I just noticed that so many are people are asking “How do I start with real estate investing?”. I was just about to answer one of the comments when I realized my reply was already good enough to be an article. It already had more than 700 words in it! Anyway, I believe the timing for answering this frequently asked question is perfect as we start with a brand new 2012!

For those who asked the same question, here goes…

7 tips to help you get you started with real estate investing

1. Begin with the end in mind. Answer the following questions:

• What do you want to achieve with real estate investing?
• Is it financial freedom?
• How do you define YOUR financial freedom?
• What is it in in terms of money (ex. passive income)?
• Is it about time freedom?
• Is it about having the freedom for you to pursue your real purpose in life?
• Is it about all of the above?

I believe the answers to the questions above can lead to what people call a “Vision”. Actually this is probably the hardest part of the process of getting started, and yet without this, one might end up running around in circles for 48 years. Okay, I’m exaggerating.

Seriously though, this is the first thing you should do, but it can get complicated. For now, I suggest you start forming your “Vision” in your mind and let’s get back to this in another post.

2. Learn as much as you can about real estate transactions in the Philippines. If you are going to invest in real estate, you will certainly enter into real estate transactions, so you need to familiarize yourself with the “ins and outs” of these transactions.

If you want to focus on investing in foreclosed properties, you can try attending a real estate auction as an observer and learn as much as you can, before actually buying any foreclosed property. Don’t be afraid to ask questions, especially when the bank officer says you should have already done your due diligence!

Whether foreclosed or not, you also need to become familiar with the legal aspects of property ownership, real estate taxation, real estate laws in the Philippines, etc. If these sound like what you would find when attending a seminar or review as part of the requirements to become a licensed real estate broker, give yourself a pat on the back because that is my next tip…

3. Attend a seminar/review for aspiring licensed real estate brokers – Do this  not really for the purpose of become a licensed realtor, but more for the knowledge. Of course, it wouldn’t hurt if you did take the real estate brokers exam and passed!

4. Find your niche. You need to become an “expert” in one area, preferably an area that is near where you live, or where you work, any place that is near you. When I say near, it should be no more than 30 minutes to an hour away. Anything farther might lead to wasting your precious time, money, and effort.

No, you cannot just say you want to invest in Metro Manila. You need to find something smaller, like a village, a barangay, a municipality, or whatever area suits you. You need to be an “expert” so that when an opportunity knocks, you will know if it really is a good deal or not. I believe it is hard to get into this level if you focus on an area that is too big, like the whole of Metro Manila for example.

Don’t believe me? Go ahead, try to focus on the whole of Metro Manila and analyze every “promising” deal that comes your way, and see how fast this will burn you out.

5. “Pay yourself first.” I believe the best way to raise capital is to raise your financial literacy so that you can manage your money and start saving for your investment. Don’t think about those “nothing down” real estate deals. If your problem is the lack of money, maybe your problem is the way you handle money.

Going into real estate investing won’t solve the problem of mismanagement of personal finances, whether you have a lot of money or not. You should solve this problem BEFORE you start investing in real estate. The simplest way to start is to pay yourself first. If you have read Robert Kiyosaki‘s “Rich Dad Poor Dad”, or David Bach‘s “The Automatic Millionaire“, or T. Harv Eker’s “Secrets of the Millionaire Mind”, or even George S. Clason’s “The Richest Man in Babylon”, you would know the wisdom of paying yourself first.

6. Let people know you are now a real estate investor. Announce to all of your facebook friends that you now invest in real estate. Send a text message to all the people in your phonebook, and/or send an email to everyone in your contacts list. Just remember that spamming is bad! Don’t forget to get some calling cards, tell people that you meet how they can contact you through this valuable “leave behind” that they can keep and retrieve when the need arises.

7. Join or start your own real estate investors club. Preferably, join a group with people from the same same area within your niche. It can be a formal real estate club, or just a network of friends that are also involved in real estate investing who meet regularly (how often is up to you, but don’t over do it!).

It would be great if your club or network includes real estate brokers, lawyers, accountants, etc, those who can help you with how things work, specifically in your niche. Aside from making new friends, you may also find mentors and business partners. Just be careful and keep an eye out for people who are out to make a quick buck at your expense…

~~~

Please bear in mind that I wrote this much like I was answering a comment, so this list only includes 7 tips that came to mind and there are definitely more! I’ll most probably have a part 2 for this in the near future.

Any more tips to get started?

Are there any other real estate investors out there who are willing to share? If you have already bought an investment property, I’m sure others who want to get started would also like to hear from you! Please share more tips through the comments below. Thanks!

Happy Real Estate Investing in 2012!

~~~

To our success and financial freedom!

Jay Castillo

Real Estate Investor
PRC Real Estate Broker License 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.

Photo credit: pobre.ch, on Flickr

7 tips to help you get you started with real estate investing is a post from: Foreclosure Investing Philippines

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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!

~~~

Photo credit: WoodlyWonderWorks via Flickr

~~~

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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Imagine this, because of blogging and income from Google Adsense, you were able to buy a foreclosed house. That would be amazing right? But what if I told you that someone has already done that for real? Now that would be awesome!

