This is a contributed post from Michael Gray, a real estate investor from California who also invests here in the Philippines.
Leverage is a powerful tool for real estate investing, you just need to know how to use it effectively in order to compound your net monthly cashflow and net worth. I’ll show how in this post…
However, the word โleverageโ is one of the most misused, or at least, misunderstood words around investment. This misuse or misunderstanding of the word sometimes leads to inefficiency of investment.
Which is why the first thing we need to do in order to make sure that we are all starting on the same page, is define the terms that were just mentioned: Leverage, Net Monthly Cashflow, and Net Worth.
What is Leverage, Net Monthly Cashflow, and Net Worth?
Leverage, as defined by dictionary.com, is โthe use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one’s investment, to control a much larger investment, or to reduce one’s own liability for any loss.โ
Investopedia defines it this way: โLeverage refers to the use of debt (borrowed funds) to amplify returns from an investment or project.โ
Here’s a short video from OneMinuteEconomics.com that explains leverage in 1 minute:
The definitions above are pretty similar and they work. They are basically referring to the use of borrowed money to increase wealth.
Notice 2 out of the 3 definitions don’t say โusing borrowed money to buy something.โ A lot of investors however, and people in general, tend to use โleverageโ as if leverage = loan. And that is a mistake.
When we use the word leverage in our discussion, we mean that we are using equity in order to compound our Net Monthly Cashflow and Net Worth.
Net Monthly Cashflow (NMC): When we talk about Net Monthly Cashflow, or NMC, we are talking about the monthly profit (income โ all expenses) that a property or portfolio produces.
Net Worth (NW): Net worth is simple. It is the total value of all assets owned, minus all liabilities. Liabilities are things you owe such as remaining mortgage balances, or any other outstanding debt.
Types of Real Estate Investors
Now that we are starting on the same page, we can talk about how to use leverage in order to compound NMC and NW. The first thing you need in order to use leverage is equity.
Equity is the difference of the total value of an asset, minus the remaining balance on the mortgage (what it is worth โ what you owe on it). So if you have a house and lot with a value of PhP 2M, and you have a remaining balance of 500k on your mortgage, then your equity is 1.5M.
If you are starting with zero equity, then there are many ways to get some, which we will get to further down.
There are three different categories of investors.
- Capital Appreciation Investors (buy low, sell high, pocket the profit),
- Cashflow Investors (Invest in assets that produce regular income),
- and those who are doing both, or Hybrid Investors.
A good example of Capital Appreciation Investors are house flippers. House flippers buy a property for well under market value, then increase the value of the property through renovation, then they sell the property and pocket the profit.
A Cashflow Investor example, on the other hand, would be one who invests in rental real estate, in this case, or any other asset that brings regular income to the owner. Rent or lease payments are the income in our example.
There is nothing right or wrongโgood or bad about being either one. You can make very good money with either or both ways.
There is plenty of room for a hybrid situation as well. A sophisticated investor is flexible and open to using whatever process will work in any particular investment situation.
Speaking of process, letโs take a look at both processes and see where leverage fits in. The goal from both perspectives is very similar. In fact, it is exactly the same until the final step.
What Real Estate To Look For?
In either process (flipping/cashflow), we are looking for a house that has a problem or an issue that is severely affecting its current market value.
This could be cosmetic, if it is old and rundown-looking, if it is in desperate need of repair, if the yard is overgrown and it has no curb appeal, or if there is an issue with paperwork, survey, and/or title.
Whatever the problem or issue is, it MUST be one that we can solve reasonably efficiently (reasonable cost and timeline), and it also has to be definite, meaning it will definitely increase the value much higher than the cost of the improvement.
So, this removes something like potential value increase when a new expressway is proposed to be built, or something that would be nice if it happened like a rise in property values, or has been talked about happening but may potentially be well in the future.
That is not investment, it is speculation!
It is not always bad to speculate. Warren Buffett says that we should have no more than 25% of our investment portfolio in speculation. However, we are talking about sure investments hereโnot speculation.
The Real Estate Investing Process
Both the cashflow investor and house flipper are looking for similar properties. Intelligent house flippers will always make sure that in the event that they are forced to hold onto the property unexpectedly, it would rent for enough to generate a positive NMC.
Cashflow investors do the same thing, except it is their main focus rather than their last resort. The only difference between them is what generating a positive NMC entails. It generally depends on how much the loan payment and rents are.
However, both types of investors could have paid cash for both the property and renovation, at which point there would be no loan payment.
In those cases, the only monthly expenses would be competent property management, repairs and maintenance, any utilities that you have agreed to pay for the tenantโif any, and taxes.
These are all negligible expenses that are easy to cover with rental income. The big expenses are loan payments. So, we must focus on properties or areas that have high enough market rents to cover those, plus a little profit.
