21 Sep2008

light1

Literally. We live in a 50+ year old rented house in Manila. It has undergone renovations several times, but it is still essentially a 50+ year old house. And it has a leaking roof. In the past few months, the leaks have gotten really outrageous, and in the heavy downpours some two weeks ago, we were running around our living room saving paintings, furniture and electronics from some 30+ gallons of water that came pouring into the area. That was absolutely the last straw. A strongly worded letter sent to our very nice landlord, finally resulted in a decision to change the entire roof; and work started yesterday, in the middle of the rainy season! So these aren’t halogen (I know, an environmental nightmare) lights with special halo effects, what you see here is the sunlight behind the halogen bulbs… you can literally SEE THE SKY from our couch! Egads. And the ruckus associated with removing decades old galvanized iron sheets and drilling new roofing materials into place is unbelievable, but at least we won’t have any more leaks…

light2

I have been asked several times by friends, family and even readers over the years what I thought about renting vs. owning a home. And I have to say, we have always RENTED our apartment or home in Manila for the past 12 years or so… and it was the wisest move we have ever made housing wise, even with the current unfettered view of the clouds from our dining table. Here is how I figure it, and I understand many folks may think the logic stinks, but it doesn’t… So if you are thinking of buying vs renting, do your own analysis and see how it comes out:

Assume the following for the “Forbes Park Example A”. Here one purchases a home in one of the toniest Makati villages in 1995, at about the height of the real estate market, when the peso to dollar exchange rate was roughly PHP25 to 1. Let’s say, for the sake of this example, you bought for cash a 1,000 square meter lot with a 15+ year home that you could move into with minor repairs at say PHP65 million or roughly USD2.6 million.

light3

Value of that same home today, assuming you maintained it reasonably, would be roughly PHP50 million or roughly USD 1.0 million. Your average annual return in peso terms would be approximately minus 2% (-2.0%) per annum. In dollar terms, it would be approximately minus 7% (-7.0%) per annum. Yup, read that again. But, ah you say, Marketman forgot to factor in saved rental income, so let’s say you got a utility of roughly PHP100,000 per month for 13 years, then you saved roughly 16,000,000 in rent, but spent maybe PHP5,000,000 in property taxes, maintenance, insurance, etc., for a net benefit of say PHP11,000,000. But even if you factor this in to the purchase price and the current price, you still would have made NOTHING on this investment in peso terms in 13 years. And in dollar terms it remains a negative return.

light4

Now, you say, Marketman picked the height of the market in 1995, when we happened to move home to the Philippines, what if you changed the starting point to say 1998, when real estate prices plunged and one could get a similar house as the one described above for say PHP50 million or roughly USD1 million at the exchange rates then. As of today, shortcutting the math, your house would be worth roughly the same, if not gain say 1% per year at the maximum, and you would have saved PHP11 million in rental and other net expenses. This is still a FAR CRY from the average return over a decade of a mutual fund in international blue chip stocks at say 12-13%.

So what if you rented instead of buying, and invested your money wisely instead? To continue the same example as above, let’s say for the sake of argument that we had PHP65 million in cash in 1995, converted it into dollars and got USD2.6 million. Invested this in a mutual fund or treasury fund and earned a conservative 8% (12% is more usual over a long period) or roughly USD 208,000 per year. Out of that annual interest, spend roughly USD50,000 a year to rent a fabulous Forbes Park house and make sure it is so well maintained that you are more than happy to live there, even if the roof leaks occasionally. You would then grow your money by say another 150,000 per year, and in 2008, interest compounded, you would have at least $5.2 million in the bank in cash or near cash financial instruments. You wouldn’t own the house you were living in, but now you could literally buy FIVE of those houses up and down the same street with your USD5.2 million, see the difference? It’s whopping huge. Particularly for anyone from abroad sucked up into the vortex of buying a local home or apartment as a retirement nest egg…

light5

Now, you say, maybe you aren’t willing to dabble in foreign exchange, and did the analysis in peso terms only. If you had PHP65 million in 1995, you could easily have invested it in safe treasury bills and other corporate bonds of blue chip companies (no high flying stocks even) and yielded some 10% or 6.5 million in annual interest. You could spend PHP2 million of that renting your home and saving the remaining 4.5 million, and today, with compound interest, you would have roughly PHP157 million, or enough to buy THREE houses. Don’t believe me? Do the math.

And I showed you the highest end example to show you that buying “prime property” isn’t always the brilliant investment people seem to believe it is. And even more so that you should do the numbers when you have to borrow some of the money to pay for a property purchase, that makes returns sink even faster. You can do this all across the spectrum and only when the numbers make sense would I consider buying over renting. Really? Well, not really. If you CANNOT stand the thought of renting and want to have a house exactly to your specifications, and nothing else will do, then throw your money at it and look the other way. It isn’t a financial decision, it is an emotional one. Also, if you want a lot or location that you do not think will be on the market in a few years, you may have to buy it now. If the basic price of land is still very low; for example the returns would change for the better if you bought Forbes Park land for PHP10 a square meter (the prices in the 1950’s) and sold it at PHP50,000 a square meter today (in peso terms, that works out to roughly 13-15% annual compound return after paying proper capital gains taxes, but in dollar terms, just 6-7% annual compound return). However, inflation has been really tame for 15+ years with the exceptions of periods of financial crises. If inflation were to run rampant, then folks owning houses could smile a little bit more. But in a rational world, in the Philippine real estate market, in the past 10-15 years, the ones who rented would, for the most part, have beat out the folks who bought fancy homes and apartments. But don’t tell everyone you know, or you won’t find a home to rent. And you must be incredibly DISCLIPLINED to invest your savings from renting rather than buying instead of going out and spending it from year to year. It’s best if 90+% of the population keep believing it’s a great thing to buy houses and apartments and then rent out their properties so that folks like us can take advantage of the weird market dynamics that allows us to occasionally see the sunlight through our ceiling, but have a fatter savings account and more funds for lechon experiments… :)

 

COMMENTS:

  1. Naz says:

    Very wisely done! You’re a real Banker who knows his trade. That’s why I scolded my Mom when she had a house built in Paranaque. A house she very rarely visits now. What a waste.
    Which would your readers choose:
    $1 million at the end of the month OR
    .01 cents to start with which doubles in value daily for 30 days

    Sep 21, 2008 | 11:33 am

     
  2. John Glenn says:

    Thanks for this enlightening analysis. Very timely! Saludo po ako sa inyo. I enjoy reading most of your food entries but this one really made my Sunday. All the best!

    Sep 21, 2008 | 11:33 am

     
  3. isabella says:

    What happened now that all the big investment banks and mutual fund banks are collapsing? What wll become of your fat bank accounts and investments?are you not affected by it?