You may be thinking that it’s me but no.  While I do blog about buying foreclosed properties, and my site also has adsense, my online income is not yet that big, and it was actually someone else who bought a foreclosed house through blogging. Please continue reading to find out who.

I first read about the house that blogging bought way back in December 2008. It was written by James of Pinoy Money Talk.

The foreclosed house that blogging (Google Adsense) bought!

Checkout the entire post here!

As mentioned by James, the house that blogging bought was actually a foreclosed property from BPI.  He accumulated enough adsense earnings to acquire the townhouse. No, his adsense earnings were not enough to buy the townhouse in cash, but it was enough to cover the downpayment. Nice!

Come to think of it, if James had enough adsense earnings for the downpayment, then it’s obvious he will have more than enough to cover the monthly amortizations.

The question is, how did he do it?

I guess the question running through your mind right now is – how did he do it? How did James earn enough money from Google Adsense to be able to make a downpayment for a foreclosed property?

Actually, Professor James Ryan Jonas, who is the founder of pinoymoneytalk.com, will be discussing how to make money online through Google Adsense and other income streams during the Money Summit and Wealth Expo 2011 on July 22-23.

This is just one of the reasons why I look forward to attending the Money Summit this year. I consider James as one of my mentors when it comes to blogging and earning online. Simply put, I am a big fan!

Who else wants to learn how to create another semi-passive income stream through blogging? Raise your hands!

I know I would!

In fact, I used a combination internet marketing (blogging and affiliate marketing to be exact) and real estate investing to help me “retire” from the corporate world.

This time around, I hope to learn more about making money online from James so I can level-up my online earnings.

Anyway, I will  really be at the Money Summit and Wealth Expo because, aside from wanting to learn from James, I will be part of a panel discussion on day 2 of the event.  If you are attending the Money Summit and Wealth Expo 2011, I look forward to seeing you there!

Who knows, we just might learn how to make enough money online to buy foreclosed properties!

