Tuesday, January 5, 2010

So, You Want to Invest in Real Estate

A lot of employee people who have realize that working for a company leads them to nowhere but their dreams and goals -- want to jump into business and investing with little or no knowledge about it.

A lot of them are sold into investing particularly real estate. They see it as a fast vehicle to creating extra income, because most people think owning a piece of real estate is a good and safe investment since they thought its value appreciates over time. Well think again!

If you have read Robert Kiyosaki’s book Rich Dad Poor Dad, he mentions there that “a house is not an asset but a liability.”

Who is Robert Kiyosaki anyway? And what is an asset and what is a liability?

(A Google search will reveal a lot of answers, but let me spare that effort for you)

Robert Kiyosaki is a big business investor and author of Rich Dad Poor Dad.

Rich Dad Poor Dad is a book about Robert’s two fathers: his biological father (his poor dad) and his best friend's father (his rich dad). Having two fathers allowed Robert, at a very young age, to see the contrasting views and beliefs of a poor and rich mindset. It was his rich dad who taught him the beings of rich people and guided him to becoming one.

The book was published in the year 1997; it was the book that rocked the financial world. It stayed in the New York Times best-selling book list for over 6 consecutive years, and 12 years later, we still see it sitting in the top 10 best-selling book, in the business category.

Further, he wrote a dozen other books about financial education which became best sellers too. He even co-wrote a book with The Apprentice creator-billionaire Donald Trump.

The problem with most people buying houses thinking that what they bought is an asset is simply because they believe that its value will go up anyway, and they can instantly collect a profit when they sell it.

What most people don’t see is that, since most real estate purchases are paid in a span of 10 or 20+ years via mortgage, this poke holes into their pockets unknowingly.

If the house doesn’t put money back to the owner (commonly in a form of rent or lease) the mortgage is a disheartening liability—that drains money out from the pocket of the investor.

My First Attempt to Real Estate Investing

About a year ago, I tried it out myself engaging in real estate investment. Wherever I go, I always look out for house-for-sale signs and get the contact numbers. I would also browse into newspaper classifieds and scan buy and sell ads magazines. I also got few foreclosed listing of commercial banks. I even sort out Sulit ads for real estate.

I inquired through some of the numbers I collected and here’s some of the information I got:
7-unit apartment | 9 million pesos (negotiable)
5-unit apartment | 5 million pesos
Single Attached house about 75 square meters in a booming property development in Mabalacat, Pampanga | around 750,000 pesos
Single Attached house about 150 square meters in a popular village in Laguna | 3 million pesos
Does it look cheap to you?

For point of illustration, I will pick the 5-unit apartment house which I found a few hundred meters away from our hometown in Angeles City.

Rental fee in Angeles City ranges between 2000-5000 pesos per month.

For 5000 pesos /month, my passive income for this piece of real estate property will be:
5 units x 5000 pesos/month = 25000 pesos passive income per month
Looks like a pretty income, wouldn’t you say? But that’s if all apartments are occupied and rented.

I would need a capital of 5 million pesos which I would probably loan in a bank plus a down payment of, say, 100,000pesos. What would be my monthly amortization look like? A good guess would be something around 15,000 to 30,000.

Let’s assume the monthly amortization is 20,000 pesos.

My monthly passive income will be:
25,000 (rents) – 20,000 = 5000 pesos!
Given all units are rented and all lessees take care of the property, all I get is a measly 5000 pesos!

Even if I have a cold cash of 5 million pesos ready to buy this apartment, this investment wouldn’t make sense to me because of the rate of cash return.

How many years before I can get back my 5 million pesos? Let’s calculate:

Income per year will be:
25,000 per month x 12 months = 300,000pesos per year
When will I get my initial 5 million investment?
5,000,000 divided by 300,000 = 16.66 years!
It will take me more than 1 decade and a half before I can fully recover my capital of 5 million. It’s also the total time before the property starts earning profit. I would be too old by then.


Totally NOT a good investment!

A Life Long Process

I consider financial education as an ongoing and life-long process.

It doesn’t actually stop to just reading a book or two about real estate. It doesn’t even end when contracts are signed and money switched hands.

I decided to put on hold my plans of investing in real estate, because I realized I need a faster business vehicle which I can engage with that will allow me to build my credibility as an ultimate investor faster than 16.66 years.

In Create Abundance Life Entrepreneurship program, I am being taught of how I can achieve this by continuously learning the following
  • Learning the Art of Leverage
  • Having the mindset of the Rich
  • Passive Income and Cashflow
  • The Importance of Team and Systems, among many others.

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