    Sep 21, 2008 | 11:37 am

     
  4. Marketman says:

    isabella, stick to very safe investments for the analysis above. A well thought off mutual fund if you must have some equities, over time, yields 12-14%, government securities from the U.S. government, U.K, etc. held to maturity, say 6-8%, triple A corporate bonds, etc. No fancy currency trading here, no derivatives, no high-flying instruments. But if you were comfortable betting in that manner, then if you bought say Apple shares, or Google or even Coca Cola, you would have done brilliantly. In the same manner that there is risk on your financial investments, your home could also burn down, be located on an earthquake fault, be subjected to a lightning strike, etc. But if you played it pretty safe and diversified your holdings, you would be doing okay. In fact, if you only bought the dollars in 1995 and stuck it in your mattress, it would still be worth $2.6 million today, more than the house you could have purchased with it… Unless of course, a burglar stole it from your bed, so better to use a safety deposit box. Naz, you are sneaky… I hope readers did the math… but essentially 1 cent that doubles everyday for 30 days yields more than 10 million by the 30th day… if only we could find investments like that one!

    Sep 21, 2008 | 12:20 pm

     
  5. lee says:

    Wow…. now i know where the lechon experiment funds come from.

    Sep 21, 2008 | 1:01 pm

     
  6. MES says:

    My DH normally leaves the food blog reading to me, but today I showed him your entry, and not only is he subscribing to your feed but also forwarding your article to his family address book. Thanks for giving us insights not only into food, but also dieting, parenting, home decorating, plagiarizing pseudo-writers, unscrupulous PR agencies, and investing! What a complete lifestyle source you are MM!

    Sep 21, 2008 | 2:03 pm

     
  7. fried-neurons says:

    Hi Marketman… the logic behind your numbers makes perfect sense. I have to say that I’m surprised, though, because I had no idea that the highest end of the real estate market in Manila has also been subject to such wild gyrations over the past decade, decade-and-a-half. When we left the Philippines, property in Forbes was in the 30- to 50-million peso range if I remember correctly. Recently I was bored and I started Googling Makati listings, and I saw quite a few houses in Forbes and Dasma listed for 75 million, 100 million, and even 200 million. I guess those are the outliers then, not representative of the broader market? Anyway, kudos once again to your number-crunching!

    Sep 21, 2008 | 2:06 pm

     
  8. fried-neurons says:

    Oh, by the way, regarding that 1 cent doubling everyday…

    Recently there was some short-term opportunity for something very close. There was a (false) rumor that spread throughout the financial world that United Airlines was about to declare bankruptcy. Their stock dropped from around $12 to 1 cent in a matter of hours, before the exchange halted all trading. The following day, everyone found out the rumors were false, trading was resumed, and the stock went back up to around $10. If you had managed to buy $1,000 worth of stock at the bottom, by the following day you would have been $1 million richer. Haha. If only…

    Sep 21, 2008 | 2:14 pm

     
  9. Marketman says:

    fried neurons, the average lot size in South Forbes is probably 1,500m2 or roughly HP75million for land only, not including a relatively new house. The average size in North Forbes is probably closer to 2,000-2,500m2. The Forbes example above is probably better named a “Dasmarinas Village Example” but the numbers work either way…

    Sep 21, 2008 | 2:16 pm

     
  10. isabella says:

    your insight is very correct,but you know the average mindset of a Filipino is to own his own house-as if that is the pinnacle of his achievement.The simple statement is” basta magkabahay lang ako”.Funny ,because they don’t understand the mathematics of life….

    Good, you are so brilliant in finance and am glad you rub it off on us here.

    Thanks a lot.I love your food blog….but I am more concerned on the financial side of life -for the truth is where willyou get the resources to buy and afford those beautiful and interesting food if you don’t have moolah.So I am tempted for the first time to join your discussion.

    Sep 21, 2008 | 3:15 pm

     
  11. Juan says:

    Whoa! Did the Philippines just suddenly become wealthy?

    Sure, with the interest income on 65 million pesoses, it makes sense. But, really, which Juan has that kind of money to invest?

    How much does, say, a middle manager make a month? Okay, I asked someone I know and he said about 50K a month. I did my own number-crunching and came up with the following conclusion: he’s better off buying because the monthly amortization is less than what he’s throwing away in rent.

    The funds that you say yield at least 8%, they’re not from here, right? If so, how does Juan who got lucky invest in it?

    Sep 21, 2008 | 9:01 pm

     
  12. poch says:

    And as for a second home, Peter Mayle strongly argued that it’s so much better to purchase ACCESS, rather than ownership. Makes total sense.

    Sep 21, 2008 | 9:32 pm

     
  13. marilen rodriguez says:

    thank you for this analysis – i learn something from your blog everyday – covers all the elements of living – food, finances, culture. it is such a pleasure because you share so generously of yourself. salamat salamat.

    Sep 21, 2008 | 9:32 pm

     
  14. RoBStaR says:

    Sep 21, 2008 | 9:35 pm

     
  15. Jade186 says:

    Thanks for this post MM! You definitely explain things more clearly than my former economics professors.

    Sep 21, 2008 | 9:57 pm

     
  16. ragamuffin girl says:

    My hubby has the same logic as you do, I suppose it helps if you know where and how to invest. For laypeople like me the thought of “owning” a house is sweet. :) But as I am educating his taste buds, he is educating me finance-wise. Good entry, this one!

    Sep 21, 2008 | 10:12 pm

     
  17. Honey says:

    this is a very timely post! my fiance and i are just discussing whether to rent a house or to invest/buy one. i’ll forward this to his mail. =)

    Sep 21, 2008 | 10:46 pm

     
  18. zena says:

    Completely unexpected but very enlightening. I wonder if Suze Ormon will agree with you. She believes in owning your home outright (I think), then diversifying investments.

    Sep 21, 2008 | 10:52 pm

     
  19. APM says:

    Amen. Marketman.

    My friends always criticize me for renting a house in Makati rather than buying one. Since 2003 I have lived in two houses in Makati one with a lot area of 700sq.m the other 650+ sq.m. Conservatively each of the houses I rented would have been valued at anywhere from Php 20 to 25 million. Yet my rent amounted to a low of Php35k (including EVAT) to my present Php 62k (including EVAT). So one one end I am saving myself from sinking in dead money in a non revenue generating asset. The other rationalization I give for my setup is that my rental expense is deductible from my income tax. In this age of uncertainty and shrinking portfolios I wonder how much longer I will succumb and sink money into a house.

    Sep 21, 2008 | 11:09 pm

     
  20. Glecy says:

    Marketman
    I don’t have 50 mil to invest, but how about buying a condo that is worth 5 mil pesos.Do you think it’s worth it? My plan is to stay for 6 months then back to US for 6 months.Reading your blog made me wonder if I am doing the right thing.Thanks for your response.

    Sep 21, 2008 | 11:49 pm

     
  21. Grace says:

    Hi MM,

    I got your point well said :-) Although I’m a realtor (under the company who developed Forbes Park) :-) In my opinion buyers should assess themselves first for their purpose in buying as i believe it would greatly depend on what they will do with the property. Like what you said if the returns would be for the better and if a person wants a lot or location that will not be on the market in a few years, they may have to buy it now. I also think that if they have kids to pass it on to a piece of land would be a great investment rather than a condo or a townhouse as it will really last a lifetime. What i want about the company that i am with is their ability to maintain the property and make its value appreciate even after 50 years (its mostly because of their property management). In fact they have come up with another Forbes Park type concept not the fake one ;-) its called Abrio which is also located in the south. If you wish to know more about it you may visit my site

    Btw, I had fun reading this topic Marketman’s expression reminds me of Mr. Weatherbee from Archie comics that was fun :-)

    Sep 22, 2008 | 1:45 am

     
  22. wysgal says:

    I remember speaking to you about this. Emotional investment is right.