So far, the strategies are exactly the same. Find a property that is well under market value, and increase the value of said property with renovation and/or by solving an issue.
Capital Appreciation Investors
Then, the house flipper (capital appreciation investors) can sell the property around market value and pocket the profit of the sale.
Generally speaking, after any discount from market value to sell it faster, or negotiated selling price, Capital Gains Tax (CGT), Documentary Stamps Tax (DST), Transfer Tax, Registration Fees โฆ etc. that you agree to pay, and professional fees for a Realtor (if you use one), you are looking at around 80% of the market valueโon average.
This 80% that is brought in is then used to pay off any loans taken out for buying/renovating, then the remainder is used to buy and renovate/solve the issue of the next property. And anything leftover is our profit from the last deal.
This cycle can be repeated indefinitely, as long as you make profit with each dealโmeaning completing proper due diligence is the most important part, so you can reduce/eliminate the risk of not making money.
Cashflow Investors
The Cashflow Investor does not sell in the last step. Instead, he or she will find a tenant for the property and start generating a Net Monthly Cashflow.
A lot of investors and would-be investors raise a valid point. They say that โif one buys a property, then rents it out, it would take a really long time to use the saved NMC to buy and renovate the next property.
Whereas with flipping, you have the cash for the next deal in your pocket already. So, Cash Flow investment is a very slow investment vehicle.โ
This statement is absolutely true and correct. It is a very slow strategy to save up the NMC to buy and renovate the second propertyโprobably years. So, since we are not interested in waiting years before the next investment, what should we do?
What if there was a way that we could keep the asset, keep the NMC, and still immediately move to the next investment, without taking any more cash out of our pocket?
You would be waiting for the โcatch,โ or, you would likely be at least waiting for some sort of sales pitch for an investment program. There is none of that here.
The Power of Leverage
There is an easy way, and it is called leverage. This is how it works:
Once our property is rented out, we have a rental property producing cashflow each month. This property is freshly renovated and worth the same as the house flipperโs.
The house flipper, on the other hand, has around 80% of the total market value after the sale, taxes, and fees, that they can fund their next deal withโafter any loans from the last deal are repaid.
Leverage allows you to get that same 80% (sometimes as much as 90%) of the market value, tax-free, to buy and renovate the next property. And, you get to continue to receive the NMC each month, though the cost of the leverage will reduce that NMC a bit for a while.
Since you own the property free and clear, the total equity = Fair Market Value. So, what is Fair Market Value (FMV)?
It is quite simply, โthe price of a property or object that a knowledgeable buyer and seller agree upon, in an unforced transaction that takes place in an open marketplace.โ That is, the current value of the property right now. Banks use appraisers to estimate this valueโthe appraised value.
Our leverage, in this case, is a cash-out refinance (or a home equity loan). A few banks will lend up to 90% of the total appraised value in a cash-out refinance, but almost all of them will loan 80%. Notice that the 80% of the appraised value is similar to the average amount pocketed by the flipper.
There are some differences, of course. It is tax free because it not income, capital gains, or profitโit is a loan. This loan is actually repaid by our tenant in the form of monthly rental payments.
This leverage will reduce the NMC of the property by the mortgage payment amount until the loan is paid in full.
However, if we do our proper due diligence the way Jay outlines in his course, then we will be only interested in those properties that will provide a positive NMC after they are leveraged.
Also, when we analyze the After Repair Value (ARV) during our due diligence, we only pursue properties of which the leverage proceeds will be well above what it costs to buy/renovate/solve the issue of the next investment.
This leftover cash is basically our profit (though it is technically loan proceeds). We can use it in any way we choose. We can use it to pay for living expenses, go on a vacation, buy a luxury, or reinvest it.
Linear Growth
Once there is a tenant is in place on our property, we have created a stream of income that will continue to finance the next deal indefinitely. So, we have created an infinite stream of properties that will continuously grow our NMC and NW foreverโฆ Just keep repeating the process.
This is linear growth. Each successful deal in the stream pays for the next deal in the same streamโgrowing our income, net worth, and net monthly income with each completed deal. It is like a straight line. One finishes, then the next starts, when that one finishes, the next starts, and so on. Sound’s like the BRRRR investing strategy…
The BRRRR investing strategy
This strategy or process is commonly referred to as the Buy, Renovate, Rent, Refinance, Repeat method or โBRRRRโ method. When we start with the BRRRR method and add leverage, we get compounding.
BRRRR is linear growth, which is good, but nowhere near as good as compounding. Linear growth gains are measured in percentages (20%, 40%, 100%). Compounding gains are measured in orders of magnitude (10x, 20x, 100x).
So, Letโs Talk About Compounding
When we talk about compounding, we mean exponential growthโnot linear. The way that we start really compounding is by starting another stream of properties to go with the one we have already established. How can we do this? Good question. Letโs talk about that.
