The risks of real estate investing and how to manage them

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Do you really wan’t to know the bad side of real estate investing? Although I believe it’s not a good idea to focus on the bad because we attract more of what we focus on, we should still be aware of the risks  in order to be able to effectively avoid or manage them.

Photo credit: kyz through flickr

That’s exactly my aim here, to help you to be aware of the most common risks involved with real real estate investing that most beginning investors fear the most, and what you should do so that you will only see the good side.

This came about through a good question I received through a comment and I believe a lot of you out there have the same question, but are probably afraid or just too shy to ask.

Anyway, the following is the question from Citizen Patrol, which I will reformat a bit so that it will be easier to read, just like what I did to Foreclosure Investing Philippines.

Comment submitted by citizen_patrol February 17, 2011 at 4:22 pm

Hi Jay,

I found your articles very informative, insightful, and enlightening! Keep up the good work! As I browsed through your articles, there is one topic I think that you have not yet written about. You’ve focused on the good side of investing in real estate, but can you come up with a write-up that focuses on the risk of venturing into this business?

The opportunities that you highlighted do sound and look promising but I sense there are also risks involved. These questions cropped up when I read some of your articles:

1. Do I need to take this ‘business’ full-time?, because you have lots of homework to do, and maintaining an 8-5 job can take so much of your time;

2. buy and hold strategy looks lucrative but the challenge is looking for tenants, which sometimes take time, and if you get tenants, you have to make sure they are prompt/regular payers;

3. the increase of interest (rates) in the bank loan after the fixed-rate period may also be a challenge, and other questions. I hope you can make a write-up which summarizes the risks when venturing into real estate.

thanks

*Actually, I already answered the comment (found here) but I will post my answers again below with additional inputs.

Hi Citizen Patrol,

Thanks again for the comment. Yes, there are definitely a lot of risks involved with real estate investing which is why due diligence is a must, among other things, which one should keep in mind to minimize risks. Let me answer your questions which I have paraphrased below.

“Does one need to do real estate investing full time?”

I can definitely say “no!”. Real estate investing can be done part time and I for one have done this. For those who don’t know, I used to work for a multinational company as the IT department manager.

It was during a time when the IT department was grossly undermanned when I decided to pursue a number of real estate deals and I did it while making sure I was fulfilling my duties and responsibilities as the IT manager, database administrator/developer, network security specialist, help-desk staff, systems administrator, etc. Get the picture?

The stress was just too much and after three years, I said to myself enough is enough. This made me take massive action and as they say, the rest is history. I believe Sha Nacino has a good idea of my story as this was one of the memorable questions she asked when she interviewed me for her book “Think Rich Yuppies”. Anyway, I’ll share more details about my story in another post soon.

“How do ensure I will find tenants which are good payers?”

As for tenants, looking for them is not really a problem if one is able to buy a property at a right price. If you bought a property at the right price, meaning you did not pay too much for it, you can also rent it out at the right price. This can be equal to or even below the current rental rates in that area, and you should still make a profit.

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As for finding good tenants, screening or pre-qualifying them is a must. Get their proof of income, bio-data, NBI clearance, interview them, etc. Pretend you are a bank doing a background/credit investigation on one of your prospective borrowers. You can never be too careful! Just be pleasant, considerate, and always talk to tenants in a nice way.

“What about the risk associated with interest rates going up?”

As for increases in monthly amortizations due to interest rates going up, the best way to avoid this is by availing of a fixed rate for the whole loan duration, for the longest period possible. Checkout my article about the crazy low home loan rates available right now.

Here are a few other things beginning investors should keep in mind (and avoid):

1. Risking it all – It is unwise to risk everything for one deal. When I say risking it all, it means risking one’s entire life savings, with little room for mistakes like cost over-runs, unexpected expenses, delayed completion of repairs which can lead to delayed selling/renting of a property etc. Sometimes people make the ultimate example of risking it all, when they quit from their jobs without first having enough successful deals that produce income that can replace one’s salary. One should also have a plan b or a fallback.

2. Not doing proper due diligence – This can lead to paying too much for a property where it is virtually impossible to sell it for a profit, or have it tenanted with a nice positive cashflow.