    The interesting thing is that it’s the only the people that would actually bother to do a cost-benefit analysis of rent vs own that would actually be “investment savvy” enough to seek out long term 10%+ returns on their pesos.

    Sep 22, 2008 | 4:27 am

     
  23. Marketman says:

    Wow! That is a surprising number of comments on this post! Wysgal, emotional, definitely. Grace, you are right, there ARE reasons to buy property, at the right price. As for the company you work for, they certainly have done well, but if you run the numbers for places like Alabang over 30 years, the returns on land are far lower than say Forbes. It also depends over what timeframe you analyze… Glecy, if you buy a condo for say PHP5 million in cash, then you should expect to be saving at least PHP400,000+ in rent or roughly PHP33,000 a month. If you only use it 6 months out of the year, the effective “cost” is PHP66,000 a month. If you can’t find other accommodations at that price, then maybe you should consider buying… but you do have the added layer of FX risk, so if the peso goes down, so does your investment, and vice-versa. APM, thanks for that comment, you just confirmed the numbers, as doubling your house value gets to a roughly PHP100-120K per month range. That means the logic has held up from the PHP50M to PHP25M level, it will start to break up near the PHP5-10M level, I suspect. Zena, I am referring to the Philippine market, where interest conditions, inflation, mortgage capabilities, appreciation of property, etc. differ from the West a little bit… Honey, it’s really best to sit down and do a basic pros and cons list. The numbers for buying vs. rent. Taxes. Maintenance. Insurance. Commuting cost based on location… I can’t stand the logic of “I bought a 2 million peso house in San Pedro Laguna and am saving P9,000 peso a month in amortization, but it turns out they spend nearly P10,000 more in gas and tolls every month!” so you must consider a LOT of things when the analysis is done. Mind you, if you worked near San Pedro, buying there might have been the most brilliant move ever. Poch, you are completely correct, actually, in my opinion, for vacations, stay in good hotels! We decided to build at the beach and understood its costs and still did it because both Mrs. MM and I remember childhood memories linked to weekends at the beach… so we knew it was emotional… but the annual cost is the equivalent of several months at hotels on vacation so one just has to do these things with fully open eyes… :) Juan, yes, in cases where monthly amortization with all other costs (like commuting and maintenance costs and insurance, etc.) is less than rent, then folks should consider that option, definitely. But look at it another way… let’s say you buy a PHP3 million townhouse in Bicutan, just 20 minutes from Makati or Manila. The annual interest you will pay on a 20 year loan is roughly 225,000 + principal of 150,000 or P375,000 total or roughly P32,000 month + taxes, maintenance, insurance, etc. so the total cost of your home would be roughly PHP40,000 per month. Last time I checked, you could get a similar home for rent at say PHP15,000-18,000… Of course rents will rise over time and so could the value of the house… but it has to rise some 7-9% per year to make up for the difference, and at the end WHAM! a 10% VAT + 35% capital gains tax to the BIR! :) So this isn’t a centillionaire’s issue only. As for the 8% bond, there’s a URC (Universal Robina Bond) in $ that is currently yielding roughly 8.0%, so the investments are out there… but you may need to have fairly big savings to buy these bonds directly, more likely look for a bond fund that only invests in top quality companies… but it isn’t impossible to yield 8%. And if one gets frisky and bought dollars in January of this year at say 40:1 and changed back today, they would have already made 15% in 9 months. Cash out and stick it in a savings account for the next year and a half an you would still average 8% a year in returns for two years. But don’t take that lightly, FX speculation is RISKY. Isabella, yes, many people DREAM of OWNING a house, but hopefully more of them will figure out how to understand the numbers before they plunge into the abyss.

    Sep 22, 2008 | 5:53 am

     
  24. kurzhaar says:

    …USD50,000 a year to rent a fabulous Forbes Park house…

    Did I read this right? That is over $4000/month, which I find (to put it mildly) rather shocking. I may have the numbers wrong but I recall listening to an NPR program on immigrant workers where the average salary of medical doctors in the Philippines was cited as less than $1000 per month. If that is what a physician makes, who on earth can afford rent in that range???

    Sep 22, 2008 | 6:31 am

     
  25. Marketman says:

    kurzhaar, that is precisely the point. At $4,000 a month, you would have a Forbes Park mansion, the local equivalent of living in a nice home in Greenwich, CT or even Beverly Hills, CA. That is the absolute top of the market practically in the Philippines. And that is for a home valued at roughly $1.5-2.0 million or so today. And yet, the yields on those homes are surprisingly low… Now is that really so shocking considering that there are apartments on Fifth Avenue in New York currently listed at $50-70 million range for say 5,000 square feet, or $10,000 a square foot, with the minimum wage for U.S. workers at what now, say $1,500 a month? And how much would an average U.S. physician make, after insurance? Say $25,000 a month? So neither the average physican in the Philippines nor the U.S. can afford to buy, let alone rent, the homes at the toniest addresses in their respective countries…

    Sep 22, 2008 | 6:44 am

     
  26. sonia says:

    it has become a global village and people seem to be always in transit. the days when people lived and died in one house are fast fading away. one more argument for just renting!
    of course a house is more than just shelter — the emotional and status nuances of owning one are there. but putting so much money in a house?
    thanks for sharing your financial savvy — which not incidentally allows us to enjoy your lechon experiments as well

    Sep 22, 2008 | 8:49 am

     
  27. kurzhaar says:

    Actually, Marketman, I know physicians here in the US who do not make anything near the amount you suggest (although they are comfortably off). I am well enough off (and do work for a living) to be able to afford to enjoy some aspects of the good life such as good food (and better wine!), but living at “the toniest” address has never held any attraction to me–in fact there is something about that which I find more than a wee bit repugnant. But that is just me… ;)

    Sep 22, 2008 | 9:18 am

     
  28. roslyn says:

    Hi! Like Grace, i too am a realtor. Thanks for the info. Its true everyone has his own reason for buying versus renting.Any which way our clients want to go, we, as realtors, actually win and earn. But in most cases, we, too act as consultants to their dilemma, and the way i see it, it is wise to have a varied portfolio for investments. I handle the high end market and these clients are rarely rthe ones who would fold up in economic crises. I still believe owning property in good locations is the way to go. Rentals from these properties cover for a lot of expense. Money in the bank depreciates and who knows if there will be a bank run? The wise move is not to have all your eggs in one basket, but i;m definitely not going to shoot down buying into real estate. Land is a commodity that cannot that is fast disappearing. Dont you think so too?
    Anyway, I also see your point. Thanks and hope to hear from you.