In order to begin compounding both Net Worth, and NMC, we can use some or all of the aforementioned leftover leverage proceeds to make a principal payment on our oldest mortgage. If we do this for each deal, we will pay off our first leverage very quickly.
Keep in mind: In order to be efficient, this means we must acquire leverage with little or no prepayment penalty.
When we pay that first leverage off, we have two choices. We can either increase our NMC by the amount that the mortgage payments were before we paid off the leverage, or we can leverage it again and start another streamโbeginning the compounding.
Hereโs an example: We will use the same example as we used in ROIโFlipping Vs Rentals: Letโs say that we have PhP 500k to invest (regardless of how we got it). Since we are intelligent investors, we decide to start small and buy a foreclosure from BFS.
We are looking for a house with an After Repair Value (ARV) around 1 million pesos in an area with market rent at 12k-15k/month (this is a goal, but not a hard line. If rent is less, then it will lower our NMC, which is okay as long as it remains positive).
We find one that needs renovation in order to reach that 1M value. Current appraised value is 700k, but it is for sale slightly under current market value, at 670k.
Since we are buying from BFS, we know that we can get a 40% discount for paying all cash, so we buy it at PhP 402,000. After the 98,000 of renovation is put into the property, it is appraised at the 1M goal. It is then rented out at the market rate of 12-15k/month.
Compounding Begins
We do a cash-out refinance at 80% for 20 years, which will put 800k of proceeds into our pocket. This would come at a monthly payment of about PhP 5,731.45 at 6% interest. So, our monthly cashflow, on the low end, would be PHP12k โ PHP5,731.45 = PHP6,268/month. On the high end, PHP15k โ PHP5,731.45 = PHP9,268.
Out of that PHP800k, we set aside PHP500k to repeat the initial process with, and have PHP300k leftover. We put PHP100k in our pocket and make a PHP200k principal payment on the PHP800k leverageโreducing the outstanding balance to PHP600k.
After only four deals, our first leverage is paid in full. At that point, we have one stream of properties that will continue growingโindefinitely.
So, we take that PHP500k that we set aside to repeat the process and start another stream of properties by buying and renovating a deal similar to our first one, then repeating the exact same process that we followed with the first stream.
Each stream pays off another “refi” with every fourth deal, and can be re-leveraged to start a new stream. This compounds our net worth and NMC exponentially, and remember that it all started with that initial PHP500kโno further investment was required.
I generally like to leverage each of the first five properties in a stream two times. Everything past that, I just take the increase in monthly income and leverage as needed.
This is because even though I have an assistant, it gets difficult to manage so many deals each month. It is a nice problem to have, but this system is like a freight train with no brakesโrunning on an infinite track.
It is difficult to stop once it gets going. Once the deals are taking too much time to keep up with, you can start using the available equity to buy bigger properties, like duplexes, triplexes, quadplexes, or apartments, which will significantly increase both our NMC and NW.
It cannot be emphasized strongly enough, that we make money when we buy. This means that our analysis and due diligence are the most important things we do in real estate investment. There is risk in every investment. Proper Due diligence significantly reduces the risk to almost nothing.
Getting Started
So, how do you get started? This depends on your current situation. If you have investment capital saved, thatโs the ideal situation. If you already have enough equity in your current house, or property that you own, that is the second-best situation.
If you have neither of those, then you can flip a few houses, which will get you through the process of finding, analyzing, negotiating, buying, renovating, and selling properties for a profit. Remember, the process is the same for both types of investment.
Another great way to start out is to partner with someone you can trust. If you both put in capital, then you could form an entity that does your investing. With your portion of the profit, you can then start your own private stream and go from there.
Find a Mentor
If you have enough capital, but lack the experience and are concerned about going it alone, then you can try to find a mentor. Someone who has plenty of experienceโbeen through the process at least several times. Most successful real estate investors are happy to spread the knowledge around.
Most successful real estate investors are also usually pretty busy, and their time is valuable. Further, each person is different and has different wants and needs. It has to be worth their while to mentor you. Keep that in mind when asking a person to mentor you.
I am not suggesting that you offer to pay him or her, because they would probably laugh at that, but offer something in return and remain humble. Robert Kiyosaki tells the story about when he was asking someone to mentor him, after he was already a successful investor.
He went to the man and said: โI want to learn from you, so I am willing to work for you and do whatever you need me to do, and Iโll do it for free.โ
This surprised the man, so it took a few times of visiting with him to get a response. Finally, the guy called him back and said, โYou want to learn from me, and you want to work for me for free and do anything I need?โ Robert said absolutely.
So the man told him okay, fly across the world and analyze this investment I am considering investing in. I think it was a diamond or gold mine. He did not offer any salary, payment or stipend for travel or anything. Robert paid for everything, which likely cost over PhP 500,000 alone.
And from then on, he learned so much and was able to compound his wealth further from that mentorship. This is just an example of how Robert brought value to the potential mentor. The point is that it has to work for both peopleโa win-win situation.