Another example of lack of due diligence would be if incomplete checking was done on the legal condition of a property and problems arise later on that can lead to the property being not sellable(for example, the title has problems), or has unexpected costs (arrears for electrical, water, real property taxes, etc.) that will wipeout any profits and lead to losses.

Other problems can lead to a longer time to get the property market ready or tenanted (for example, repair duration is under estimated).

3. Tenants from hell – One may fall into the trap of getting anyone as a tenant by not screening them, and tenants from hell not only fail to pay on time, they may also destroy the property and turn a would-be cashflow generating property into a money pit.

Most of the points I have raised above are mentioned in this article on How NOT to invest in foreclosures, although there are more risks that one should consider. I’ll write more articles about doing due diligence in the future.

Thanks again for the feedback and question Citizen Patrol!

What do you fear most about real estate investing?

I believe the questions above only covered the tip of the iceberg.

How about you, what are your fears when it comes to real estate investing? What’s stopping you from taking the first step?

Let me know through the comments section and we’ll answer them next. Thanks!

Happy real estate investing!

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 Investing Philippines facebook page

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

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About Jay Castillo

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

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  • Josephine

    Hi Jay,

    I am a subscriber of your blog and I am now definite with my decision to focus on real estate as my vehicle to financial independence. But as you have posted there is a substantial risk in real estate investing that we fear most. But I think having a mentor is the number 1 in the list of ways to overcome our fear. So I would like to know if you offer mentoring?

  • Ric

    Hi Mr. Castillo ,

    Im Ric im new here so does in investing i’ve been reading all the topics in your article it was really helpful ^_^ . After reading some of your articles lately i’ve realized that the 1st real state investment that i bought 5 years ago does not earning any passive income unless i would sell it and speculate appreciation after those 5 years that past since i bought it . Im working abroad from Japan im not a contract worker im just lucky to have a long term residence visa i’ve really wanted to stay there in the philippines since most of my friends was in there. Im thinking right now if im going to sell the lot property that i bought and use those fund to buy a foreclosure property after educating myself regarding documentation and real state laws , taxes any advice if that was a good move to start with so that i can fund my foreclosure investment i cant rely on any of my family but myself im working from a Factory here im saving right now so that i can go back to school im going to study Entrepreneurship im in my mid 20’s right now i dont mind if im the eldest student im determined to pursue my path i know ive done so many mistakes in the past but being a self made those mistakes teaches me some lesson . Glad to find this site im so thankful for all the knowledge that you’ve shared and so does to other members that i’ve gain .

    Thank you ,
    Ric

  • http://mygrungesite.com Paulo

    Hey Jay, thanks for every post you made. They’re all worth reading. I’ve been reading alot books and watching videos about creative real estate investing for years in regular basis but I haven’t got my first deal yet. I’m just an ordinary employee earning minimum wage monthly and have no capability of financing a deal even to pay for earnest fee. I’ve been seeing alot properties which I know are really good deals based on my math. I don’t even have relatives who I can ask for help financially. What can you advice? What’s the worst thing can happen if I’m not able to come up money for downpayment to finance property? Are there anything that they so called Hard Money Landers here in Philippines? How could I find them? Please help.

  • joeworski

    Hi Jay,

    I’m not sure if this is on topic, but you seem to give out good answers. Here’s my scenario, I bought a lot with a high profile developer, paid the reservation and almost half of my deposit, but experiencing tough times right now and I have to back out of the sale, The developer is telling me that I cannot get ANY of my money back. What is the law on this situations? The whole project hasn’t been turned over yet. Any thoughts? Thank you!

    Joe

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

      Hi Joe, the Maceda law might be applicable in your case. How long have you been paying?

      • Joe

        Hi Jay! Thank’s for the reply, what’s the maceda law? Let me go into further details.. I first signed the reservation Aug2010, but i upgraded and changed my lot december 2010 so i signed another reservation and a contract to sell, the 20% deposit is payable until june 2012. Siguro i paid about 10% na including the reservation fee… What do you think? Thanks in advance!

