Account Name: Kristine Ann E. Aganon
Bank: Bank of the Philippine Islands, Tandang Sora Branch
Account Type: Current
Account No: 2385-0616-28

You are invited to the first ever Think Rich Quick seminar on March 27, 2010 is a post from: Foreclosure Investing Philippines

My wife who has become so obsessed with finding a new house we can call our home shares updates on what we are thinking of doing with our old house that was devastated by Ondoy, what things to consider, our target locations, finding not just a house but also a sound real estate investment by searching foreclosed property listings, and applicable tax exemptions and pending articles about this and other taxes that apply to real estate, which I hope she finishes soon…

I’m just glad that I was able to convince her to buy a property the way true real estate investors looks for a good deal. Knowing how stubborn she is, I was surprised how easy it was for me to convince her that this is a perfect opportunity for us (as a team) to find a really sound real estate investment that will produce a good positive cashflow if we decide to have it rented out, or sell it for a significant profit down the road. This can only happen if we buy a house well below market value and apply Rich Dad‘s principle “… You make money when you buy, not when you sell” as often mentioned by Robert Kiyosaki, best selling author of “Rich Dad Poor Dad”.

Our journey to our new house

By Cherry Castillo

As most of you may already know, we are looking for a new house, as our old house was totally devastated by Ondoy. I am sure many of you are in the same boat as ours. Of course, our decision to move entails more decisions with regard to the next steps, such as:

1. What do we do with our old house? Right now, we have a payment holiday until January 15 with Pag-Ibig. But after that date, we have to continue paying the monthly amortizations. Admittedly, the market value of the house is in question, and it’s not practical to continue paying the amortizations which was based on the market value of Provident Village prior to Ondoy. The next question is, do we sell it now, do we let Pag-Ibig foreclose it, or do we surrender it through a dacion en pago (a.k.a. payment in kind – that is, we give the house as payment for the loan)? If we sell it now, we will be selling it at a loss, but we will be cutting our losses since we will stop paying the high monthly amortization. If we let Pag-Ibig foreclose it (or if we surrender it through dacion en pago), how do we go about it? While it is clear that my husband will no longer be able to take out another housing loan from Pag-Ibig, would it also affect my husband’s credit rating and prevent him from taking out a loan from banks?

2. Granted that we will be moving, where do we go? We can  go anywhere! Anywhere where there’s no flood of course. And since we are now so paranoid of natural (and man-made) calamities, if we are to move, we have to make sure that the area is one that was not reached by floods and that there is at least a second floor.  I don’t want to be in the mountainside too for fear of landslides. We are now open to condominiums (unlike before, when I really could not imagine living in one), but not those that are too high, as I am also concerned about earthquakes. You may have noticed that there have been a lot of news about earthquakes in the Asian region and in the Philippines in particular. I have been telling my officemates that the best place to be is in a low-rise condominium, somewhere in the 3^rd or 4^th floor, since it will not be reached by floods, the structure will be strong enough to withstand earthquakes, and if there’s a fire I can jump out of the window and just have broken bones, or, if there’s a swimming pool nearby, I can just go straight to it. I know it’s a bit on the psycho side but you really get to think a lot about these things if you’ve gone through the great flood brought about by Ondoy. Oh, I forgot, I don’t know how to swim. I better join my son in his swimming lessons this summer! And time to turn into reality the Ondoy-related ideas I have thought about.

3. Where are our target locations? I have narrowed down our choices to the elevated portions of Kapitolyo, Pasig, San Juan, and Quezon City near UP. Aside from the earlier-mentioned considerations, it is very important for us to be near to a good co-ed school for our son as he will be turning five in January 2010 already and it won’t be long before he enters elementary school. I have sort-of developed loyalty to Mother Goose  Playskool and Grade School (This is my son’s school in Provident Village, Marikina which was also devastated by Ondoy. Because they have several branches, they allowed my son to finish the rest of the school year in their Makati branch. Mabuhay ang Mother Goose!) so I want to find a house near a Mother Goose branch. As for my work, I am currently working in Makati but I am open to moving to Ortigas or QC, or maybe if my husband’s business picks up, I might just help him in the business. One of the best lessons I learned in the past years is that TIME is the most precious commodity. There are only 24 hours in a day and spending it on the road is totally useless. So the house should be near the place of work and study. In the course of my research, I have learned that prices are really so steep in the good areas.