Happy learning!

~~~

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.

PS. I am also thankful to James for creating a list of the Top 100 Popular Blogs in the Philippines where www.foreclosurephilippines.com is currently at the 29th spot as of June 2011.

PPS. Today, July 15, 2011, is the last day to avail of pre-registered rates for the Money Summit and Wealth Expo 2011. Click here NOW to learn more and register.

The foreclosed house that blogging bought! is a post from: Foreclosure Investing Philippines

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Here’s good news! Pre-registered rates for the upcoming Money Summit and Wealth Expo 2011 has been extended to July 15. This means  you only need to pay Php5,995 instead of Php7,995! I have also added an exclusive tool as a bonus for readers and subscribers of Foreclosure Investing Philippines. Please continue reading for more details!

Money Summit and Wealth Expo 2011

22 Money Masters share their business, real estate, and investment strategies!

Discover what income opportunities are out there and the strategies you need to learn to succeed at the Money Summit and Wealth Expo 2011. The 2-day conference features22 combined experts in Manila and Cebu who will share various passive income opportunities and investment, real estate, and business strategies to help you add more income streams so you can do whatever you want, whenever you want, wherever you want, with whomever you want, and for as long as you want.

If you register for either Manila or Cebu, you get not just 12 speakers but 22 speakers (2 speakers will be speaking at both Manila and Cebu)! Why? If you attend Money Summit Manila, you will also get exclusive access to recorded video of speakers at Money Summit Cebu — and vice versa! You are, in fact, getting 2 conferences for 1 fee!

Learning Curve Inc. is proud to present Money Summit & Wealth Expo 2011, co-presented by Avida Land and sponsored by BDO, BPI Asset Management, New San Jose Builders, Pru Life, Megaworld, Antel, and Prime Real Estate, with media partners BusinessWorld, Sulit, 88DB.com, Yehey, WheninManila.com, PinoyMoneyTalk, MoneySense, and InfoTXT, and marketing partners Salt & Light Ventures, Businessmaker Academy, and Registered Financial Planners Philippines.

What You Will Learn – Manila
We invited 12 speakers for Money Summit Manila who are experts in business, real estate, and investing who will teach you how to:

1. Build passive income with fixer uppers, with Think Rich Pinoy best-selling author Larry Gamboa
2. Generate regular cash flow from condo sales and rentals, with Cynthia Palad-Yap, Real Estate Movers founder
3. Build wealth with rental properties, with Bong Gutierrez, Avida Land division head
4. Make money from foreclosures and wholesaling, with Jay Castillo, ForeclosurePhilippines.com founder, Sha Nacino, Think Rich Yuppies author, and William Abriza, real estate investor
5. Ride the stock market bull run using peso cost averaging, with Conrado Bate, CitisecOnline CEO
6. Trade stocks using technical analysis, with Bonner Dytoc, Absolute Traders COO
7. Build a diversified portfolio of investment funds, with Ma. Teresa Marcial-Javier, BPI Asset Management group head*
8. Create a money machine of digital products, Ian del Carmen, Fireball Group of Companies Founder
9. Sell high-value information with membership sites, with Jorge “Jojy” Azurin, BusinessSummaries.com founder
10. Create residual income through licensing and royalties, Ardy Roberto, best-selling author and Salt & Light Ventures and Inspire Leadership Consultancy co-founder
11. Earn passive income from blogs and social media, with Vince Golangco, WhenInManila.com Founder
12. Make money online through Google Adsense and other income streams, with Prof. James Ryan Jonas, PinoyMoneyTalk Founder

* for confirmation

Confirmed speakers for Money Summit Cebu include:

1. Jay Aldeguer, Island Souvenirs founder
2. Tomasito Academia, PAREB chairman
3. Noli Alleje, The Property Forum founder
4. Bong Gutierrez, Avida Land division head
5. Conrado Bate, CitisecOnline CEO
6. Eireen Diokno-Bernardo, Dekada Arts founder
7. JP Villegas, Nu Skin Blue Diamond executive
8. Jerome San, Laurus Enterprises founder
9. Mark So, Forex Club Asia founder

What Participants Say

Last year, over 370 participants attended Money Summit. Overwhelmingly, they attributed Money Summit in opening their eyes to the numerous income-generating and wealth-building opportunities and credited Money Summit for helping them take action toward their goal of achieving financial freedom. Here are some of the testimonies:

“There are so many opportunities to explore in the conference.” — Vivencio Lubrin, DMCI

“It’s insightful and you will be moved to take the action on your path to success.” – Raymond Cortes, Zuñiga, Tuple & Co

“The fee is affordable and the lessons learned from speakers are priceless.” –  Madonna Dizon, Glittery Snitch Graphics Design Svcs.

“I learned a lot from this conference. It made me decide that I have to act for my future, so should others.” – Richard Jimenez , Sykes Asia

“Lots of opportunities to ponder, reflect, and take action on.” — Emelita Francisca Marbella, Orange County Plotting Services & Snack Exchange

“Informative and will give participants various options towards financial freedom.” — Sam Ganapin, AIPC

“The speakers are very effective and they exude mastery on their topics.” — Herra Thesa Diaz, Uni-Tec Enterprises

“Very educational. An eye opener!” — Herbert Ponce, Ponce Auto Supply

“Highly educational and can help a lot in developing your strategy on how to make money.” — Francisco Sajonia Jr.

“I learned a lot. The speaker mix is fantastic. Chockful of info.” — Noria Adam-Lim, UP-Diliman

“This is one of the best conferences I have ever attended where I learned a lot!” — Marieta Cruz

“There is a wealth of learning that can be obtained from the summit.” — Melissa Deveza-Guinto, Egg Design Com. Inc.

“High value for my money & time — the knowledge after & meeting people are priceless.”–  Claire Tangonan

When: July 22-23, 2011 (Friday-Saturday); 8:30am – 05:30pm

Where: Carlos P. Romulo Auditorium, 5/F RCBC Plaza, Makati City

[final date and venue for Cebu to be announced]

Fee: Just pay P5,995 instead of P7,995 until July 15, 2011. That’s a very small investment compared to what you could possible earn in massive, passive income! How much are you willing to pay for 22 money experts who will tell you their secrets to generating passive income in business, real estate, and investments? P5,955 divided by 22 is only P272.50 per speaker. How much would they charge you separately for a full hour of consultation or coaching? If you think about it, you’re getting a huge bargain!

But you need to sign up before seats run out! We extended the deadline for the pre-registered rate of P5,995 to July 15. After that, we will charge the regular rate of P7,995.