Finding a Deal
Once we know where our investment capital is going to come from, it is time to start looking for deals. This site is an excellent place to find potential investment properties that are under market value, but not all of them are, so proper due diligence is crucial. Further, a lot of these foreclosed properties have problems that are easily solvable.
There are plenty of places to find deals. There are plenty of scams as well, so always do your due diligence thoroughly and you will almost always be safe from scammers.
Also, โinspect what you expect.โ Verify that the seller is the actual owner or has the right to sell the property, and that they are who they say that they are.
The 100:10:3:1 rule starts over with each property. This means that for every investment, you must look at 100 properties. Of those 100 properties, you will find 10 with potential and worth further investigation.
Of those 10, you will start your due diligence and negotiate on three. Of those three, there will likely be one that everything comes together, the offer is accepted, and you buy the property.
Start Practicing Right Now
Even if you do not have the capital or equity to invest right away, you should get in the habit of trying to find the next โDeal of the Decade.โ As Dolf de Roos frequently says, โthe deal of the decade comes around about once per week.โ
Start finding, analyzing, and practicing due diligence as soon as you can, so that when you are ready to start, you have some experience already. Also, chat, talk, and spend time with like-minded people. It is much easier to learn together, than alone.
The Philippines is the new land of opportunity and it is ready to make a serious rise. There is no shortage of great deals here. They are everywhereโthat is why I came here. You just have to look for them, and know what youโre looking for.
If you do not yet know how to find and analyze potential investments, I highly recommend Jayโs course.
When I came to the Philippines, I knew that all of my experience, trial and error, and developing my strategy in the US, mean absolutely nothing here.
I needed to learn some things immediately, and since learning is a lifelong process, I am always doing it. I didnโt want to spend the next few years figuring things out. So, I started looking for a good course. I looked at several courses and chose Jayโs.
All I wanted to know, was how to find good potential investments here, how to analyze properties here, how to determine renovation costs, and how I can get access to leverage. Also, the process and fees involved in buying, selling, and managing properties here.
I learned all of that and more in Jayโs course, and that is why Iโm donating these articles to help him help Filipinos gain their financial independence, and become sophisticated investors.
Feel free to leave any comments or questions below and Jay will get them to me. I will try to answer questions as soon as I can.
~Michael Gray
Michael Gray is a cash-flow real estate investor from Los Angeles, California who has personally acquired over 45 rental units for himself as well as hundreds more on behalf of the private equity fund he manages. He also runs a full-service property management company, which currently has over 300 units under its care. After months of research in 2019, he relocated to the Philippines to take part in this flourishing economy and real estate market. After enrolling in Jay’s course on buying foreclosures here in the Philippines, Michael has adopted Jay as an unofficial mentor, and writing a few articles to help Jay in his mission is his way of giving back for the priceless information and experience Jay has shared with him.
![Why invest in foreclosed properties in the Philippines? + Top things to consider [Video]](https://www.foreclosurephilippines.com/wp-content/uploads/2023/03/video-how-to-invest-in-foreclosed-properties-in-the-philippines-v3-728x410.jpg "Why invest in foreclosed properties in the Philippines? + Top things to consider [Video] 6")
Hi jay and michael
Please help
I have a 10 units apartment in the philippines. Which is under SME loan with BDO.
What banks offer cash out refinance with commercial properties?
Should i cash out refinance it with another bank?or the same bank.
I want to do the BRRRR process but get stuck in refinancing stage.
Thank you very much! This article is very helpful and insightful, my husband and I learned a lot. Weโve really been praying and planning to go into rental business. But we have only thought of the linear strategy. Thank you for the strategies youโve shared here. Hope we get to apply them soon.
Just a few newbie questions on the application side please:
1. When buying properties from BFS, are their posted prices already the discounted one? Or will the 30-40% discount still be deducted from those prices posted on their website?
2. Do Philippine banks really accept previously foreclosed houses which we have bought, renovated and rented out, for refinancing or as collateral for equity loans, given that houseโs history of foreclosure with previous owner?
Thank you in advance, Jay & Michael!
1. The listed price is their minimum bid. Once you win with the highest bid, you get the cash discount when you pay. Also, PAG iBig gives a 30% cash discount as well. That is their product. But you should focus on the process, not necessarily the product.
The idea is to find properties that are listed below their current market values. Also, properties that have problems that are solvable pretty easily, but are currently severely affecting the current market value.
This can be done with any bank whether there is an additional discount for paying cash or not… Further, just because there is a big cash discount does not mean it is a good deal. There are plenty of properties listed way below current market value at banks without discounts, and plenty of properties listed well above their current market value, that remain above that value even with the discount. DUE DILIGENCE IS THE KEY!!!!!