4. This of course led me to search our site for foreclosed property listings (In the right side of the this page, you can use the “search” function to look for listings in this site.) I have also called several banks so I have updated listings with me, which my husband will be posting soon. I have also revisited my husband’s post on the Ultimate List of Bank Websites and I have found some updated listings there too. I have found a lot of promising properties and I must admit that it’s really exciting looking for good buys. I have been a bit depressed since last week, after I visited our old house and saw its sorry state. I determined that the only way for me to get out of depression is to finally have a new house! I have been joking that leaving our house is like breaking up with a boyfriend of 5 years – the only way to have closure is to have a new house/boyfriend! The process of looking for and deciding on the perfect place to grow our roots is both tiring and exciting. I do hope we find the house meant for us soon. We have visited a foreclosed property in Mandaluyong last week, full of excitement, only to have our bubble burst because of the really bad neighborhood, one of the worst as my husband put it (And he grew up in Mandaluyong! I really don’t understand why the Mandaluyong local government spends so much money fixing the islands  when they have so many squatters!).  My husband reminded me that it should be the other way around – we should find the worst looking house in a good neighborhood. I have also selected several properties and when I called up the bank, I discovered that they either have pending cases or encumbrances, or the bank does not have possession. Hay! I guess we have to look at more foreclosed properties (Around 100 more according to my husband – that’s a lot!). In God’s time, I know we will find the one for us.

5. Applicable taxes and tax exemptions? Being the tax person that I am, I really have to consider taking advantage of the  capital gains tax (CGT) exemption from the sale of principal residence. I also need to create a post about this and all the other taxes – real property tax (RPT), percentage taxes, VAT, etc. (Okay, I’m really delinquent I admit!).

So basically, we will be going through the entire process of choosing a property that will also be a good investment. We are also looking at other properties, though not foreclosed but are rather houses for sale by owner (FSBO), but which look like good deals. We will do our best to document each step of the way so that it can be a handy and useful guide for everybody, much like a walk-through of the process. Wish us luck!

Cherry is my wife. She is a certified public accountant (CPA) and lawyer.

—

My vision – financial freedom for all!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Click here to contact me via E-mail
Mobile phone (Call/SMS): +639178843882
Twitter: http://twitter.com/jay_castillo
Facebook: Foreclosure Philippines fan page

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

PS. If you are a new visitor, please start here to learn more about foreclosure investing in the Philippines.

PS2. Larry Gamboa and Bo Sanchez will give the Think Rich Pinoy Seminar this November 21 at the Philamlife Building in UN avenue in Manila. Larry will discuss his unique Real Estate methods, buying foreclosed properties and turning them around for passive income. You’ll also get to play Robert Kiyosaki’s CashFlow 101 Game and learn! To attend, click here now!

PS3. If you feel that anyone else you know might benefit from this post, please do share this to them and don’t forget to subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. If your inbox is getting full, you may subscribe through my RSS Feed instead.

Our journey to our new house – Finding a new home like true real estate investors is a post from: Foreclosure Investing Philippines

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I first played Rich Dad‘s Cashflow 101 game way back in 2007, after I found Think Rich Pinoy Seminar attendees who organized their own cashflow 101 game sessions.

I was hooked ever since. I play cashflow 101 whenever I get a chance to do so as part of “sharpening the saw”.

I believe that the cashflow 101 game effectively simulates one’s  journey out of the rat race and I would like to share here what I have learned from playing what I consider to be a “life changing game” and its practical applications in real life.