  • reluctant seller

    Hi Jay

    Nice article. Tanong ko lang safe ba na ibigay ang photocopy ng transfer of title sa isang interested buyer? Possible pang maswindle ako?

    Jerson

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  • jhun

    Hi Jay,

    Thanks for talking about risks. How do you handle payment transactions on real estate? How do you avoid being swindled with bounced check or insufficient fund.

    Lets say you will now close the deal with the buyer. How do you go about doing the transaction? Do you do it via money transfer thru the bank?

    When do you sign the deed of sale. Is it when the money is safely in your bank account already? How about if the situation is reverse? Do you only transfer the money to the sellers account once he already signed the DOA and has given you the title and tax certificate?

    How are you sure he will be paying the capital gains tax and will provide you with the receipt?

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

      Hi Juhn,

      Thanks for the excellent questions! I will cover these in greater detail in another series of posts. For now, just keep in mind that post-dated checks are not a good form of security because our bouncing check law lacks teeth. Eveything should be “Kaliwaan” meaning you don’t sign the deed until the check clears. If you are the buyer, your proptection is the acknowledgement receipt/reservation agreement. For CGT, you can specify in the contract that proof of payment must be provided.

      Thanks again for the good questions and as I have mentioned above, I will discuss the answers in greater detail through another series. :-)

  • Franz Enriquez

    Hi Jay!

    Nice post! I learn a lot from your website. I have been a Robert Kiyosaki fan for years now, but haven’t really made the first step. That is, to invest and do business with real estate. Our main concern here in the Philippines really, is getting a loan (which is hard and requires the usual credit checks and submitting countless requirements) to finance our eventual first step. I have also followed Trace Trajano but did not get to attend his seminars due to proximity concerns. He is saying that this is not a hurdle, as there are other means to get the financing one needs to invest in real estate. Thus, my question, after doing all the pre-requisites (Choosing the right property, due diligence, etc.), are there other options, other than banks, to get the capitalization needed? I would also like to know the expenses that can be incurred when purchasing foreclosed properties (taxes, fees, etc). Good luck and more power!

    Franz

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

      Hi Franz, glad to see a fellow Robert Kiyosaki fan!

      yes, getting a loan is a big concern and that is a limitation for me right now. After I “retired”, I no longer have steady employment(obviously), which means I won’t get approved for a loan easily. I guess it’s time to search for investors. this will be covered in another post. Taxes like CGT, CWT, DST, Transfer tax have been covered before. just search for them or checkout the topics. Thanks!

      • Franz Enriquez

        Thanks Jay for the response! =)

      • http://www.homesearch.ph Fernan Borines

        Hello Jay!

        Yes, this has always been my concern with regards to dealing foreclosures. I’ve been investing in real estate for some years now but have always bought my properties in cash because I am not “loanable” as I am self-employed. I don’t know if you remember me, we met once here in Paranaque when you were negotiating a foreclosed 4-door apartment for me in Las Pinas..

        ..that time I had just finished reading Larry’s book and he said that (despite of age limitations) he was able to acquire his foreclosed properties without credit investigation. No qualifying. No paperwork.

        Is this really possible? I believe this is an integral part of what he and you are teaching about investing in foreclosed real estate?

        Thanks bro! You’re blog has always been an inspiration! – fernan, homesearch.ph

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

          Hi Fernan,

          Of course I remember you, you are also one of those I consider as a mentor. I admire how you are very focused on your niche in the south! =)

          I’m just sad the deal did not push through for the 4-door property in LPC, although I heard that the previous approved buyer backed out.

          To date, only Unionbank is not doing any credit investigation for prospective buyers. All the rest(as far as I know) require buyers to pass their CI.

          I guess the only other option we have (I am also no loanable at the moment as I am no longer employed) aside from paying in cash is to get private lenders or passive investors to finance our deals. This can be complicated though, and requires very well written contracts.

          Thanks for dropping by, cheers!

  • http://yahoo.com eco

    sir jay where can i find people or small group doing this foreclosed real estate business? do you have a group that i can join with? i’m a newbie and i like to do this business. can you refer me to your group? please help.. tia.