    Sep 22, 2008 | 10:56 am

     
  29. Kai says:

    With that logic, I am justified then in the status of my home ownership now. I wanted a house and lot within the metropolis, but couldn’t find an affordable one with a nice location and neighborhood, so I bought a condo unit, leased it out, and moved out of town but still within travelling range, chosing to live by the mercies of company-provided housing, rent-free, and totally utility expense-free. The lease payments on my condo covers the monthly amortization of the balance of the cost.

    We Filipinos have been ingrained with the importance of land ownership, probably due to our history. I am actually part-heir to tracts of land and several aging empty houses which I do not want handed down to me. They’re just migraine triggers. But I never say that out loud, or suffer bashing from the folks.

    Sep 22, 2008 | 11:17 am

     
  30. Marketman says:

    Hi Roslyn and Grace and all the realtors out there. i agree that some degree of portfolio diversification, as it were, is very smart indeed, and no better way than to own a piece of prime property as your home.

    However, I would premise everything by saying that it is my PERSONAL opinion, and only that, that property as an “investment” was most suitable perhaps 50-15 years ago, with financial type instruments having become a much more efficient means of earning reasonable returns in the past two decades. I state this EVEN with crises such as the one we are experiencing in global financial markets right now, WHICH I MIGHT ADD, is caused ultimately by the collapse in the OVERINFLATED U.S. REAL ESTATE market, not by financial instruments, per se. One just has to enter these purchases with open eyes rather than assume that all real estate purchases make sense.

    These are just anecdotal examples, but they should give you an idea how buyers need to think:

    For example, I know someone who bought a prime Makati village lot for just PHP250 a m2 in 1972, and sold it for PHP30,000 after taxes and commissions in 2007, or 35 years later… effective compound return on investment? Approximately 14.5% per annum less property taxes. In dollar terms, just 9% per annum less property taxes. Not too bad. But if you did the example over the last 10-20 years, returns would plunge. And this was someone who got into the property VERY early. Assume no house was ever built on it.

    Or at the same time, assume you bought one of the few upscale apartments in Makati at say PHP200,000 in 1972 and sold it this year for say PHP16,000,000 with difficulty as your building is already visibly tired, and if you were a company at 35% tax + 12% VAT, you would get some legally PHP11million net on the sale price, or over 36 years, a return of just 11.5% return plus the utility of using the property as your home, better than the empty lot example, not bad but not stellar.

    Another actual example, when Pacific Plaza Towers at Fort Bonifacio first sold apartments to hoards of people on the line for one in 1995, they were asking roughly $1 million and I ran out of that presentation so fast it wasn’t funny. Today, the same exact apartment can probably be purchased for $600,000-700,000, a dramatic loss on a really cool upscale building. Soon after the 1997 crash, their sales people were calling me up practically begging me to consider an apartment for just $400,000 or so… If I bought then at say $400K at the low and sold today at say 650K less corp taxes and VAT for a net of say $550K, then my annualized return would be just 3.33% + the rental income or utility of staying in it. Not very thrilling returns even from the bottom of the market to today…

    Or, as was very much the case, you bought an Upper East Side townhouse in a very good neighborhood in New York for say $200,000 CASH and I know of one specific example, which you then sold last year for say $8 million, and you would have earned some 10.7% in dollar terms, plus nice rental or utility income. Now you’re talking, some 15% return overall in this case…

    So you see, the actual returns over time aren’t as spectacular as folks might think they are. The minute you move to less prime properties, the numbers get much less attractive. But don’t get me wrong, I am actually partially in the REAL ESTATE business myself and have been selling commercial properties with specific income streams… and I, for one, would rather that folks out there don’t think the way I do or real estate prices might drop! :)

    I would much rather think of a primary house purchase as an emotional purchase, that would allow one to ignore the “numbers,” as it were. But if you were trained to do the math, then you would naturally dissect whether it is financially advantageous or not to rent vs. buy… I just think folks looking to buy should be more aware. And for some reason, in prime manila homes and some apartments, over the last 10-15 years, the rent option has been the financially more wise one, in my opinion. That may change, but until then, I will have to see the sky from our dining table every once in a while…

    Sep 22, 2008 | 11:49 am

     
  31. roslyn says:

    Thanks again. But you are doing the mathematics for real estate investments. (I’m sorry if i’m not as analytical as you are, I’m just really rushing thru this) but do you mind doing an analysis also for money had it been saved in a bank? And what are the potential expenses or risks involved in doing so too?So with stocks. I still have to see banks go for a long investment term and yield the same results as real estate. Am I being so hard headed here? Sorry, but pls show us the numbers for banks and other investment tools as well. Thanks again!

    Sep 22, 2008 | 12:19 pm

     
  32. carlo p says:

    Marketman, this isn’t the best example to use because luxury homes like Forbes Park have the lowest rental yields in real estate.

    If you take an example like condos or townhouses (in which most Filipinos in Manila live in), you’ll see the numbers tell a different story.

    Take a 2M condo for example, would you rather be paying P15,000/month in rent or paying a monthly amortization of P20,000 to own it? The difference isn’t that big anymore

    Sep 22, 2008 | 12:20 pm

     
  33. chrisb says:

    I’m not a finance person but I do know that putting your money (apart from your everyday cash flow needs) in a savings account is not wise at all. You get half a percent interest p.a.! And if you factor in inflation, you will see the value of your savings go down. Or even time deposits, which give only 3-5% interest nowadays. So, I think any investment scheme that you compare to an interest bearing bank account will surely come out the winner…

    Sep 22, 2008 | 12:42 pm

     
  34. Marketman says:

    roslyn, I don’t have the latest data, but it doesn’t change that much from year to year, and one should look at investments over a longer term horizon.

    But it does follow a typical risk return grid… for U.S. investments, something along these lines…

    Small Cap Stocks at say 15-17% per annum
    Large Cap Stocks at say 13-15% per annum (Philippine stocks at 18-20%+ due to added risk)
    Top Quality Corporate Bonds at say 8-12% per annum
    Long Term U.S. Govt Bonds at say 7-9% per annum
    Short Term U.S. Govt Bonds at say 5-7% per annum
    Bank Deposits U.S. at say 3-6% per annum

    And real estate, depending on country, should fall somewhere in annual returns NET of CARRYING costs between U.S. Govt Bonds and Top Quality Corporate Bonds… in other words, 8-12% annual net return. For the Philippines, because of the existing risk premiums and interest rates (cost of capital), the net returns should probably be about 3-5% more, or roughly 11-18% per annum, say 14% or so. If properties are yielding a net less than this, you have to have other compelling reasons to be buying them. Right now, the rent we pay on a 50+ year old house in a fabulous location with roof torn out just above my desk right now, is roughly 3.00% per annum less property taxes, insurance, administrative and extensive maintenance costs, thus yielding an annual return of just 2.50% or less for our landlord. And I don’t think the price of this property has gone up 12% in the last year alone to make up for the poor rental income. And there are several homes in this village at this 3-4% rental yield scenario… Rental apartments at One Roxas Triangle or Essensa are probably getting a net yield of 6-7%, better than a house and lot in nearby neighborhoods. On another front, I rent out commercial properties for a family company, and while applying the rules of returns as best I can, the best we can do at this point is roughly a 7% net return on mediocre quality commercial rentals… Companies like Ayala Land or SM might be able to eke out 12-14+% from their commercial real estate rental portfolios at the highest end of the return spectrum…