Here goes my Top 7 lessons learned from playing Rich Dad’s cashflow 101 game…

A photo of the cashflow 101 board game courtesy of Earth del Mundo

1. Simplify and get out of the rat race faster

I noticed that whenever I played the cashflow 101 game and was able to choose a “simple” profession like a truck driver for example, I was able to get out of the rat race faster. This happened during the Think Rich Pinoy Seminar I attended last August 2007. As a truck driver, although my salary was low, my monthly expenses were also very low.

Because I had  low monthly expenses, I already had a positive cashflow and all I needed to do was just get those passive income generating deals. After each payday, I had more money to invest, and with just a few passive income generating deals, I had enough passive income that exceeded my monthly expenses, and I was able to get out of the rat race faster.

In real life, I am applying the same strategy by reducing my monthly expenses by leading a simple life. This was also described by Bo Sanchez in his book “Simplify and Live the Good Life” and T. Harv Eker in his book “Secrets of the Millionaire Mind”. My family and I lead simple lives, which explains my very low target monthly passive income which is why I know I am going to get out of the rat race in real life very soon!

2. Start with small deals first, and the big deals will follow

In the beginning of the game, I always chose small deals even if they produced little cashflow. Later on, when the market presents good opportunities, I was able to sell or “flip” these small deals and then I used the profit to buy the bigger deals that produced greater cashflow, allowing me to get out of the rat race.

My four “green houses” which I’ll exchange for a “red hotel” during a recent game I played with Earth. I was not able to get out of the rat race during this game but we only played for an hour due to time constraints.

In real life, I am also following the same path. I focus on single family homes or properties which may produce little cashflow at  the very least, but can actually generate significant profits if “flipped” or sold through “rent-to-own”. I can then use the profit later when they are enough to get bigger deals that can produce bigger positive cashflow.

3. Over-leverage often leads to bankruptcy

During the game, we often encounter great deals that produce a lot of positive cashflow but require a big downpayment and it is tempting to borrow money from the bank just to be able to buy those great deals. However, there is such a thing as becoming over-leveraged which can produce negative cashflow situations because of the high monthly payments for those loans.

Even if one’s passive income is enough to cover the monthly payments for those loans, imagine if something happened and the monthly income of one’s investment properties were affected, suddenly the monthly payments for the loans cause a negative cashflow and can lead to bankruptcy. The same can also happen when one is downsized. This is the reason why one should avoid deals that lead to too much exposure or over-leverage.

Applying this is real life is a no brainer. I would not dare buy those multi-unit apartments unless they were in the same price range as the single family homes I focus on. As mentioned in lesson number 2 above, I can go for those bigger deals later when profits from my small deals are enough.

4. It is better to wait for a good opportunity than settle for those not so good deals

In the game, good opportunities come in the form of deals that have big ROI potential, and can be bought with little or no downpayment, while producing positive cashflow. If any of these elements are missing, I consider a deal as “not so good” and I pass them up and just wait for the good deals.

In real life, I do the same and patiently wait for good opportunities. If a not so good deal comes my way, I can either look for ways to make it into a good deal, or I just pass it up and wait for another more worthwhile deal to pursue.

5. Learn how to spot a good deal and grab it

One of the biggest challenges one faces in the game is how to spot those good deals so that you can grab them. Sometimes a good deal is right under your nose and it slips away because you didn’t realize soon enough that it was a good deal.

I believe spotting good deals is a skill and you can only learn this skill by continuously analyzing deals. Once you get the hang of it, you will start seeing those good deals more often. Normally those deals would have slipped away without you knowing it. If you see good deals often, it’s just logical that you will eventually grab one of those deals right?!

6. Learn how to protect your investments

I distinctly remember games where apartment buildings getting toppled by mud and all the cashflow generated by these properties are gone, unless I am covered by insurance.