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

      Hi Eco,

      You can always go to buyfirstdeal.com as there are a lot of people there just like us who are looking for people to partner with. Just make sure you do your due diligence even with people as there are not so good people out there too.

  • arnel

    Hi Sir Jay,

    I am really excited to start my very first real estate deal but there are a lot of fears I have in my mind. One of my fear is that I have limited knowledge about real estate, I really don’t know where and how to start. Another thing, do we need an assistance of a lawyer for the purchase contract and sales contract to make it a valid contract? Please help me, I want to know what would be the first thing I need to do to get started. Thanks! God Bless!

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

      Hi Arnel, again, your questions deserve to be answered through an entire post. :-)

      With regards to contracts, yes, you should always get the services of a lawyer who is recommended by your friends.

  • lizziemg

    Glad to see your post on this topic. I made the twin mistake of not pre screening my tenant and not checking out the documentation for the rental forwarded to me by my broker. The tenant ended up preterminating the lease but not before trashing my condo unit. Fortunately, I was able to collect payment on the damages and have my condo unit fixed but that was a close call. Experience is a very good teacher.

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

      Hi Lizziemg, sorry to hear about what happened to your condo. I’m glad you were still able to get paid for the damages. Yes, experience is a very good teacher, thanks for sharing yours! i’m sure this will enlighten would be landlords. cheers!

  • http://www.everypesocounts.com Tim

    Hi Jay,

    This post clears a lot of my doubts about putting my unit for rent. You sound very confident about finding tenants and that it’s not that hard… I guess I should be too. It’s really like you overheard my thoughts because just a few days ago, I was thinking how to screen tenants. And hopefully, I’ll be able to get one in the near future.

    Thanks again!

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

      Hi Tim! Well, as long as your rental rates are not overpriced for that area/location, you should not have a problem finding tenants. Haha, law of attraction at work re: your thoughts on tenant screening! good luck and I hope you will find a “tenant from heaven”!

  • FLR

    Sir Jay,

    Thank you for the information you’re sharing. Actually I’m just starting to study how to do real estate. May I ask if for example I bid in an auction how long (days/months) will the bank give you for you to pay the initial payment (Like the 10% of the whole amount)?

    Thanks

    • http://yahoo.com eco

      i think it will depend with your negotiation.. you can read think rich pinoy book of mr. larry gamboa, there you will find some answer to your question and bunch of information too..

      TO sir jay:
      please join me with your group.. kahit taga abot ng ballpen, papel at calculator pag nag co-compute ka ng passive income hehehe..

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

        :-)

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

      Hi FLR, usually they require the downpayment to be paid within 5 working days for auctions. For foreclosed properties that are being sold through negotiated sale, the downpayment can be payable in 30 days or longer, depending on what gets approved. Thanks for the question!

  • http://greatdealhouses.blogspot.com Neri

    Hi Jay!

    Thanks for the post. It’s really informative. Can you give as more ideas about Second mortgage (or even third, fourth, etc.)? How is it done? Is it practiced here in the Philippines? Thanks!

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

      You’re welcome Neri! Second mortgages are not that common here. At least with the TCT’s/CCT’s that I have checked, I have never seen any second mortgages. Although, I believe it is possible to have them here. Even with pag-ibig, they specify in their mortgage contract that theirs is a FIRST MORTGAGE, so I guess second mortgages are possible. Cheers!

  • BVL

    Sir Jay,
    Im afraid of doing the offer/auctions to the bank because they might refuse because I dont have a job after being an OFW. But I have a relative that can finance/invest for it if ever I won in an auction. I am thinking of doing the Wholesaling approach, can you help me know the contracts needed on doing this, eg. contract between me and the seller, and contract between me and the end buyer..thank you and more power for your very informative site!

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

      Hi BVL,

      It’s great that you have relative who can finance your deal in case you win an auction, but I believe there is wisdom in the advice of one of my mentors who said it would be better to do your first deal on your own. This needs a long explanation and i will explain it by answering through an entire post.

      Wholesaling can be done but you will have to focus on individual sellers, not banks. you can use a non-Exclusive option to purchase contract, copies of which can be downloaded from buyfirstdeal.com. Thanks again for the comment!