But wait, there’s more! Want to pay as low as P3,329 per head? Go as a group! The more people, the lower you pay! Check out our special group rates below:

Buy 2 – Get 1 Free: Pay P5,995 for 2 participants and get 1 more free! (equivalent to P3,997/pax)
Buy 3 – Get 1 Free: Pay P4,995 for 3 participants and get 1 more free! (equivalent to P3,746/pax)
Buy 4 – Get 1 Free: Pay P4,495 for 4 participants and get 1 more free! (equivalent to P3,596/pax)
Buy 5 – Get 1 Free: Pay P3,995 for 5 participants and get 1 more free! (equivalent to P3,329/pax)

Limited seats only

CLICK HERE FOR MORE INFO!

or

SIGN UP NOW USING THE FORM BELOW!

Exclusive bonus from foreclosurephilippines.com

Money Summit and Wealth Expo 2011 pre-registered rates extended until July 15! is a post from: Foreclosure Investing Philippines

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*I have turned this into a sticky post for new visitors.

I was supposed to finish writing my “Goodbye and thank you to 2010, Hello 2011…” post, but ended up with this list of the best “How to” articles from Foreclosure Investing Philippines during the year that passed. After all, FIP is so much more than just listings of foreclosed properties and public auctions. I believe you also need to know how to invest in foreclosed properties and bank acquired assets.

I hope this list will help you get started on the right foot. Just in time for the new year right?!

Of course I won’t let 2010 go without counting the blessings that came my way, but for now, here’s a list of “How to” articles from 2010 that can help you get started with real estate investing in 2011:

How to keep the passion burning for real estate investing – 2011 has just started and I know you are all fired up and ready to take on just about anything to succeed with real estate investing. Even with a good start, challenges and problems will surely try to block your path to financial freedom, and how does one “Stay hungry and foolish”? This post aims to help take care of that.

How to turn listings of foreclosed properties into opportunities – So you’ve played cashflow 101 and you got out of the rat race by buying passive income generating real estate, including some foreclosed properties. However, one may realize that buying properties in the game is not as easy in real life. Read this to learn how to start finding those “opportunity cards” for real inside listings of foreclosed properties.

How passive income through real estate investing can lead to financial freedom – What exactly is passive income? Why do you need to start getting those passive income deals to get out of the rat race? Just how does one get out of the rat race faster? Read this to find out.

How to be a proactive real estate investor – We always hear people say “I can’t do this and I can’t do that because of this and that…I have no choice.”. Most of the time, we talk like this to ourselves, unless we begin to be proactive. This article tries to convince us to start believing that we always have a choice.

Are foreclosed properties good deals? – If you think that just because a property is a foreclosed property, then it is automatically a good buy, think again! Before you get started with investing in foreclosed properties, find out why it is often said that real estate investing is a numbers game.

4 reasons why we need to be financially literate real estate investors – More money is never the solution if the problem is lack of financial literacy. Learn how having financial literacy is the only way to get started with real estate investing, and how it also prevents you from becoming like most lotto winners, who lose their money fast.

How to compute for the ARV of foreclosed properties – Okay, so you found a foreclosed property and you want to make an offer, or you want to bid for it. But before anything else, you need to determine what it could be worth, this would help you calculate this.

How to compute for the Maximum Allowable Offer or MAO for foreclosed properties – After computing for a property ‘s “value”, you also need to determine at what maximum price you can pay for it, leaving enough room for you to make enough money and be happy.

How to compute for the projected costs for acquiring, carrying, and selling a property – But wait, how does one know that the estimated costs for buying and holding a property are accurate? One needs to make sure just how much it would cost to buy a property and also the related costs of holding it for the projected amount of time needed to sell it.

How to compute for Net Operating Income or NOI and find good investment properties – Rental properties are not all profit, there are operating expenses that will be incurred, and you need to consider these to get the NOI, and see if a property can really generate positive cashflow and passive income.

Instant gratification versus delayed gratification – Want to learn how practicing a little delayed gratification can help you get started with real estate investing? Read this!

How to find opportunities and get started with real estate investing – If you really want to get started with real estate investing, you need to learn how to see those opportunities and grab them. They can lead to a series of advantages and lead to even more opportunities.

2010 has passed and lessons have been learned, but I would like to say thank you to 2010 one last time.

Happy Investing!

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.

PS. 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. Mailbox getting full? Subscribe through my RSS Feed instead.

FIP’s best of 2010 to help you get started in 2011 is a post from: Foreclosure Investing Philippines

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In my previous posts about Maximum Allowable Offer (MAO), After Repair Value (ARV), and Cost Factor (CF), we determined these numbers for properties that we intended to flip for a profit. This time around let’s determine another number that is more applicable to income generating properties like multi-door apartments, which are obviously better kept for cashflow and passive income. This number is Net Operating Income or NOI. What exactly is NOI, and why is it important? Please read on to find out.

What is Net Operating Income or NOI?

NOI is basically what remains of the actual or projected annual income of a property, after all operating expenses have been deducted. Operating expenses include real property taxes, property insurance, property management, maintenance reserves, vacancy rates , collection losses, etc.

Costs related to debt servicing (in case a property was purchased through financing), are not yet deducted, when calculating for NOI. Furthermore, NOI can be before or after taxes. For this post, we will be computing for the NOI before income taxes are deducted.