Does Ondoy and Pepeng ring a bell? Who would have thought that a game like cashflow 101 actually teaches us to protect our investments from such disasters and calamities. Better get your investments insured with “Acts of God nature” coverage pronto!

7. Net worth is worth less, cashflow is king

Once you play cashflow 101, you will notice its emphasis on the importance of cashflow over one’s net worth. You will see that it really is more important to have positive cashflow from passive income. What is the use of having a big net worth if you don’t have any positive cashflow?

In real life, we should apply this by focusing on building our positive cashflow with income generating assets. Even if we have to use leverage to buy these assets, it really is okay. We call this good debt. Don’t be afraid to have good debts that buy real assets that produce the cashflow we need to get out of the rat race for real!

Get out of the rat race in the game, and in real life!

So you got out of the rat race when you played cashflow 101. So what?! That’s useless if you don’t take action and apply the lessons you have learned from the game in real life. But playing a game is one thing, doing it in real life is an entirely different thing… or is it?

I can truly say that Robert Kiyosaki‘s Cashflow 101 game is a “life changing” game because my life has really changed ever since I decided to apply in real life the lessons I have learned from it. Take note that I only listed the top 7 lessons I have learned and I can assure all of you that there are more lessons one can learn from this game.

People may find it hard to believe that one can learn so much from a game and can have such a huge impact in life. I guess you just have to play the game and experience it for yourselves.

How about you, have you played Rich Dad’s cashflow 101 game? What did you learn? Are you applying them in real life?

—

My vision – financial freedom for all!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Twitter: http://twitter.com/jay_castillo
Facebook: Foreclosure Philippines fan page

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

PS. If you are a new visitor, please start here to learn more about foreclosure investing in the Philippines.

Top 7 lessons I learned from playing Rich Dad's Cashflow 101 game is a post from: Foreclosure Investing Philippines

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This is the second part in my series on the reflections of a real estate investor(that would be me!) after Typhoon Ondoy’s wrath. If you missed the first part, you may want to read it before reading this. You can find part one here – Reflections of a Real Estate Investor: Ondoy’s aftermath

Next I try to share what I’ve learned and become aware of as a licensed real estate broker, homeowner, and as a real estate investor in Provident Village, Marikina City, Philippines. Here goes…

This banner was placed on a wall at the entrance of Provident Village, Marikina City

Yes, I know we can!

Last Monday, I went back to Provident Village to see the situation and to check if we can already go back to our house to try to salvage what can be salvaged and assess the extent of the damage. As I turned right to the entrance of Provident Village, I saw the banner above and  tears rolled down my face immediately. No, they were not tears of despair but rather tears of hope. The banner reads “Bangon Marikina, kaya natin ito (Get up Marikina, we can do this!)”. I say yes, I know we  can!

I was also pleasantly surprised that there were a lot of bulldozers and trucks that were being used for the clearing up operations. Last Monday, the front of our house was still full of mud and debris which made it not passable to small cars like my Hyundai Getz but I can see that our entire street will be cleared before the end of this week.

Suggestions from Mayor MCF

After a quick visit to Provident Village, I then proceeded to the Marikina City Hall to attend a meeting between Mayor Marides C. Fernando (also known as MCF to her constituents in Marikina City) and the Real Estate Brokers Association of the Philippines – Marikina River City Inc. (REBAP-MRCI) chapter which I was a member of.

REBAP-MRCI President Malou Llado(left) speaks as MCF(center) and other REBAP-MRCI members listen

Meeting adjourned. I’m the guy at the back but in the middle of the picture, with glasses.