    Btw, no where do I suggest you stick your money in a bank deposit instead of real estate. If you have a long investment timeframe, a mixture of bonds and stocks with reputable handlers is statistically the way to go, unless you would prefer to risk your hat on real estate, which, at least, you will have a roof over your heads, irrespective of returns achieved…

    Sep 22, 2008 | 1:21 pm

     
  35. Marketman says:

    carlo p, yes, I agree that yields get better at the lower priced pieces of homes for the most part, and I do mention that above, in fact at the PHP5 million range even. However, even at the P3 million townhouse example I explore in the comments above, the effective cost, assuming you borrowed the entire amount is roughly PHP40,000 a month, so much more expensive than the PHP15,000-20,000 in rent. And if you move far out of town to get a cheaper house, the gas and toll expenses need to be factored in on the negative side, while you could argue that you have to factor in the positive benefits of cleaner air… :) And isn’t it ironic that the most loaded folks don’t insist on getting the highest possible rational returns for their money? Isn’t that wasteful, in a way? :(

    Sep 22, 2008 | 1:47 pm

     
  36. frank says:

    Nice job you did here MM – there’s a lot of things one could project and show using mathematical calculations in investing.

    The other things that wouldn’t really be apparent in ALL the great computations are factors that ought not to be forgotten as these are extremely important in plunking your hard-earned savings whether in real estate or investment-grade media are:
    your risk tolerance, age, etc. AND not the least of which is whether one is parlaying a really “free” money and not something that you might need in case of emergency.

    Just my 2 cents in my pocket.

    Sep 22, 2008 | 2:06 pm

     
  37. Marketman says:

    frank, amen to all those things…

    Sep 22, 2008 | 2:10 pm

     
  38. dizzy says:

    I really appreciate this detailed perspective, Mr. MM :) It really is food for thought (all the numbers, I have yet to digest though), especially since I live in a subdivision where home owners tend to look down on residents who are “simply renting”. I wonder if other “tenants” experience this too?

    Sep 22, 2008 | 2:32 pm

     
  39. Marketman says:

    dizzy, I happily do the same analysis for friends who own huge houses and its funny how stricken the looks on some of their faces sometimes get… of course, home ownership has other non-financial benefits, like bragging rights, I suppose. But if financial rationale is to be applied, I would rather rent and take a good vacation once a year or so with the savings… :)

    Sep 22, 2008 | 3:52 pm

     
  40. Marketman says:

    The other, more macro issue to be addressed in real estate over all, is that much of it is like sleeping capital. Instead of it being productive at optimum rates, many people are happy to have it yield sub-optimal results, and THAT ATTITUDE is bad for the overall capital markets and productivity of capital for the nation as a whole. It says we are happy to be inefficient, or wasteful, from a rational financial perspective…

    Sep 22, 2008 | 4:13 pm

     
  41. amina says:

    Thanks for the very insightful comments…especially someone who is well-versed in investing. Real estate yields pay off…but will do so in the long-term because it is as you put it “sleeping capital”. I guess it is more an emotional choice as our elders placed value in land, besides it is tangible… unlike some investments that show proof only in paper. Frank’s points above are all spot on, it wouldn’t matter much if the money plunked down is not something you need to pull out due to an emergency.

    Sep 22, 2008 | 5:56 pm

     
  42. APM says:

    Most realtors try to peddle their wares as an investment when they don’t really understand the process of investing. People fail to understand that an Asset is something that is used to make money.If you live in your house then you are only making psychological income in the sense that you have the security that should the financial meltdown result in the worthlessness of all currencies then you will still have a roof over your head. I do believe that owning commercial real estate is a good long term investment.

    If you analyze the sales of real property developers then you will notice that OFW sales amount to 40 to 70 percent of all sales (depending on the company). That accounts for all of the empty subdivisions and condo units with the occasional relative temporarily residing inside. A lot of these OFW sales are actually financed by US Mortgages and are subject to late balloon payments. In short I am not bullish on residential property values on the short term.

    Sep 22, 2008 | 6:19 pm

     
  43. freelance says:

    with regards to the 5M/2M scenario… but in purchasing a home, the payments do stop in x number of years, doesn’t it? if you rent for 18,000 or so a month and happen to live an extra 40 years, you will have to pay millions more for your lifetime. i lack the ability to crunch the numbers, but does it still make sense to just rent, assuming you don’t have millions to risk in stocks?

    Sep 22, 2008 | 6:40 pm

     
  44. Marketman says:

    freelance, the point is that if you rent AND SAVE AND INVEST the savings over buying, then in 20 or so years you can probably buy two homes instead of one… If you re-read the main post, in the example of the most expensive forbes park home where you rented instead, then changed your money into dollars and invested for 30+ years, you would have been able to buy five houses today… that’s why renting in that case makes so much sense… Look at this way, if you rented at P20,000 instead of buying at amortized rate of 40,000, you could put away P20,000 every month for say 20 years… you want to guess how much that is compounded if you are lucky enough to earn say 12% per year? It comes out to a whopping P19.8 million, which should allow you to buy 2 houses instead of the one that you would have bought earlier… Of course at 8% annual return, the number would drop to P11.8 million, probably still enough to buy at least 1.5 houses at that point… :)

    Sep 22, 2008 | 6:45 pm

     
  45. sylvia says:

    Thanks for an interesting article, MM.

    zena, Suze Orman’s advice applies only to the US. I think (and someone pls correct me if I’m wrong) that homeowners in the Phils. do not get the same tax breaks that are eligible to US homeowners.

    Sep 23, 2008 | 1:38 am

     
  46. Marketman says:

    sylvia, you are right, the tax set-up in the U.S. is more advantageous to taxpayers compared to the Philippines.

    Sep 23, 2008 | 7:04 am

     
  47. JE says:

    This has piqued my curiosity, given that we haven’t had a house of our own for around almost twenty years, and that we’ve always thought about when we should buy one. I don’t think we have sufficient funds yet to make that move, and now this article is offering food for thought as to whether it’s a good long-term investment (of course not considering the emotional factor).

    Curiously though, are your findings based more on previous experience in dealing with similar scenarios, or is there some book/reference that us folks can check that contains similar analysis?