2. Foreclosure is a people problem, not a property problem. So, just because a property is foreclosed on, does not mean there is anything wrong with the property. Banks look at the people borrowing the money and assess the value of the property. Then they loan a percentage of that total property value and the ability of the person to repay the loan. Their decision has nothing to do with the people who owned the house before you, and their personal financial situation.
So yes, banks will not only lend on the equity, but will actually lend you the purchase money on it. This is huge, and a big reason why I decided to move here and get involved in the real estate market a few years ago.
Thanks for the reply, Michael. Very insightful and helpful again. Focus on the process, not on the product.. importance of due diligence.
Thanks for being willing to share your knowledge. Best regards, Jay & Michael.
One more thing Beverly. I know that you know this already, but other readers may not. It is in regards to the following part of your question:
A few questions โ can you share from which institutions or banks have you actually bought these properties you used for BRRRR? What was mentioned was BFS. Any other which provides the best deals or discounts?
It is easy for us to focus on the product rather than the process. BFS, Pag Ibig, and unionbank all offer discounts on spot cash. However, they are not always starting at or below the current market value. Sometimes the banks or lenders need a certain amount of money based on how much they loaned originally–regardless of the current market value. So sometimes properties could still be above their current market value–after discount. Further, sometimes other banks have properties listed at well-under current market value, yet offer no discount for spot cash. So it can be a much better deal to buy from a retail bank with no discount sometimes.
Also, there are a lot of owners out there who are selling properties, and they do not necessarily know the actual current market value of a property. They think they know about what it is worth, but do not. And, people do not always want to pay for an appraisal–especially if they think they know already. So they list it for well below market value and are willing to negotiate from there.
This is exactly what happened in the case I mentioned in my response to Ray. A seller offered a 500sqm lot for sale not far for from the Baguio Mansion House. The zonal value in that area is 3,500-4,500/sqm, yet they were offering it at 2,500/sqm-negotiable. We agreed on 1,300/sqm, or 650k. During my due diligence, the seller gave us a lot plan that showed the lot at 500sqm. When I went down to the municipal hall, they had the official plan, and the lot seems to be closer to 660 sqm. So, I spoke with my geodetic about getting a survey that is based on the official plan at the municipality and having that extra 160 sqm included, then submitting that survey to the municipal hall.
Since the seller is almost 80 years old, he had bought that lot many, many years ago–before I was even born. He got it for 25k, and never did anything with it. He is selling it for the 650k that we agreed on. So everyone is extremely happy with our deal. For me, that is an example of a “deal of the decade,” which Dolf de Roos says comes around about once per week.
It is my pleasure Joel. I want everyone to do well in investment here in the Philippines. The least I can do is share what I can.
Thank you Michael for the enlightenment and motivation to invest in real estate. Appreciate your article.
You are most welcome Yeen
I have a question for Michael can you please email me would be appreciated [email protected]
While this is all very informative – I feel – after investing in the Philippines in properties since a while – that there are pink glasses in front of the eyes of the author. Maybe it worked out for him that way. It clearly didn’t for me with this awesome results. I am not unhappy but here are some things that are noteworthy:
A) RENTING: A house worth a million Peso – where does that fetch 12-15k net rent in the Philippines? I would jump on that right away.
For me and in my experience: A condo on EDSA (SMDC) valued ๏ฝ3M fetches ๏ฝ15k max net. (Rent minus Asso Dues-Internet, Repair and Renovation, missing items etc.) I am happy but it is far from the authors suggestion. (3Mx12=36k or 3Mx15=45k). But a condo in QC (Century Properties) valued 3M fetches not even 15k net. In fact it there is simply no one interested although the amenities are the best I have ever seen in the Philippines. (It is for sale btw ๐ ). The 3 houses in Davao worth 1.8-2M (Susana Talomo) fetch in average 6.5k rent. Not 12k not 15k – not 24 or 30k – not even close.
On top my record is that I can get an occupancy of about 80% max. because SMDC on EDSA is a great location. The rest is far below par to be honest.
Currently with corona it even far less and the rent is down 25-30% as well.
So in principle the article is informative and not wrong, only – it is not as easy as you hope for – and therefore my honest advise:
Have a good amount – yes double that what you think now – in the back pocket. If there is no renter for a year or only for half a year – you need to have strong reserves to sit this one out. The last thing you want is to forfeit the property to the bank and with limited reserves you will have that risk.
B) Talking about risk: A flood – an earthquake or a volcano – like in case of the pre-selling project in Taal – can make it all go sideways very very quickly. And in the case of condos – it is almost impossible to insure that properly. The Condo Corp has a general insurance – I estimate it to come to about a fourth of the current market value. (Maybe construction is really that cheap compared to the retail price) You buy a home insurance but that can’t cover the missing value – only the “inside” of your home from the paint of the wall and further in so to speak. In total – there will be a tremendous loss if something happens to your project. I haven’t found a solution for Condo Insurances as of now; anyone? For houses you have better options though.