Sample income generating property: A 10-door apartment

Example: You have found a promising 10-door apartment in Marikina City and the current rental income per unit is Php5,000. Determine the NOI. (Keep in mind that this is just a hypothetical property which shall be used to better illustrate how we to determine NOI)

Assumptions: Let’s assume that Real Property Taxes would amount to Php30,000 per year, property insurance would be around Php12,000/year, and property management would be Php5,000/month or Php60,000/year. The property also has a vacancy rate of 15%, and you also set aside Php5,000/mo for your maintenance reserves. Lastly, let us also make an assumption that there will be a collection loss of 5%, meaning you won’t be able to collect rents from your tenants 5% of the time (these are caused by your tenants from hell).

The NOI would then be as follows:

Why do we need to compute for NOI?

Let me give you 3 good reasons why you need NOI:

1. You need the NOI to determine if a property that is being offered to you as a “good investment” is really a good investment. Most people offer income generating properties without considering operating expenses. If you compute for the the NOI, you will surely know if a property will really be a worthy investment. If you know the NOI, and you are going to buy a property through bank financing, you can easily determine the cashflow it can generate. In our example above, if you bought it through bank financing and your monthly amortization is less than Php26,500/month, then you can already say that this is a self-liquidating property.
2. You need the NOI to determine a property’s cash-on-cash return. This gives you an objective way to compare your projected returns from an income generating property with other investments like stocks, bonds, mutual funds, etc. This will be tackled in my next post which should be ready by next week.
3. You need the NOI, along with the capitalization rate or cap rate to determine a property’s market value using the income method. For income generating properties, the income method is the recommended way to calculate for the property’s market value or After Repair Value. This will be tackled after my post on how to determine the cash-on-cash return. Please watch for it.

Things to remember about NOI

Obviously, the accuracy of the NOI greatly depends on the accuracy of the rental income and operating expenses that you will use. My advice is to use actual values as much as possible.

It would be easy to get actual rental rates by going around the immediate vicinity of the property you are evaluating.

Real property taxes can be checked by getting a copy of a property’s statement of account or SOA for real property taxes at the office of the City/Municipal Assessor’s office or Treasurer’s office.

For maintenance reserves, I have read a lot of books that say setting aside 10% of the gross rent would be good enough, but it still depends on you. Depending on the age of a property, maintenance reserves might need to be bigger, especially if repairs and maintenance needs to be done sooner.

I suppose estimates for vacancy rates, and collection losses, can come from landlords or property managers that operate in the same area. By the way, more than 2 years ago, I asked around and found out that during that time, property managers usually charge anywhere between 8% to 15% of gross rents. I’m not sure if these figures are still accurate so I will have to ask around again.

If you are evaluating a rental property, make sure you include NOI as one of the numbers you need to determine as part of due diligence. Remember, without NOI, you really won’t know for sure if you will have any positive cashflow/passive income, and it will help you stay away from properties that are really just money pits.

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. Here’s great news! Trace has a Mystery Speaker in his upcoming TRQ 2.0 seminar who will talk about property management. Click here http://bit.ly/attendtrq2 to sign up if you have not done so already. As of October 18, 2010, only 33 seats are left for TRQ 2.0! Click here NOW to register before seats run out!

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 compute for Net Operating Income or NOI and find good investment properties is a post from: Foreclosure Investing Philippines

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Welcome to the fifth and last part of this series on the 3 types of income one can get through real estate investing. Before you begin reading this article, I recommend you review the first four parts:

How to get portfolio income through real estate investing

Earned income through real estate investing

Passive income through real estate investing – the path to financial freedom(Part 1)

How passive income through real estate investing can lead to financial freedom(Part 2)

In this series finale, let me share some final words and how one can use all three types of income to achieve financial freedom. Here goes…

Recap and some afterthoughts…

Portfolio Income

In a nutshell, portfolio income in real estate is basically income on paper in the form of equity. You still need to either sell or refinance a property to make use of your equity. Any property bought below market value should have a big potential for a gain in equity, if it really was bought below market value.

Portfolio income may boost one’s net worth and may give one bragging rights, but as Rich Dad would put it, someone’s net worth is often “worth less” than they think. In other words, if one’s equity cannot be turned into cash, or if the property cannot generate any positive cashflow, then those properties are “worth less” as they really are not  assets that put money in your pocket but are rather liabilities that take money away from your pocket.

Speaking of paper assets, one may soon be able to invest in a Real Estate Investment Trust or REIT here in the Philippines, which I believe is a form of paper asset. More information about REIT in the Philippines can be found here: Real Estate Investment Trusts (REIT) – The next big thing in real estate

Earned income

Earned income that one can gain through capital gains, and commissions(now referred to as professional fees because of the RESA LAW) is a relatively quicker way of earning from real estate investing, but should not be looked at as a means to get rich quick.

I believe that the earned income one can get through capital gains from flipping properties should be used to acquire passive income generating assets later on.