    Sep 23, 2008 | 11:03 am

     
  48. Marketman says:

    JE, analyzing investments is pretty simple at the core… how much does it cost, what do you get out of it, how much is it worth at the end. For financial analysis, one always compares an ivestment against other potential investments and there is a risk/return matrix that pretty much holds, though some would argue that it doesn’t… I do tend to believe in general that very low risk things like keeping cash in your safe has little yield but little loss, while buyig high-flying stocks could have a very high return or you could crash and burn. All of the principles applied in my post and comments above are just basic financial analysis. And yes, I used to do this 18 hours a day in some form or another… and there it gets a bit more complicated… There must be basic real estate investing text books on the market for first time buyers… but make sure it is thinking about the interests of the buyers, not the sellers or brokers, who tend to focus on different issues for understandable reasons…

    Sep 23, 2008 | 11:19 am

     
  49. Lei says:

    the first time that an enlightened officemate mentioned to me that real estate is not always an “asset”, i was surprised but then after further explanation and very clear examples, I finally understood what he was talking about. if your real estate is not giving you income and is in fact making you cough up money on a regular basis like say taxes, maintenance cost, depreciation on the house, then you may want to look more closely if you are in fact investing or on the contrary losing money by acquiring said property. so when i read your post on this one, i am one who can clearly say that i know for a fact that what you are saying is correct.

    for those who may have a hard time understanding it considering that it goes against what most of us grew up with, that a house and lot is an investment in itself, try reading the book ‘rich dad poor dad’.

    Sep 23, 2008 | 11:31 am

     
  50. freelance says:

    ok, thanks marketmanila. i’ve heard of this before but never considered it because i have never seen the breakdown. this is enlightening. thanks for the response.

    Sep 23, 2008 | 11:50 am

     
  51. caryn says:

    MM, we just finished the payments on our condo; after reading your article, i don’t know whether to laugh or cry ;-)

    Sep 23, 2008 | 2:07 pm

     
  52. virgie says:

    Hi,

    I agree with Lei. I just read poor dad, rich dad and with MM’s explanation, it all makes sense. I thought that investing in real estate will make one’s future secure. I was wrong. Before, with every little savings I had, I will buy a small piece of property here and there and those were my security blankets. Now, what I have are lots with no income and a lot of headaches specially when its time to pay taxes. Not to mention that some don’t even appreciate in value. Those that I bought on instalment are my worst investment. I lost a lot of money if I compare investing vs buying that property. You are very right MM. Any “asset” that is not giving an income is just a white elephant. I learned my lesson the hard way. In today’s financial environment, “Cash is King”.

    Sep 24, 2008 | 8:52 am

     
  53. Danny says:

    MM,
    I know that this is off the topic but will ask anyway. We have a home in Manila and have the same issue about the roof.
    a) Are you happy with the roof wrt. no leaks and noise caused by the thinner gauge steel?
    b) How long did it take to completely replace the roof ?
    c) Can you disclose the company that supplied the roofing material ?

    Due to the nature of question (c), perhaps a direct email response would work here.

    Thanks
    Danny

    Sep 24, 2008 | 9:23 am

     
  54. Marketman says:

    Danny, our landlord made the arrangements for repairs. They used the medium gauge steel with full insulation on all parts of the roof. They put a LOT of people on the job and for a bungalow, it will take some 3-4 weeks total of work. The sheets are pre-painted and come in long spans… Metalink in the brand name, I think.

    Sep 24, 2008 | 10:06 am

     
  55. AleXena says:

    MarketMan I have a question, I am fairly new in the world of employment and I am now looking at investing in a mutual fund next year but at the same time would want to deposit some part of my Xmas bonus to a savings account.

    Is it safe to have a mindset that saving accounts in bank is literally for safe-keeping money you could invest in some stocks and bond later?

    I know that the interest rate are small and my money wont grow in it but I am also thought in my family that this is the way to grow my investments. Can you enlighthen me with this matter.

    I like the idea and would very much expand my knowledge in portfolio investments particulalry mutual funds given the current state of my finances. I have a degree in Economics so I fairly know how these things goes.

    Thank you Market Man for sharing your knowledge with us. Not only do you feed our stomachs but also our minds as well.

    Keep it up!=)

    Sep 24, 2008 | 12:01 pm

     
  56. Marketman says:

    AleXena, in my opinion, and that is my opinion only, I would keep money in a savings and checking accounts for my immediate and emergency needs. Say looking out 6-12 months ahead, if fully employed. Money in a mutual fund for stocks or bonds should be LONG TERM money. If you are disciplined and put away money for the long term on a regular basis, you will be surprised how much you can save. For example, if you put away PHP5,000 a month for 30 years and you earn an average of 10% annual return compounded, you would have roughly 11.3 million at the end of the 30 years! So many people cannot save and it is a shame. Follks who make PHP30,000-50,000 who tell me they just can’t save aren’t trying hard enough, in my opinion. If you are young and determined, you can certainly put away some money for the longer term…

    Sep 24, 2008 | 3:35 pm

     
  57. AleXena says:

    Thank you MarketMan every advice I get about portfolio investments really makes me more determined to invest.=)

    I am the 3rd generation in the family from my father’s side and they are pretty good in investments although a bit conservative. My father also doesn’t believe in putting all your money in the bank but is not too keen in mutual funding due to lack of knowledge perhaps. So I guess I will start the tradition.

    I will certainly take in consideration your advice and will start a passbook account hopefully before the year ends and once it grows I will invest it in small-scale mutual funds. My idea is to save half of what I will earn from mutual funds and invest the other half again to earn more. Of course I will do it in long term.

    It is true that a lot of people cannot save or they don’t even try, especially in my generation. I have a lot of friends who earns more than what I do but can’t even manage to save a thousand. In this area I thank my parents for the discipline.

    THANK YOU, THANK YOU, THANK YOU FOR THE EFFORT!!!=)

    Truly appreciated!=)

    Sep 24, 2008 | 4:58 pm

     
  58. Ms. D says:

    Thank you very much MM for sharing this wih us. Just few months ago i had the guts to start saving =). Am not good with Math but this is enough for me to understand.

    Sep 24, 2008 | 5:04 pm

     
  59. Jan says:

    hmmm.. very long article..

    my short point here is that why not use the money your paying the landlord to amortize a new house or condo?

    instead of paying the landlord rent wherein you cannot own that house/property eventually, why not pay monthly amortization. kung medyo malaki ang monthly, eh di habaan ang terms ng ilang years…

    kumbaga rent to own… :)

    Sep 24, 2008 | 10:59 pm

     
  60. Marketman says:

    Jan, if you bothered to read the article and understand it, and the comments that followed, perhaps you would see the point. And I won’t repeat it, just read it. You don’t have to agree with it, as it is my opinion, but I am correct from a rational financial view. :) At least in the specific cases I site. Rent to own is a joke if your rent is too high relative to the property you are in… Just read and understand the discussion before you fire off a comment that makes it utterly clear that you didn’t bother to do even that. Oh, but if that is too much work, then just go ahead and rent to own. Make the developers happier and richer… :)

    Sep 25, 2008 | 5:51 am

     
  61. eej says:

    The real estate meltdown here in the US is a rude wake up a call. If you plan to invest in RE, this is the perfect time as home owners are practically slashing prices to bare bones to get them off their hands.

    Sep 25, 2008 | 7:23 am

     
  62. Myra P. says:

    MM, your thoughts on time deposits? Saw an ad for Psbank that offers 6.5% per annm, tax-free, for 5 years. Too conservative a return for money that is locked up for so long? Guess it only makes sense if the plan is to use that money for a specific future need, like college tuition… But is 6.5% enough to match inflation over x amount of years? Perhaps it should just be viewed as forced savings, a good tool for the less disciplined saver and compulsive spender!