C) Selling: I made my own experience with that and let me tell you – buying is easy – selling is super hard. The reason is that most cash rich people and the ones with a healthy income are a few only – and – guess what – they are also sort of investors like you. The bulk of Filipinos – sad to say – struggles with life. And this is your market since the Investor type is like a shark – waiting for someone getting into financial trouble and then bite to buy it cheap. The average Filipino doesn’t have the financial means to buy at high price. Pag Ibig has some calculators to see how much income you should have for what sort of loan amount. Everyone is looking for a good deal understandably and there are plenty around as average Filipinos are vulnerable to financial trouble. So there is only a very limited chance of fetching a good price and a sale can take a long, long time.
Used condos are also hard to sell for the same reason but somehow people still sign up for the new condos with double the price compared to the secondary market. Strange but true. I figure it must be the pre-selling phase that they focus on with not fully grasping the shock that will come when the balance is due and you haggle with the banks.
D) Another issue is the cost of selling – it is about 15% if you have a broker combined for Seller and Buyer. So, in order to sell with a profit – you need to get at least 20% more than you bought if for and – yes – you have a massive increase in paper and BIR value but almost no money in your pocket. (Well the rent is yours but if you loaned the property – that is mostly going for the interest). So while BIR is happy – you are not so happy. I am not going into the seller buyer share here as this is all up to negotiation in the Philippines. While it is not according to the law. PS. If you (seller) take over the 6% Property Sales Tax (Capital Gains Tax- ha ha – what a hilarious name for that because you pay – regardless of gain or loss), that becomes part of the value of what the seller gets (sales price) and you also pay your 6% CGT etc. on that 6%.
Just to share with you what I feel is the reality of the property market in the Philippines.
All the best and stay safe folks
Hi Ray,
Thank you for your comments. I welcome all comments and questions, even if negative like yours. I will go down the list and answer them one by one–as long as I can read through my pink glasses or whatever… haha just playing. Here are my responses:
A) RENTING: A house worth a million Peso โ where does that fetch 12-15k net rent in the Philippines? I would jump on that right away.
My area of focus is Mabalacat, Angeles, San Fernando–all in Pampanga, and Balanga Bataan, where I lived for my first year and a half here. However, you can find similar deals in Bulacan and even Cavite. All you have to do is look and you will see them.
For me and in my experience: A condo on EDSA (SMDC) valued ๏ฝ3M fetches ๏ฝ15k max net. (Rent minus Asso Dues-Internet, Repair and Renovation, missing items etc.) I am happy but it is far from the authors suggestion. (3Mx12=36k or 3Mx15=45k). But a condo in QC (Century Properties) valued 3M fetches not even 15k net.
That is a good personal experience, and I appreciate it. That is an unfortunate place to choose to invest, especially because that condo is very expensive, and rents are low. You really need to do proper due diligence and invest in a city that is growing rapidly like Angeles, Clark, and San Fernando, which are on the list of fastest-growing cities here in the Philippines. You need to do your research, of course, it is not the same in every city in the Philippines. Before I came to the Philippines, I researched for 3 months straight on the economy and real estate market, as well as which areas to invest in. I recommend you do the same. Google is full of this information, as is Lamundi, Dot…etc.
But a condo in QC (Century Properties) valued 3M fetches not even 15k net. In fact it there is simply no one interested although the amenities are the best I have ever seen in the Philippines. (It is for sale btw ). The 3 houses in Davao worth 1.8-2M (Susana Talomo) fetch in average 6.5k rent. Not 12k not 15k โ not 24 or 30k โ not even close.
On top my record is that I can get an occupancy of about 80% max. because SMDC on EDSA is a great location. The rest is far below par to be honest.
Currently with corona it even far less and the rent is down 25-30% as well.
That is a poor investment for a rental, as you have shown. Having 80% occupancy is also poor. You may consider hiring a property management company.
In one of the properties I discussed a bit in the zoom, and in the class q and a was in a subdivision in San Fernando, a townhouse, For sale rush under a million pesos, and people were asking for 20k+ rent. This was during covid. You can message me and I will share my spreadsheet of at least 30 properties that meet my investment criteria. Actual properties that are or were for sale in the last few months at or around a million pesos , in areas where 12k+ is conservative. You just need to do the research.
B) Talking about risk: A flood โ an earthquake or a volcano โ like in case of the pre-selling project in Taal โ can make it all go sideways very very quickly. And in the case of condos โ it is almost impossible to insure that properly. The Condo Corp has a general insurance โ I estimate it to come to about a fourth of the current market value. (Maybe construction is really that cheap compared to the retail price) You buy a home insurance but that canโt cover the missing value โ only the โinsideโ of your home from the paint of the wall and further in so to speak. In total โ there will be a tremendous loss if something happens to your project. I havenโt found a solution for Condo Insurances as of now; anyone? For houses you have better options though.
