Which way to make money in real estate would you recommend?

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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.


Saving is for wimps!  I have a plan for affordable housing.


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.

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

Yes it can be done!

More on rent-to-own

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

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

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

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

More on rentals

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

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

How about buy and hold?

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

Up next

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

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

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

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

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Photo credit: WoodlyWonderWorks via Flickr

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To our success and financial freedom!

Jay Castillo

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

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

Full disclosure: Nothing to disclose.

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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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  • Jay

    Hi Jay. My name is Jay too. What would be good rate of return from rental income?

    I saw an old condo unit for sale in ortigas area selling for around 3.5M and is currently being leased long term. If I purchase the unit, the Return on investment is around 6.5-7% based on the annual income from the rent less the assoc dues and real estate tax. Does it sound like a good investment to spend your 3.5M? Passive income is more than 20k monthly and it sounds good to me plus the condo could appreciate a little bit more in a few more years. If i grow old and retire, it is a place where my wife and I can probably live but that’s a long way down the road.
    However, Im thinking if it’s better to just place the money in mutual funds and let it sit there for a long time. My only caveat with long term mutual funds is that you only get earnings after maturity which is usually after 5 years.

  • http://www.howtogirlblog.com Kevin

    A lot of people would choose rentals, it looks easy and uncomplicated. My problem with this is capital, putting up a building or a space for rent may be costly. Yes, it has long term benefits, but we need numerous spaces or a good location to earn higher. I am more interested on real state agents, I can imagine the hard work involved, but just like your friend, he had received huge benefits after he had mastered the profession.

  • Roger

    I recommend rentals :)

  • joko

    I prefer cashflow and at the same time less maintenance and worries so i would prefer rent to own scheme. More power Sir Jay! I look up to you in terms of foreclosure properties.

    Mabuhay po kayo!

  • http://www.livingcashflow101.com/ Ronald Cagape

    Excellent insights, Jay.

    One can also be a dealer even with limited funds. You just have to do it right. It’s also good to be an agent/broker in the beginning. For long-term wealth, I build everyone should a business, even in real estate. Your business could be involved in brokerage, development or leasing or even all of the above. It’s just important to have that long-term view.