Given the Philippines’ booming real estate industry, the old adage “safe as houses” has never rung so true. Healthy capital appreciation and attractive rental yields characterize Manila’s residential property market, the office sector boasts impressive take-up, while commercial and industrial properties are making a comeback.
But this doesn’t mean that everyone should just get into real estate investing without giving it much thought. It is, after all, a business venture that requires due diligence and involves risks. The latter, however, could be avoided if you have done your homework.
So what are these ways you can make money from real estate?
1. Buy and Hold
Real estate experts agree that this probably is the simplest and most secure form of property investment. It involves buying a property, holding onto it, and hopefully reaping the benefits of capital growth, which is the increase in the price of an asset over time. For example, an apartment worth Php10 million 10 years ago may be worth Php10.9 million today, meaning the property has grown in value for Php900,000. Essentially capital growth can be achieved through buying and holding an asset as property prices have traditionally grown from year to year.
According to Michael Furlong, head of Melbourne-based MAP Real Estate, this is probably one of the best long-term real estate investment strategies.
People believe that you can just buy a property and sit on it for two years, make some money and get out. They’re totally not understanding what the strategy of property is. The strategy of property is long term—a minimum of seven years.
But how much is a property expected to appreciate in value? This is subject to a number of factors, including location, property type, time frame, and at what stage the property cycle is currently in. Therefore, carefully timing and choosing your purchase are of utmost importance.
2. Buy to Rent
If you plan to invest in a buy-to-rent property, you have to make sure that the house you’re keeping an eye on is cash-flow positive. Avoid those with an “outrageous” price tag—those that are way too high considering the cash flows the rental property can generate.
As an example, let’s say there’s an apartment worth Php8 million on which you have invested a cash equity of Php1.6 million (or 20 percent down payment). If the apartment generates a rental income of Php45,000 per month, and the mortgage plus other operating expenses total Php30,000 per month, that will leave you with a positive cash flow of Php15,000 per month or Php180,000 per year. If we divide this Php180,000 annual cash flow by the Php1.6 million initial cash investment, it generates a cash-on-cash return of 11.25 percent, which is roughly the rental yield of Manila’s high-end residential properties in 2012, according to data from Colliers International.
However, not all properties are created equal; some are more attractive to renters than others. Location here matters a great deal, as potential renters will not shell out money for an apartment in the middle of nowhere. In addition, the property’s amenities, quality of finishing, and to some extent the developer’s reputation will matter a great deal.
3. Buy, Renovate, and Sell
Also called flipping, this involves buying a house, making a few retouches, and selling it for profit. If you want to flip a house, first understand that you are in the business of selling property fast. Hence, your focus must be on speed, not maximum profit. Every delay compounds your risk, so better sell a property quickly at a small profit and go on to the next deal.
In addition, if you want to be successful, understand that not every location is ideal to flipping property. Locales that were hit hardest and suffered the greatest losses are your best bet, as those full of foreclosures.
According to Forbes contributor Larry Light, there are important considerations that every investor must have in mind before going into flipping properties. One is to pass on expensive repairs, as properties like these eat up your money, not to mention the time it takes before you can put them back on the market. The next one is to take no debt, because buying a property in cash reduces your risk and saves you on lending fees. Doing so also allows you to move quickly, so you can take advantage of good deals out there fast. Last and perhaps the most important is understand the market thoroughly. Make sure that your deals are in areas where employment is strong, as jobs are the secret sauces that lead to strong buyers. You need people with jobs to buy your property if you want to make money.
There are many factors to consider before jumping onto real estate investment. However, the single most important is to determine your long-term goals. What do you hope to achieve through your investment? Once you have done so, then it’s time to look for a suitable property that fits your strategy.
In addition, in order to maximize your investment returns, you need to incorporate key criteria, which include location, design, build quality, tenantability, and return on investment, to your investment decision, according to Finder.com.au. Therefore, seeking the help of real estate experts will prove absolutely vital when reviewing your options.
