WHAT I LIKE ABOUT REAL ESTATE

There are few things I like about Real Estate (RE) Investment. First, it is a genuine passive income with competitive returns. Second, it works well with inflation compared to paper investment (bonds, stocks, CDs and the like).

One. RE is truly a passive income generator. It gives you rental income with minimum management effort required. This income generated provides higher returns especially if properly leveraged. What I mean by this is that if you finance the acquisition of the RE by borrowings the rate of return on your own money is high. 

Let me illustrate. Suppose you are buying a RE worth 1M. A bank is willing to finance 60% of the value of the RE at 12% p.a. (At present you can even borrow as low as 6% p.a.) That means your own equity in the purchase is 400k. Now this property is being leased for 15k a month. Lets do the math. Your total annual interest expense for the loan is 72k (600k x 12%). Your annual gross rental is 180k (15k x 12 months). This gives us a net cash flow of 108k a year. Therefore it gives you a return on your investment at 27% p.a. (108k/400k). 

Second. RE increase in value as inflation rise. As cost of materials, labor and overhead in construction increase, the value of RE increases. Now going back to the previous example. Assuming the loan has been paid in full after 20 years. Say annually property prices increase at 6% (Range in the Philippines is 5% to 10%) and the inflation rate is 4.9% (August 2014). On the 20th year the the property for which your equity is 400k is now valued at 3.2M. The present value is 1.2M (3.2M discounted at inflation rate for period of 20 yrs) . You therefore gain 800K (1.2M - 400k) on top of your net rental return of 27% p.a. 

What is good (for wise investors) today is that interest rates are low. Philippines as an emerging market is attracting investors, thus money is flowing in. The ability to leverage your return is significantly high today. There may be adjustments or corrections on interest in the future but what is important is that you position your self correctly to take advantage of the favorable economic realities.