Although it may appear that earned income through flipping properties received a bashing from me when I compared it to the rat race, make no mistake, I still believe that we still need to flip properties for capital gains as it is a great way to build capital. This can then be used later on to buy bigger deals that can produce bigger positive cashflow, much like lesson #2 in the Top 7 lessons I learned from playing Rich Dad’s Cashflow 101 game.

Passive income

Passive income, considered by many as the holy grail of real estate investing, can really help one become financially free, but there are a lot of things one should remember when investing for passive income. Let me summarize them below.

1. Proper pre-screening of tenants is needed to avoid “tenants from hell”. Failure to do this can spell disaster.
2. Rental properties require competent property management and maintenance.
3. It is the hardest real estate investing technique to do because finding properties that can generate positive cashflow is more difficult than finding properties that can be flipped for a profit, and this applies whether you buy foreclosed properties from banks, or those that are for sale by owners or FSBO’s.
4. It may sound simple, but is definitely not easy.
5. Although it may not be easy, it is easier than most people think. It is definitely easier than spending most of your life stuck in the rat race as an employee.
6. Negatively geared rental properties can become positively geared eventually through rental escalation(Thanks Gio for reminding me about this through your comment), provided the property is in a good location. Of course, it would be ideal to have a rental property produce positive cashflow from the very start.

Which investing strategy should you use?

Do you invest for equity and build you net worth, or for capital gains through flipping (wholesaling and retailing), or for passive income by acquiring rental properties? If you ask me, I believe it would be better to combine all of them! let me try to explain as follows:

1. “Make money when you buy, not when you sell…”

In other words, make sure you buy properties below market value. How much below market value? That would depend on your profit targets but a safe target would be to acquire properties between 40% to 50% below market value. In effect, that discount would translate to a bigger potential for equity gain. This would help ensure that a deal will really be profitable, provided you were able to arrive at a fairly accurate estimate of a property’s market value.

2. Raise capital through earned income/capital gains

As mentioned earlier in this post, one can potentially raise capital faster by flipping properties that are bought at a price below market value for capital gains, or even through the accumulation of “professional fees” by acting as a real estate broker or agent. These can then be used later on to buy bigger deals that can produce bigger positive cashflow.

3. Use the capital to acquire passive income generating assets

The capital that can be raised through flipping properties can then be used to acquire income generating rental properties.

There you have it folks…

I hope you have enjoyed reading this series as much as I enjoyed writing it.  I would like to believe that I have this burning passion for real estate investing and I wish that somehow, I was able to share this passion of mine through this post. Feel free to let me know what you think by leaving a comment below. Thanks!

Let me leave you all with a quote from Herbert Spencer, which I often hear from Ebb, a teammate of mine in the RYP team:

“The great aim of education is not knowledge but action.”

Herbert Spencer-English philosopher (1820 – 1903)

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

PPPS. 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!

3 types of income in real estate investing and which strategy to use is a post from: Foreclosure Investing Philippines

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Welcome to the fourth part of this series on the 3 types of income one can get through real estate investing. This is actually part 2 the third type of income which is passive income. Before you begin reading this article, I recommend you review the first three parts:

How to get portfolio income through real estate investing

Earned income through real estate investing

Passive income through real estate investing – the path to financial freedom(Part 1)

In the first part about passive income, we defined what passive income is, showed some examples of it, listed down advantages and disadvantages, and some key points we should remember about it. Now let’s continue…

Before I talk about how passive income from real estate can lead to financial freedom, let me first try to define what financial freedom is for me.

What is financial freedom?

For me, financial freedom is having the freedom to do the things that are truly most important in life for you, the things that you really want to do, not the things you have to do, the things that you would do if you had a choice, and you can do all of these without worrying about where to get money to provide for your family, because there is more than enough cashflow in the form of passive income that can sustain all of your needs, without the need for job or a life where you are stuck in the rat race.

More importantly, financial freedom also means having time freedom, and if you think about it, time is really the most precious commodity we have. Once it passes, it cannot be brought back, and it is gone forever. I’m sure most of you out there would agree that when you are stuck in the rat race, there is no such thing as time freedom.

What is the “rat race”?

Just what is the rat race? Wikipedia defines the rat race as an endless, self-defeating or pointless pursuit, often used to describe work, particularly excessive work; in general terms, if one works too much, when one is in the rat race. Most often in the rat race, one can expend a lot of time and effort, but ultimately achieve nothing meaningful.

Another way of looking at it would be to realize that living life in the rat race becomes pointless if it becomes detrimental to your family, relationships, health, and to your life in general. What’s your rat race?

How much passive income do we need to be financially free?

Okay, so how much passive income does one need to get out of the rat race. The answer is simple, it should be more than enough to cover one’s monthly expenses.

Going back to our previous assumption that we need to earn at least Php100,000 per month to cover our monthly expenses (and also have enough for our other “money jars“), how many passive income deals like our previous example do we need? The number of deals would be equal to our monthly expenses divided by the monthly positive cashflow from passive income which we computed as Php4,057.41/month

Number of passive income deals = Php100,000 per month / Php4,057.41 per month

=24.6 deals or 25