As real estate brokers (and also as a real estate investor in my case), members of REBAP-MRCI wanted to know how we could help the Marikina City Government after the City of Marikina was badly hit by Typhoon Ondoy. We were also interested in finding out what plans the Marikina City Government had for Marikina after the devastation. Obviously, the floods will have a big impact on property prices and demand for such, which in turn would affect the livelihood of real estate brokers that focus on the City of Marikina. I’ll try to summarize what I learned from the meeting below:

1. MCF suggested that houses in those areas that experienced very high floods should seriously consider using their first floors exclusively for garage or parking purposes and houses should at least have a second floor. A roof deck is highly recommended. It would be more like a house built on stilts.  I personally have thought of the same in case we do decide to push through with plans to have a major renovation done on our house. More on this later.
2. During the conversation, one member of REBAP-MRCI asked if there were any plans to put up more water pumping stations in Marikina. MCF answered with another question, “Where would the flood waters be pumped to?” I guess the real problem is that the flood waters are not really from Marikina itself but rather from the surrounding areas. That’s the problem with being a valley.
3. With regard to reports that some homeowners are selling their houses at ridiculously low prices and yet still have no interested buyers, MCF advised us that maybe we can find opportunities there. Of  course as licensed brokers we may help those that want to sell and also help find houses for sale for real estate investors.
4. Another suggestion from MCF was to use low lying areas exclusively for non-residential purposes which are okay to get submerged by flood waters.

Our meeting got cut short because of an unplanned but very welcome healing mass with healing priest Father Suarez which was just about to start at the Marikina City Hall. The meeting was adjourned and  we just attended  the mass. This was just what we all needed, healing!

Father Suarez during the healing mass at the Marikina City hall

Lessons learned and observations of a homeowner in Provident Village

1. Always have your house insured with coverage for Acts of God. Though a lot of people have said that what had happened was actually an act of man(ex. the alleged releasing of water from dams, climate change, etc.), it would not hurt to have Acts of God coverage. The higher premiums would have been well worth it. Unfortunately, our house only had fire insurance. I’m quite certain insurance premiums would sky rocket after the floods and I also won’t be surprised if insurance companies would start refusing to give such coverage to areas hit by the floods.

2. Houses should be built like houses on stilts. In this configuration, the ground floor would be just a wide open space that can serve as parking or a basketball court, etc.  At the very minimum, houses should have a second floor that has an exit that won’t be hampered by flood waters (more on this below). There were a lot of reports of people being trapped at their second floors and they only got out by destroying the ceiling and the roof.

3. Functionality of doors and windows and their locks should not be affected by flood waters. One thing in common I found with most houses that got submerged by the floods was the doors and windows(including fire escapes) could not easily be opened. Either the door mechanisms/padlocks got jammed or the wood of the door itself expanded and got stuck with the door jamb. I’m not sure if there are water resistant door mechanisms and locks out there but I guess keeping them well lubricated would help. As for doors, I guess using high quality wood would help prevent the “pamamaga(expanding)”. Obviously, if the rising water had force and pressure, this would also hamper opening them.

4. Have rubber boats, air-beds, life-jackets, life-savers or inner tubes, or any acceptable “floatation” device handy. These would at least give you a fighting chance in case you needed to move to higher ground. When my son and Emily, his nanny, eventually had to transfer from roof-to-roof to reach the 3-story apartment building a house away, they used an air-bed from one of our neighbors. I’m so thankful for the courage and quick thinking of Emily, and Edgar, one of our neighbors. It turns out Edgar was a ship captain and was prepared for such situations. Thank God!

5. Have some sort of alerting mechanism in place that would warn against floods, etc. Here in the office, I implemented an automated monitoring system on critical servers which automatically sends SMS alerts which I receive on my cellphone in case conditions that can lead to problems occur. For example, if the free space on the system drive of our e-mail server goes below a threshold we have set, all concerned I.T. staff including myself will receive an alert through a text message. I just wish that someone can come up with a similar system that would alert the City Government just in case an unusually high amount of rain fall occurs or if flood waters or water released from dams  are detected from surrounding areas that would eventually end up in Marikina City.  The City government can then alert residents or even evacuate them. Maybe I should forward this idea to PAGASA, they already have equipment that measure rainfall right?