    Sep 25, 2008 | 7:39 am

     
  63. Marketman says:

    Myra P. If the amount is fairly substantial, you might consider buying dollars then locking it into a medium term deposit. In the past 30+ years, the peso has only strengthened on an annual basis maybe 3-5 years out of 30, so its a good bet the dollars will be worth more in peso terms in five years… Or if you have whatever the minimum denomination is, and know a good banker/broker, you could buy a top quality bond such as SM or RFM foods that would mature before 5 years are up, and they are paying roughly 7,5-8.0% on dollars right now. But you must hold till maturity to avoid any fluctuations in price. But at 8%, I am happy to hold for 3-4 years. But these are just my thoughts, I am not a licensed financial adviser (actually, I wonder if they get a license here)…

    But the best investments we have made in the past 5-10 years? Surprisingly? Artwork or ancient maps. A small bencab purchased five years ago would probably have nearly doubled in value by now, plus you get to look at it everyday… Good old maps would probably have risen some 10-15% per annum in the same period. But art investing is even more tricky… :) On that front, I say, if you trust your eye, buy what you like, and don’t expect it to appreciate… if your eye is good, you will almost certainly beat the stock market, and artwork is more pleasing to the eye when hung on a wall than stock certificates….

    Sep 25, 2008 | 7:58 am

     
  64. Marketman says:

    eej, so right you are. For me, the best time to buy real estate would be during the height of a bubble burst, which is just about now in the U.S. I bet there are houses on the market where the true amortization and tax deduction benefits ARE lower in fact than existing rental leases… now that would be attractive indeed. Problem is, for the best properties on either coast or beautiful neighborhoods in between, the prices have barely softened.

    Sep 25, 2008 | 8:02 am

     
  65. portugalbear says:

    Well said MM. My mom and sister bought a house somewhere in Kamuning for “investment purposes” and it’s only now that we’re able to rent it out and earn from it. Prior to renting it out, we had to spend to maintain it, pay taxes etc.

    Sep 25, 2008 | 10:47 am

     
  66. Jan says:

    marketman, are you an expert in these kind of financial analysis or are you just in this kind of situation? just wondering…

    Sep 26, 2008 | 1:50 pm

     
  67. Marketman says:

    Jan, if you read my About section, you would have a feel for my background, but just to repeat… I think anyone who has done a basic college level financial analysis course with future and present values as part of lesson plan would be able to do the above type of analysis. As for my background, I did an undergraduate degree in finance in Boston, then worked for several years as a financial analyst and lending officer for one of the world’s top 3 banks, handling the largest portfolio of loans in their Manila office, I then went off to get my MBA in NY and majored in Corporate Finance. I then worked in management consulting at 3 of the top 5 firms globally for nearly 12 years, starting in NY, then to Singapore, Indonesia, Australia, the rest of Southeast Asia, with stints in India, the U.S., the Middle East and the U.K. My specialty was essentially financial institutions with an even more drill down focus into problem loans of all sorts, including large home mortgage as well as corporate portfolios. I have advised state banks, money center banks, regional banks, central banks, investment banks, commercial banks, retail banks, insurance companies, etc. I have done corporate strategy, retail banking issues, credit cards, foreign exchange and derivative trading, corporate finance, corporate banking, middle market banking and related projects of a similar sort. Oh, also did a bit of mergers and acquisitions work. I retired from full time consulting work before the age of 40 and now write this blog… so I think I have a reasonable background in this kind of financial analysis… And I also happen to be managing a very small family owned real estate company which at some point had a hotel, as well as residential and commerical leasing operations. Unprofitable coconut and prawn farms too. :)

    Sep 26, 2008 | 2:29 pm

     
  68. tups says:

    Let me just temporarily leave my lurking nook and pitch in. I just bought a home and it was not an emotional decision. The financing aspect was extremely attractive (well below my average returns in the last five years – single digit with no prepayment penalties) and at the same time, the local equity bull run in the Philippines (as well as global markets) has come to a happy close late last year. As putting a majority of my money in fixed-income securities and/or bank loans is tantamount to shooting myself as inflation will simply eat-up the so called “nominal” interest, I just decided that purchasing is still the best use for my money. In short, it isn’t cut and dried.

    The middle market for properties has always been a strong one (especially the core-mid and low-mid) although the condo market seems to be approaching a tipping point. There are opportunities to be made. I generally agree that renting favors the rent-er in terms of economics. Even established property companies have IRR targets for commercial lease that are woefully low relative to outright sales projects. However, they still develop leasable areas for the lower cashflow volatility and inherent value multiplier effects (the lease areas complement the for-sale areas, so on the whole their IRR makes sense on a consolidated basis).

    Buying property isn’t for everyone. But it still makes sense for a few who can understand and exploit the economics behind it.

    Sep 26, 2008 | 5:37 pm

     
  69. Marketman says:

    tups, very well put, as always savvy investors who understand what they are doing are likely to be far better off than those who rely on serendipity. I am sure there are some very nice opportunities in real estate, just as there are horrible ones. And that applies to all markets around the globe… but overall, one must also compare against other potential markets and against opportunities foregone…

    Sep 26, 2008 | 5:46 pm

     
  70. Marketman says:

    tups, I am curious though where there are clear consistent returns in middle market properties… I would guess that a 20-30 year analysis of areas such as BF Homes, Sucat villages, Better Living in Bicutan, Philam Homes in Quezon City, villages in Antipolo, all developed at the time as middle market properties have had as an average, pretty dismal returns over a long period of time. As for apartments, few have paid for themselves if purchased in the last 15 years or so, although i agree rental income from small apartments is higher as a percentage of the asset cost than for larger properties. What underlies the apparent boom and bust cycles in Philippine real estate is that the developers themselves make a fairly large margin to begin with… take for example a small apartment again at the upper end in Fort Bonifacio that effectively sells for PHP80,000+ a square meter + costly financing when at most the underlying intrinsic cost of building the apartment, common areas, acquiring the land, etc. might be at just PHP40-50,000 per square meter at most. So if there is a glut of supply, the prices will always revert towards the intrinsic cost or slightly below it… With so much land still available in Metro Manila, it may take several decades before the underlying land values really do rise dramatically from year to year as they might on average in say a place like Hong Kong or Singapore… Now as for buying property or lots opportunistically when prices are at their best, then building a house at cost with a slight margin for contractors profits, then your asset is as close to the base cost as possible, and you would have less downside risk… But I do agree there are some rare opportunities for smart folks with eyes wide open…

    Sep 26, 2008 | 6:24 pm

     
  71. Canadian says:

    Marketman, sorry for the imposition but, I’d like to you if you could you recommend a reliable investment broker in the Philippines. My family’s expecting a substantial amount from the proceeds of a sale of a property in the Phil. We’re thinking of investing it in either new or resale condo or house that we could use when we’re there vacationing but your piece here has enlightened me enough to think otherwise. I’d appreciate very much if you could share a reputable broker who could assist us. Thank you and God bless.