You might be saying “What the… it would take that many deals just to get out of the rat race?!“.

But don’t forget that if you focused on flipping, even if you made 25 deals already that each made Php100,000, you will still have to continue flipping properties, and it would be an endless cycle, much like that in the rat race.

If you focused on true cashflow generating properties, and even if each only made a measly Php4,057.41 of positive cashflow per month, your 25th deal can be your last because you already have accumulated more than Php100,000 of positive cashflow from passive income! You can stop and retire if you wanted to because you are already financially free!

Getting out of the rat race faster

I know I know, a lot of you out there might still be saying “I need to buy 25 rental properties just to get out of the rat race?! That could take forever!”.

But there are ways to get out of the rat race faster, let me show you a couple of examples:

1. Instead of rentals, go for a rent-to-own scheme

What if you 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 10 years at 12% annual interest rate(this is the current rate for most banks).

This results in a monthly amortization of Php11,477.68/month( You can verify this by using our mortgage calculator). You will notice this is even higher than our previous example.

This time however, instead of renting out the property, what if you sold it through a rent-to-own scheme at a contract price of Php2M @ with 10% down with the balance payable in 15 years at 15% annual interest rates? Your tenant-buyer would then be paying you Php25,192.57/month for the next 15 years.

Assuming monthly expenses all add up to about Php4,000/month just like ion our previous example, the resulting monthly positive cashflow would be:

Monthly Cashflow = Monthly Rent-to-own payment – Monthly Expenses – Monthly amortization

=Php25,192.57 – Php4,000 – Php11,477.68

= Php9,714.89/month

How many passive income deals like this do we need to get out of the rat race?

Number of passive income deals = Php100,000/month / Php9,714.89/month per deal

=10.29 or 11 deals

Wow, from 25 deals down to 11 deals, now this is more like it! But wait, there’s more! What if you and your tenant-buyer agree to shorten the payment period?

2. Shorten the payment period

What if instead of having a rent-to-own agreement that has a payment term of 15 years, you go for 10 years instead? Your tenant-buyer would then be paying you Php29,040.29/month for the next 10 years. The resulting monthly cashflow would be

Monthly Cashflow = Monthly rent-to-own payment – Monthly Expenses – Monthly amortization

= Php29,040.29 – Php4,000 – Php11,477.68

= Php13,562.62/month

How many passive income deals like this do we need to get out of the rat race?

Number of passive income deals = Php100,000/month / Php13,562.62/month per deal

=7.4 or 8 deals

Wow, from 25 deals down to 8 deals! Actually there are a lot more things one can do to get out of the rat race faster. One way is by increasing the net monthly cashflow by lowering maintenance/property management expenses. another way would be to refinance your loan with another bank at lower interest rates, etc.

I won’t discuss them here for now, I would not want to get anyone out there to become overly optimistic and want to get rich quick. Keep in mind that investing for passive income is not a get rich quick scheme!

Again, we also need to consider that for rental income, taxes range from a low of 3% percentage tax to a high of 12% VAT, which are mutually exclusive. You pay one or the other, depending on which is applicable. As mentioned previously, the taxable income can be reduced through allowable deductions, thereby lessening the payable taxes. Let’s discuss more about taxation of rental income in a future article.

Another thing about rent-to-own deals, keep in mind that your cashflow stops at the end of the payment term as you no longer own the property. But still, your cash comes in all throughout the duration of the rent-to-own agreement, which is 10 years in my last example above. Anyway, I believe one can “create” a lot of other passive income streams in 10 years time to replace one rent-to-own deal right?

Passive income will help you stop living life passively

One thing I failed to mention in the first part about passive income is it really helps one to stop living passively. When I say living passively, it’s like one is going through life like a zombie who just accepts what’s happening, instead of taking charge of our lives.

For example, one just goes through the motions of being an employee, yet there is more to life than just being an employee. There is a way to live where you don’t need to spend most of your time making a living and you can actually focus on the “living” part. One does not need to live life passively because we always have a choice. Bo Sanchez explains this best in his article “Don’t be a Zombie”

Can it really be done?

Yes, it can really be done, you can trust me on this. The key is persistence, commitment, perseverance, bias for action, the drive to keep moving forward in spite of failure, having courage to face your fears and get out of your comfort zones, and the will to succeed! If you don’t believe it is possible, then you might be surprised when you read this!

Where do I start?

“All this talk about passive income and financial freedom sounds nice but how does one start?” you might be asking.

Most focus on “how”. Just like what most of my mentors and books I’ve read say, I believe you should first focus on “why”.

Why would you want to start this journey to financial freedom?!

That “why” should also be big enough to sustain you and see you through until you succeed!

You need a big enough reason to start, an emotional why, a higher purpose, something worth fighting for. Think about your rat race and why you would want to get out of it. What would you do once you are free? Find that purpose and use it to fan your burning desire and your passion to achieve financial freedom.

If passive income is easy, everyone would be doing it right?

Yes, if it were easy, everyone would be doing it. But I did not say getting passive income is easy, because it’s not. It may sound simple, but it is not easy, and it is probably the hardest of all real estate investing techniques to do, and with good reason. It is harder to find those positive cashflow generating properties than properties that can be flipped for a profit.

But let me tell you something that I have learned through firsthand experience. Sure it may not be easy, but it is definitely easier than most people think! This is coming from someone who is doing it.

I also believe that you can do it too!

Coming up next: Summary and wrap-up on the three types of income one can get through real estate investing