6. The flood receded very fast so the problem is really with the source of the floods. Would you believe that the flood that reached levels as high as the ceilings of the second floor of houses in Provident Village receded by the next day? Yes, it receded that fast. In fairness to the efforts of the Marikina Government, I believe that the drainage systems are functioning as they should, but it just so happened that the flood waters, wherever it came from, was just too much. What if there was a way to at least control the source of the floods? Another  challenge, how can the drainage systems be cleaned of the mud (that will eventually harden) left behind by the flood waters?

7. Just sell the house and live in a flood free area! I know a lot of you have this in mind just like me. This would be the ultimate solution for me and my family unless someone finds a permanent solution that would result in a flood free Provident Village. I just wish selling the house would be easy. We could then move to another place in Marikina that was not affected by the floods. In case I decide to, I would have to wait for the village to be cleared of all the mud and debris before I can sell the house. Let’s wait and see…

Points to ponder from the point of view of a real estate investor

1. Do I renovate the house and construct a second floor and a roof deck or do I repair the house at its present configuration (our house is just a bungalow)? The obvious things I should consider would be the cost involved and if these can be recovered if I have our house rented out or sold down the road. For the same cost of constructing a second floor plus roofdeck, I could already have a new house constructed somewhere else that is flood free, which I can definitely sell for a profit or rent with positive cashflow in the future.

2. Do I sell the house now (after doing some repairs to make it ready for occupancy) or wait for property prices to stabilize after a few years? As mentioned above, property prices in Marikina have surely been affected by the recent floods. Demand is also very low while supply is very high as I’m sure a lot of homeowners already have their Provident Village houses for sale while there are very few people interested in buying properties in areas affected by the floods(except maybe for investors). If I decide not sell the house now, I should be able able to find tenants to at least cover part of the monthly amortizations for our house.

3. As an investor, I really should avoid flood prone areas! I’m just lucky that all of my investment properties were not affected by the floods and only my primary residence was hit. Just the same, I should also treat my home as an investment as I have mentioned in my recent post:  Why not treat your first home as a real estate investment?. As early as now, the implications I see are getting a negative cashflow if I do decide to have our house rented out, the difficulty of finding tenants/buyers for a bungalow in the middle of  Provident Village, the time it would take for the clearing up operations to finish(I estimate this to finish around Christmas time), and more importantly, the safety of those who would be living in our house.

What do you think?

To be continued…

*Photos of MCF and Father Suarez are courtesy of Cora Uy of REBAP-MRCI: http://www.rebapmarikina.com

**I would also like to thank all REBAP-MRCI and REBAP-QC members for the relief goods given to fellow REBAP members affected by the floods, including me and my family.

Lessons learned by a real estate broker, homeowner, and investor from Provident Village is a post from: Foreclosure Investing Philippines

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I remember a lot of comments from readers and also from people I meet in person who tell me that they are just looking for a place to live and are not really looking for a real estate investment. My default answer is “Why not treat your first home as an investment?”

In reality, once you buy a property, you become a real estate investor. Buying a home is often considered to be the biggest investment one can make so it’s best to treat it as a real investment — one which will give you reasonable returns if you do decide to turn it into a rental property or if you sell it further down the road.

What are reasonable returns?

Normally, when a person buys a house which he intends to live in, he does not consider how much rent he would earn if he decides to rent the property out, and whether the possible rental income would be more than his monthly amortization. It is not uncommon for a homeowner who moves up the corporate ladder or improves his situation to move to a better home but keep his first home for sentimental reasons.

Thus, if in the future, the homeowner decides to move to another house and converts his first house into a rental property, the rentals are often not enough to cover the monthly amortizations, thereby producing a negative cashflow situation. Had the homeowner considered his first house as a real investment, he could have dedicated more time to finding a property that would fetch better rental rates which could cover the monthly amortizations, thus giving the owner a nice positive cashflow.

More often than not, factors that may affect market values and appreciation are not given too much attention by a home buyer as the primary goal is just to have a place to live in. When the time comes to sell the property, it is very likely that there is little or no room for significant profits. At times, the homeowner may even have to sell at a loss. This situation could have been avoided had the home owner considered buying a property that was way below market value*.