Those are very good reasons not to invest in condos, which I do not and have not suggested people do. I understand that you made a poor investment choice, and I have done it too. No one is immune from making mistakes. However, your experience is irrelevant to the system I laid out. I think that a big part of your mistake was your lack of due diligence. You are comparing your poor experience with a well-researched, studied, and very strong due diligence performed. It is like comparing Apples to Oranges. You need to put in the work in order to get the results you want. There are no shortcuts in investment.
C) Selling: I made my own experience with that and let me tell you โ buying is easy โ selling is super hard. The reason is that most cash rich people and the ones with a healthy income are a few only โ and โ guess what โ they are also sort of investors like you. The bulk of Filipinos โ sad to say โ struggles with life. And this is your market since the Investor type is like a shark โ waiting for someone getting into financial trouble and then bite to buy it cheap.
That is a very pessimistic view. I don’t wait for people going into financial hardship and wait to pounce and buy it cheap. There are many reasons why people sell houses for well-under market value. Sometimes there are people who are selling a property from a deceased relative that they live nowhere near. I just bought a lot in Baguio well under market value because the seller was old and he bought it 50 years ago for 25k. Imagine his delight when I offered him 650k for it…. He made over 26 times his money and was delighted to do it.
Sometimes people already have a different house that is out of the area and they are just trying to get rid of their house that is in complete disrepair and broken-down. Perhaps they don’t have the time or desire to do anything with it and they just want out.
Sometimes people are actually going through financial troubles and about to lose their house and destroy their good name and credit. They can’t sleep at night because of the stress. They stay up late praying that someone will take over the payments pasalo, and are extremely happy to get the weight off their shoulders and escape major problems. Sometimes they want to sell it for just what they owe on it and are delighted for anything above that. That is helping people not being a shark. You are out of line by insulting me like that.
Buying foreclosures has nothing to do with waiting for people to run into financial problems and being like a shark. It involves buying properties at a discount from banks that own properties, which there are thousands of in the Philippines.
The average Filipino doesnโt have the financial means to buy at high price. Pag Ibig has some calculators to see how much income you should have for what sort of loan amount. Everyone is looking for a good deal understandably and there are plenty around as average Filipinos are vulnerable to financial trouble. So there is only a very limited chance of fetching a good price and a sale can take a long, long time.
Used condos are also hard to sell for the same reason but somehow people still sign up for the new condos with double the price compared to the secondary market. Strange but true. I figure it must be the pre-selling phase that they focus on with not fully grasping the shock that will come when the balance is due and you haggle with the banks.
I am sorry that you are having problems finding/buying good investments, and having a hard time renting your bad investments and keeping them rented, and having a hard time selling your investments. I might be pessimistic if that was my experience as well, so I do not blame you. What I recommend is taking an investment course. Knowledge will certainly go very far in helping you do better. Like the great John Wooden said: “It’s what you learn, after you know it all, that counts.” This has been true for me as well as most people. I have made lots of mistakes too over my last 20 years of investing. I have learned so much more from my failures than I have from my successes. This is why I am always learning, even if I feel like I already know the subject.
You will also realize upon a second reading of my article, that I rarely sell the properties. So, once again, while your experience is important, and I appreciate you sharing it, it is kind of irrelevant to the conversation. I am aware of potential downfalls and trouble with selling property, which is a major reason why I don’t do it much. It takes time, costs money, and is flush with taxes and fees. Again, perhaps you should use a professional to help you sell your property. And also price it properly. I am not sure that you read the article, at least not fully. I recommend that you do that. Due diligence is the most important step, in which your problems are addressed.
D) Another issue is the cost of selling โ it is about 15% if you have a broker combined for Seller and Buyer. So, in order to sell with a profit โ you need to get at least 20% more than you bought if for and โ yes โ you have a massive increase in paper and BIR value but almost no money in your pocket. (Well the rent is yours but if you loaned the property โ that is mostly going for the interest). So while BIR is happy โ you are not so happy. I am not going into the seller buyer share here as this is all up to negotiation in the Philippines. While it is not according to the law. PS. If you (seller) take over the 6% Property Sales Tax (Capital Gains Tax- ha ha โ what a hilarious name for that because you pay โ regardless of gain or loss), that becomes part of the value of what the seller gets (sales price) and you also pay your 6% CGT etc. on that 6%.
Just to share with you what I feel is the reality of the property market in the Philippines.
As you would have read in my article, I say that you get to keep about 80% of what you sell it for, so at least we can agree on that, if nothing else. This is another reason why I suspect that you have not read the article. You are not really giving an accurate depiction of the property market in the Philippines. What you are actually doing is demonstrating what can happen if you get into investing without the necessary knowledge and research. I am sorry that you have had failures and troubles investing. If you recognize the problems, accept them, and take responsibility for them, then you can learn from them.
