After inspecting a bunch of foreclosed properties recently, I was to drop-off my real estate broker at her house. Her grandson who was around 7 years old, approached us after I parked, while we were still inside my car.

He signaled me to open the window, which I did, and he noticed I was using my HTC Touch Pro 2 while I was texting someone and he said “Wow, you have a nice phone! Are you rich?”.

My HTC Touch Pro 2 with my property analyzer worksheet loaded

Both my broker and I answered without hesitation “Yes of course, we are rich!”. (If someone asks you the same question, you should always say yes, and let the Law of Attraction do its magic!)

He then sarcastically said “Yeah, you must be rich, it’s probably the reason why you have such an expensive car”. Take note that my car is an SUB… a subcompact! It’s a turbo-diesel Hyundai Getz.

The 2008 Hyundai Getz. My car is the CRDI variant

I said “Well, because this was the car I bought, I was able to buy three houses the following year…”.

He then said to his grandma “Lola, let’s buy Jollibee…”.

I guess my answer did not sink in and he was more interested with satisfying his craving for burgers and fries, which is totally understandable for a kid his age.

In retrospect, I believe that my broker’s grandson was just frank enough to ask me the very same question which I believe some people who see my car dare not ask me, why did I buy my car, when I could have bought a more expensive or bigger one?

When I availed of the car plan offered at the company I used to work for way back in 2008, I could have bought the newly released 8th generation of the Honda Civic or a Ford Focus. I knew some people at the office back then had this question in mind, according to some of my close friends.

Why did I buy my car?

One of the reasons why I bought a diesel powered subcompact was to manage my cashflow, which in turn helped me buy three foreclosed properties the following year. Hard to believe right?

Aside from the lower monthly amortizations, which was less than two-thirds of what I would have paid for on a monthly basis if I had bought a Civic, my monthly expenses for diesel fuel was just less than Php2,000 per month. Compare that to my wife’s 1998 Honda Civic for which I had to spend more than Php4,000 for unleaded fuel per month.

Maintenance for my new car was also easy on the pocket, at about Php6,000 per quarter. Our old car needed about Php25,000 per quarter on the average for maintenance and repairs (new problems were always being found that needed to be repaired… that sucked big time!). By the way, I forgot to mention that my car is covered by a 5 year warranty… nice!

It’s hard to believe but the net effect of my choice of buying my car was it lowered my monthly expenses by about Php5,000 per month, as compared to buying a more expensive car, or maintaining the old car we had.

Php5,000 per month may not sound much but that is already comparable to the positive cashflow of one rental property. It is also just about equal to 10% of my take home pay back then, which meant I already had enough to fulfill my target of setting aside at least 10% of my total monthly income for my Financial Freedom Account or FFA.

Instead of draining my savings, buying a car actually helped me increase my savings by lowering my expenses. Who wouldn’t want to have that?!

Delayed gratification

Even if I could have bought a more expensive car back then, I chose not to do so, and bought a small car instead.  I simply needed a car that can take me and my family safely and comfortably from point A to point B (It did just that when we drove from Antipolo to Baguio and back to Mandaluyong with just 1 full tank of diesel back in 2008).

I believe what I did was an example of delayed gratification. My logic here was I can buy a small car for now, and it would not hinder my goal to build my Financial Freedom Account, which I will use to buy real assets that put cash in my pocket.

After I buy real assets first, I can then use any excess cashflow or money from capital gains to buy a bigger or more expensive car, if I wanted to. So far I am very happy with my Getz.

But wait, you might be thinking I did not practice delayed gratification when I bought my mobile phone. Not really, the HTC Touch Pro 2 was released more than a year ago and the one I bought last October was a second hand unit, although it was good as new. A brand new unit at malls would retail for around Php35,000 but I bought mine for less than a third of  the retail price, from a reputable seller at tipidcp.com.

Instant gratification

Imagine if I had bought a more expensive car first. That would have resulted in little or no money left for me to invest in real estate. I probably would not have been able to buy the three foreclosed properties I acquired last 2009.

Who knows, maybe I would not have been able to save enough money for my emergency fund, and I would not have had the courage to resign and get out of the rat race.

Buy assets first, liabilities second

Another great example of delayed gratification would be to buy assets first, liabilities second, just like what Robert Kiyosaki mentioned in the video below.

He bought a Porsche by first investing in a storage facility, and then he used the cashflow it generated to pay for the Porsche. The cashflow remained even after the Porsche was already fully paid. Now that’s a smart way to buy a liability!

Let me see… a Hyundai Tucson, a  Ford Fiesta, or even a Toyota Prius would be nice. I guess I should be asking myself  “How many good real estate deals do I need to buy first?”. What do you think?

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. Attend Larry Gamboa‘s Think Rich Pinoy Seminar on December 4, 2010. Click here now to grab your seats now! or download more information about the Think Rich Pinoy Seminar (please feel free to forward to your friends).

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

Instant gratification versus delayed gratification 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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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.

P.P.S – 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 instead to my RSS Feed.

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

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