*-”Market Value” is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

Buying a property below market value would be in alignment with what Robert Kiyosaki often says which is “You should make money when you buy, not when you sell”. Money is made in the form of equity* at the time the property is bought and the profit is realized when the property is sold. Robert Kiyosaki is the bestselling author of Rich Dad Poor Dad.

*- Equity is the difference between a property’s current appraised value or market value and the loan principal balance

The opportunity is there so don’t waste it

Everyone at one point or another will really have to buy his or her own home so why not make the most out of the opportunity? If done well, one could gain passive income in the form of positive cashflow, or a significant profit, or both. At the very least, the education one can gain from treating his first home as a real estate investment is priceless.

It is virtually risk-free

Since initially the goal of the home buyer is to have a place to live in, he would not really be concerned with holding costs associated with properties that take time to lease or sell. He/she lives in the place anyway so this makes it virtually risk-free in my opinion. In fact, I apply the same strategy to all of the deals that I have done this year as my last fallback would be to live in the property just in case I am unable to sell or rent it quickly.

The challenge in deciding to live in one’s investment property

If one decides to live in his/her own investment property, chances are one will have the tendency to  fall in love with the property and over-improve it. I guess that’s the only risk that one should manage. Falling in love with a property can cloud one’s judgment and introduce costly improvements that one might no longer be able to recover.

If your first home is good investment, it can lead to more investment properties

If one buys his first home as an investment and not just as a place of residence, it can help ensure that more real estate investments would follow or at least it won’t prevent the homebuyer from buying more investment properties. Believe me when I say that buying a home that costs too much and is considered to be a liability can really hinder one’s ability to build enough capital to buy the next investment property. This is based on first-hand experience.

Ready to buy your first home? I wish you successful investing!

—–

To our financial freedom!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Social Network: http://foreclosurephilippines.ning.com
Mobile: +639178843882
E-mail: ph.investor [at] gmail [dot] com

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

P.S. – If you are a new visitor, please start here to learn more about foreclosure investing in the Philippines.

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Why not treat your first home as a real estate investment? is a post from: Foreclosure Investing Philippines

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“Around here, however, we don’t look backwards for very long. We keep moving forward, opening up new doors and doing new things… and curiosity keeps leading us down new paths.” – Walt Disney, as quoted in the movie “Meet the Robinsons“

I have often spoken of the time when I was unable to get a foreclosed property from a Buena Mano Green Tag listing a few years back and I just realized that it would be better if I created a post about this. It turns out, however, that I already wrote about this in my old site so I am just re-posting that article here, with some minor updates to make things clearer…

This happened way back  August 2007 after just 2 weeks of attending the weekly Cashflow group sessions at The Charter House in Makati. For those who have no idea what the Cashflow group was, it’s a weekly meeting of people who are interested in real estate investing as described in Larry Gamboa‘s book “Think Rich Pinoy” (Page 142).

Anyway, as an offshoot of attending those meetings, I was able to get a copy of BPI’s Buena Mano Green Tag listing and I highlighted promising properties on the list. When I showed the list to my mentor then (Dinna Revilla, who I contacted because Larry Gamboa said in his book that she was his mentor), she pointed out this one property in Makati that was probably worth looking into because of its good location.

This was a condo unit at the BSA Mansions in Makati with a floor area of 34sqm. The intention was to make an offer to buy it for 2M. The day before (which was a Tuesday as the weekly cashflow group meetings are held Wednesdays), I called BPI to check if the unit was still available. They said yes and that I could visit the unit anytime. During the cashflow meeting, we decided to visit the unit on Saturday. Come Saturday, fellow Cashflow attendees Karen, Glenn, Earth and myself visited the property and found the unit as a great deal mainly because of the good location and relatively good condition of the property as it only needed minimal repairs.