Yes, you read that right, there will be a fifth and last part of this series where I will summarize everything and add some more of my insights (yes, there’s more!), and yours as well, along with any other questions you may have.

Go ahead! Please write them down in the comments section below. Thanks!

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 passive income through real estate investing can lead to financial freedom is a post from: Foreclosure Investing Philippines

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The Money Summit and Wealth Expo 2010 promises to be the biggest wealth building and income opportunities conference in the Philippines, featuring 4 proven ways to build wealth and generate passive income. The Money Summit and Wealth Expo will be held on July 2-3, 2010, 8:30AM to 5:30PM, at the Carlos P. Romulo Auditorium, RCBC Plaza, Makati City.

But why should one attend? Let me try to give you 10 reasons…

Top 10 reasons to attend the Money Summit and Wealth Expo 2010

(in no particular order)

money-summit-and-wealth-expo-2010

1. Property Forum founder Noli Alleje – Although Noli “El Subastajero” Alleje is more famous as a real estate auction expert, he himself is also a real estate investor. I am quite used to seeing Noli handle public auctions they conduct and I look forward to hearing him speak for the first time on how to make quick profits through foreclosures.

2. Eden Alemania-Dayrit – Eden will be talking about her real estate investing strategies. Eden is one of the Think Rich Pinoy Franchisees. Although I often see Eden as she is a classmate of mine in a real estate class we are both attending right now, I know I will learn a thing or two each time she speaks.

3. Jomar Hilario – Jomar Hilario is dubbed as the Timothy Ferris (author of the book “The Four Hour Work Week”) of the Philippines who works only four hours per week and yet earns so much more than the monthly salary he used to get working for a big consulting company, and I want to be just like him. For those who don’t know, I created this blog last October 2008 right after I volunteered and helped facilitate one of his internet marketing workshops just over 1 year and 7 months ago. Jomar always has something new to teach and I look forward to learning more from him.

4. I shall sharpen my saw – I believe that the moment a person thinks he knows everything, that person will get left behind. That is the reason why I consistently try to improve myself by attending seminars like this. I look forward to learning a lot of new things which are practical and actionable. Some people might even say that that I am a seminar junkie and they are right. If it were not for my being a seminar junkie, I’d probably be stuck in the rat race up to now.

5. I am really interested with the Business Track – Along with my teammates in the RYP Realty Team, we want to turn real estate investing into a real estate business where we are the business owners. We want to set it up in such a way that it would be like a turnkey business. I believe that the business track will really help us with this and should also help other attendees as well.

6. This is neither a get rich quick scheme nor a scam – The Money Summit & Wealth Expo features 16 real life successful entrepreneurs, top investors, best-selling business authors, sales superstars, and money experts, who walk the talk. They are already rich and successful and have been money experts for a long time.They are not professional speakers who make money through seminars, they are real money experts, real investors, real entrepreneurs, and real millionaires. Need I say more?!

7. I want to rub elbows with like minded people – Those who will be attending will obviously include people who also want to be rich and financially free, those who are already rich and financially free, and everything in between. It is always nice to be with like minded individuals as we can network with one another, synergize, and help each other succeed.

8. This will help enhance the entrepreneur in me – I truly believe that attendees like me will not only be inspired to take the path to entrepreneurship, we will also know how to start, and enhance the entrepreneur within us. With so many successful entrepreneurs sharing their knowledge, it would be hard not to find at least one entrepreneurial path that fits us. I intend to find multiple paths to help provide multiple streams of passive income.

9. Get a lot of free, legally downloadable e-books and audiobooks – By registering  through this link on or before June 12, 2010,  you will be able to get a lot of legally downloadable e-books and audiobooks, at absolutely no additional cost. These tools will help address the seven most common obstacles to success, and a whole lot more.

10. If you attend and use our link, you will be helping us win the Apprentice challenge – Yes, we are on the last leg of the apprentice challenge, and once again, we need your help. I believe that if we win, everyone wins, as we are committed to share virtually everything we will learn to those who are willing and are also committed to learn real estate investing. We believe being Trace’s partners would really help speed up the learning process not just for us but for everyone else as well. I have said it before and I will say it again, if we win, no one gets left behind!

Full disclosure – Please read!

I would like to disclose that we will be earning 10% of the proceeds if you buy using our link, but we have decided to donate 50% of our net profit to Bo Sanchez’ Anawim and Grace To Be Born.  Anawim is the home of 55 abandoned elderly plus a few orphans and physically and mentally handicapped persons. By signing up with us, you are helping us help the poorest of the poor. Grace to be born provides counseling and a halfway house for pregnant young women who are being forced to have an abortion.

With your registration to the Money Summit and Wealth Expo 2010, you are actually supporting a baby because we are donating part of the ticket proceeds to the Grace to be Born ministry of Bo Sanchez.

We are allocating the rest of our profit to those who may want to refer a friend, and earn 5% of the summit fee. That means if your friend avails of the VIP Pass, you get Php224.75. Refer 10 friends and earn Php2,247.50!

I hope to see you at the summit! Please  forward to your friends and relatives. Thank you!

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!

Top 10 reasons to attend the Money Summit and Wealth Expo 2010 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
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Text by Jay Castillo and Cherry Castillo. Copyright © 2010 All rights reserved.

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

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