As I mentioned, there are no shortcuts in investment. You need to invest in your education, do the research, and put in the work. I have had failures over the years, and many of them–even though I did research and put work in. I did not blame anyone or anything or any circumstance for my failures, except myself. Once I accepted the responsibility, I ask myself two questions. The first question is “what did I do right?” Start with the positive and you are more likely to repeat the right things. Next question is “what would I do differently next time?” Another positive question instead of blaming, complaining, making excuses, or being negative, which is sometimes hard to do when I fail at something.
I recommend enrolling in a course–if not Jay’s, then another one of your choice. Also, as you will learn in the course, you need to find your area and really get to know values and market rents…basically, know your market. Knowledge is power. If you want to succeed, you have to first realize that you have made a mistake or two, then find out why. I am not trying to be rude or argue here, just give you more insight to me, an investor living and investing in the Philippines right now. In fact, there is a fiesta property I am in the process of buying a brand-new townhouse, pasalo (no financial shark activity, the couple was approved for in-house financing, then were given a house and lot by their aunt as a wedding gift and were trying not to lose their down payment for backing out). It is right on the border of Porac and Angeles in a Fiesta Community. The total price is actually 1.1M, and the down payment is only 160k. Since it is a corner lot, it is extra-large compared to the others. It is two beds and one CR, but I am adding a master on, which the market rent is easily 15k+ for. Also, my team can add that room onto the back for under 200k, and it will have an ARV closer to 2.3M, as others in the community are currently selling for. This is not something I’m “hoping for,” it is something I am doing right now. And many in our private investing group on FB for alumni of Jay’s course are doing similar deals and making good money. As you correctly said, there are great deals everywhere here, which is why I moved here almost 3 years ago. So, our experience and reality of the Philippine property market is much different than yours–mainly because we all have something in common. We have invested in our education, we do the research, we know our markets, and we learn from each other. If you want to discuss this further or have any other questions or comments, please feel free to email them to me. I am always happy to help–as long as you are at least respectful–even if you disagree with me. I will always try to extend the same courtesy to you as well.
Thanks again Ray.
Great article Michael. You laid it all out for anyone willing to do the work!
Thanks!
-Matt
Thanks Matt. You have the key to successful investment right there–short and sweet. You need to be willing to do the work. “You reap what you sow. But you must sow first.”
Wow! Very good.
Thank you.
I found a property worth P50m, but can be bought for P28m at 20% down payment.
Do you know any investor or funder who may be interested in this deal?
Thanks,
Jonathan
Hi Jonathan,
There are many questions and information that would need to be addressed to respond to something like that. If I told you that I know of a property that is worth 20M that you can buy for 5M, you have absolutely no idea what type of property it is, where it is, how the value was arrived at, what the income/cashflow is like…etc. Information is key, but this is not the place for that. You can email me if you’d like to explain more details.
This is just awesome, Michael! Thank you for sharing your knowledge and experience with us. Having some concrete computations here makes it more clear on how this can really give us financial independence.
And thanks again to Jay and Cherry for starting this website and this campaign, enabling more Filipinos to see the value of real estate investing and gaining financial independence.
A few questions – can you share from which institutions or banks have you actually bought these properties you used for BRRRR? What was mentioned was BFS. Any other which provides the best deals or discounts? I understand Pag-ibig also offers discount for cash buyers.
And for refinancing, which banks do you prefer, and that which offers what you mentioned here as no or low prepayment penalty.
Can you refinance a property whose title is under consolidation? – which I see in a lot of Pag-ibig properties.
Thanks Beverly. It is good to talk with you again.
BFS is tough in our area because they don’t have many good, unoccupied properties, but there are a couple here and there. I bought with PagIbig, as I think you have too if I am not mistaken. If I recall, you bought it at auction. If you wait for negotiated sale, or second auction, you can get 30% off for spot cash. UnionBank will give 10% for spot cash, and also offers up to 90% LTV. I think 20 years in the maximum loan term, but you can always refinance it after you pay down the balance a bit, though they want you to be under 65 or 70 when the loan matures (which is pretty standard), so I recommend having your business hold and refi it if the age thing is an issue as it is for me on anything 20 years or longer. I do have people that will hold it for me as well…like a surrogate.
Pag Ibig is actually a pretty good institution of refinancing as well–especially if you are buying one of their properties. Also, EastWest bank is very easy to work with–though I have not used them here in the Philippines, I’ve used them a lot in the US.
As for title consolidation and refinancing: once the title is consolidated, it is back in the bank’s name. Once it is transferred to your name, you can refi. I am not sure that you can do it in any other circumstance.
Very informative and lots of learnings! Thank you for your generosity for sharing this
It is my pleasure Joel. I want everyone to do well in investment here in the Philippines. The least I can do is share what I can.