The numbers looked good as comparable condo units were selling at about 2.5M to 3.0M (take note that this was August 2007), meaning I could get at least P500,000 in gross profit if I flipped the property. If I were to go for a cashflow strategy, I could get at least Php6,000 monthly positive cashflow (Php6,000 would be the difference between the monthly rent and the monthly amortizations). I could even get more if I were to rent it out to an expat. Take note that this condo was just a stone’s throw away from Asian Institute of Management (AIM) and Greenbelt 3.

Come Monday, I had a proposal ready and called BPI to check on the property. I was shocked to find out that the property was already sold last Friday, the day before we visited it.

I guess it was a really good deal as the bank officer told me the buyer bought it in cash. Oh well, no need to feel bad as I am sure that there are other properties out there… I just have to keep finding those great deals.

Lessons learned:

1. Great properties are sold quickly, and being able to decide quickly and take action is key. Had we inspected the property sooner, that might have been our first real estate investment. We had waited until Saturday when we knew about the property since Tuesday. What a difference a few days made!  Of course, ready cash on hand for investment purposes would have helped as well!
2. Do the numbers fast! Back then, I created a simple excel sheet to help me do this, I will share this here soon when I finish making it fool-proof.
3. It’s all about location, location, location! I am constantly on the lookout for bargain properties  in great locations. I am more confident that I will be making my money when I buy, not when I sell — meaning, I’m not doing any speculation as this is based on the present market value of comparable properties.
4. I found out that this bank sold properties through mortgage loans, which meant I must be able to meet their financial requirements which are very stringent. Although I was confident on this, it would still take more time as compared to banks that sell properties through a contract-to-sell.

Take note that the above article was written almost 2 years ago. Do you think my failure to acquire what could have been my first investment property made me lose interest in pursuing my goal of becoming a successful real estate investor? Of course not! If it had, you wouldn’t be reading this right now. Failures like this happened to me lots of times but persistence, patience, and passion helped me sustain my pursuit. If I remember correctly, similar failures happened to me at least  5 more times but I decided to suspend the disbelief and kept moving forward. I got the “Keep moving forward!” attitude from the movie “Meet The Robinsons”. This movie is highly recommended for anyone who has experienced failing in life and you will understand once you have watched it. Trust me on this!

There was a memorable conversation in that movie, where the family was having dinner and Lewis fixed the peanut butter and jelly contraption but failed. Lewis was sad and felt sorry for himself. He was surprised when the family was so happy that he failed!  They were jubilant because they knew that from failure, he had learned a lot and not much from success. And then they told him the magic words “Keep moving forward!”

My wife and I really believe in this. How many times have we heard of stories of successful people who had a failure that could have made them give up forever? What made the difference is how they carefully dissected their failure, learned from it, and moved forward. Many times, if successful persons hadn’t encountered failure (or failures), they would not have been forced to move forward. In short, failure can be a turning point in one’s life. It can either propel you to work harder in order to succeed, or bring you to the throes of depression. You have the power to choose which path to take.

I remember that during those times two years ago, I would often hear people around me say that “real estate investing is hard”, “real estate investing needs big capital”, “you need to have connections”, “investing in real estate is risky”, etc. and all those things that beginning real estate investors hear from so called “well-meaning” people around us. I’m just glad I didn’t listen to all that crap!

Learning from failure is such a tremendous, life-changing thing that it deserves a separate post. In the meantime, “Keep moving forward!”

—–

To our financial freedom!

Jay (and Cherry) Castillo
Real Estate Investor
REBL#: 20056
Blog: http://www.foreclosurephilippines.com
Social Network: http://foreclosurephilippines.ning.com
Mobile: +639178843882
E-mail: ph.investor@gmail.com

Text by Jay and Cherry Castillo. Copyright © 2009 All rights reserved.

I failed to grab my first real estate investment property… so what?! Just keep moving forward! is a post from: Foreclosure Investing Philippines

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