    Sep 28, 2008 | 9:40 am

     
  72. ria says:

    Sep 28, 2008 | 5:18 pm

     
  73. Marketman says:

    ria, thank you so much for that link, it is superb. Though I wrote my post before, he has written a much better piece, with solid data… my hunches were right however, and what more in peso terms when the peso has depreciated against the dollar in perhpas 25 out of the last 30 years! Thanks again. Other readers, I strongly recommend reading that link above! Canadian, I gather you need a REAL ESATE broker to find a home, sorry, I wouldn’t know one well enough to recommend them…

    Sep 28, 2008 | 5:29 pm

     
  74. Canadian says:

    Marketman, I need an investment broker, please. Thanks again.

    Sep 29, 2008 | 2:07 am

     
  75. erbie says:

    Sir MM,
    i would like to ask where to purchase the URC $ Bonds you mentioned and for how much?Thank you very much.

    Oct 4, 2008 | 2:04 pm

     
  76. zel says:

    Hi,

    This is really a great post. We are currently paying for a condo and moving in by April next year. At least now we still have time to think about it & do the math. Thanks for posting this.

    Oct 14, 2008 | 5:13 pm

     
  77. Antoniette says:

    Hello MM,

    The huge amounts and financial terminologies seemed intimidating. I am just a regular employee and makes less than P20000 a month. but i just need to ask you this…because i am not financially savvy, and I am in a bind.
    we have been renting for the past 5 years and lucky for me, my landlady had not increased the rent since we lived in it. my hubby wants to buy a house, but since we do not have enough money to buy it outright, we are thinking of getting it through Pag-ibig. I am in mindanao where land is still cheap and properties in good locations can sell for an average of 5 million with 300 to 500 square meters of land. Pag-ibig offers an annual interest of 6% and it takes 20 to 30 years to pay, of course the house would be in a low-cost subdivision with an average lot area of 120 square meters. With monthly amortizations of say P4000, i would end up paying for a house and lot 3x more than its value. at present my rent is just P2000… i know it is very cheap and I am really fortunate, newer apartments here rents for P4000, townhouses at P10000. and i live walking distance from my work so i don’t spend money on fare. my instincts tells me that the low-cost housing loan is not a good idea just by looking at the numbers. am i right? i am also not that keen on buying a house…renting seems to be more practical.

    Oct 15, 2008 | 11:27 am

     
  78. Marketman says:

    Hi Atoniette, of course, go with your gut feel. But from my perspective, I can say this. Pag-ibig loans at 6% are VERY cheap compared to a commercial loan at say 12-14% so that already makes the deal better than most. But don’t forget to look at maintenance costs, taxes, etc. as part of your analysis. At PHP5 million, the home shouldn’t be in a low cost subdivision… and renting is much more flexible…owning is a major commitment…

    Oct 15, 2008 | 12:35 pm

     
  79. Jun says:

    I bought a house in 2005 for about $300k and I’m paying a monthly amortization of about $1.4k now. The current rental today is about $1.9k and projected to fall to probably $1.5k in a year time due to economic condition. If I sell my house now I will gain about $100k as the market price is still high for the low end property in the country that I’m living now. I am contemplating to sell it now after reading your posting and probably take the money to invest somewhere else and use it again to buy another house later on when the housing price hit the bottom. BTW here in the country that I stay with 30% of our salary are automatically taken out by the Gov to put in a provident fund where certain amount can be use for housing, investment, education, retirement and medical. This is the reason why almost 90% of family here own their house.

    Oct 15, 2008 | 6:09 pm

     
  80. Marketman says:

    Jun, you probably live in Singapore or a place like that, I lived there too for a few years, though I worked for an international company, and wasn’t part of the local provident fund system. Actually, in that sense, I like the way Singapore FORCES people to save and it is generally a good bet to have real estate in Singapore as a small island nation with great fundamentals will typically result in a fairly good real estate market over time… Please consider your moves carefully and not only base it on this post… conditions vary from market to market and with different local rules and taxes…

    Oct 15, 2008 | 6:20 pm

     
  81. Jun says:

    Hi MM,

    Cool so you are very familiar with Singapore and thanks for the advice. Actually when I think about it deeper what are we going to achieve if I sell the house now. Probably be able to upgrade in a bigger house once the market price drop further and $100k richer but again I have to pay higher on amortization. Currently I only pay about 10% of our household income on the amortization. If I rent I will still pay the same amount or if I upgrade I will pay about 20% of our household income. Will it change our life dramatically? Not really I will still need to work till I have enough on my retirement nest.

    But should I wait for my retirement?. Like you I have the courage to go back in 1998 in Manila to try our luck in food business but we got burn and lost our savings. Me and my wife still have that passion for food and we are thinking of starting something again. This time we will be wiser I will continue to work :) while my wife manage the business. This time our objective is to satisfy our passion to share good food not merely to profit from it. I’ll keep u posted ;)

    Oct 16, 2008 | 9:59 am

     
  82. Grace says:

    I’m surprised you did a great job here (as always) by helping so many people and yes the company that i worked for really did a great job in terms of real estate development but you’re absolutely right (with the alabang development) that’s why their greatest project to date is still Forbes Park (and ofcourse makati). As to those balikbayan’s if you really have the need to buy a condo for you have a place to stay whenever you visit manila i suggest you go for a condotel type of development. It is best if you want it for investment as well:-) I used to work with a developer who successfully run a condotel in the south and the owners are very happy with the income since their hotel is fully booked most of the time as there are limited no. of hotels in the area. Bottom line, it is still best to buy a property (for investment) with a good location. For personal use it will always be comfort and accessibility to the things that are important to you :-) You may drop by at my site and pm me if you have some questions about properties i’ll be glad to help you.

    Oct 20, 2008 | 3:06 am

     
  83. Grace says:

    To your reader Canadian Man, i can recommend him to some of the broker’s that i know he can probably just choose who among them and if he wanted a project from our company then he can email me :-)

    Oct 20, 2008 | 3:19 am

     
  84. Grace says:

    Sorry for posting 3 times in a row.I was just browsing thru your replies catching up, as i normally visit the food and recipes that you post more often. I’ve learned so much from this topic, infact I’M SO THANKFUL as this can be a great tool for us. I gathered that you gave another interesting example for real estate investments that didn’t turn out well. I too have heard of someone who bought Pacific Plaza at 16M from its original price of 25M. I guess it pays to study your investment very well before buying it. After reading the analysis that you did i’d like to be called fried-neurons as well! Just kidding :-) but seriously, if you really are trained to do the math and you’ve seen rental trend in your area(especially if its located in a developed area), I would say that it is indeed better to rent and invest your other money in a more lucrative investment. That is if you are like MM who’s an investment banker or atleast have a good cosultant . As I see it real estate is best for some people because they just have to find a GOOD LOCATION and a GOOD DEVELOPER and wait for it to appreciate. That’s why its a good thing you post another topic on how stock market can easily be understood this will give people an option on what they really need..

    Oct 20, 2008 | 4:21 am

     
  85. Nowell says:

    Hi MM,

    Very informative. just confused on compounding interest. how do you compute that? example on 5000 savings per month in 30yrs you get 11m…. thank you in advance MM :)

    Oct 21, 2008 | 9:32 am

     
 

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