Most first-time home buyers and investors tend to focus too much on the total contract price when deciding which property to acquire. In addition, they affix their budget based on present earnings alone, not considering their long-term earning potential. When this is the main focus, the knee-jerk reaction would be to continue saving before finally investing or settling for a low investment budget.
This mindset either makes you settle for less or delay your investments that would cost you millions of savings, capital appreciation and many more financial benefits. In reality, you don’t need millions to be able to buy a property. What you need to have is what I call the 3Cs of buying a property.
1. Capacity
We’re not talking about having millions in your bank account. All you need is a steady and growing income to be able to pay the monthly down payment and the monthly amortization for the bank loan upon turnover. With pre-selling scheme and generous payment terms offered by the developers nowadays, you don’t need to shell out millions outright to buy a quality property. For example, you can own a quality studio unit for as low as Php13K per month under pre-selling in a prime location like Mandaluyong.
2. Credit
Before the property gets turned over to you, you will need to get a bank loan which gives you the power of leverage. Leverage, as defined, is to use something (loan) to maximum advantage (capital appreciation). In real estate, you can take advantage of it through acquiring a property that appreciates or grows in value at a much higher rate (for as much as 30%) than the interest rate from the housing loan (at 5-6.5% per annum). You see that the benefit (potential gains) significantly outweighs the cost (interest). Learn more about the power of leverage here: HOW DEBTS COULD BE BETTER FOR YOU.
3. Cash Flow
Last and probably the most important aspect to keep in check is your cash flow. Cash flow management is the process of planning a schedule of income or capacity (inflow) and payments including credits (outflow). By mastering the two sides of your cash flow with a long-term point of view, you will be able to maximize the benefit whether you’re an end-user or an investor.
To understand just how big an effect managing your cash flows can have, let us take the next 2 illustrations as an example.
Illustration 1 (End-user): Ability to buy a better property
Person A and Person B are both end-users and each has Php40,000 net free cash inflow, just enough for the monthly payment of a 2-bedroom unit in a property they really like. Person A felt that it would be really tight in terms of his budget right now so he settled for a 1-bedroom unit instead at Php25,000 monthly payment.
Meanwhile, Person B still went for a 2-br unit at 40K monthly payment, even if he knew he would have to make a few sacrifices for not too long. This is because he planned for his cash flow on a long-term point of view, thinking that he will get promoted or move to another company in a few years. By next year, he was promoted with a salary increase so the 40K monthly payment doesn’t hurt anymore.
Never sell yourself short. The late 20s to mid-30s are considered the peak earning growth years, where you will feel a rapid increase in your income. By considering your capacity now and in the coming years, you will find so many more property options that will open.
Illustration 2 (Investor) : Ability to buy multiple properties to multiply earnings
Person X and Person Y are both investors and each has Php1.5 million in the bank, with Php30K free net cash inflow. They have been eyeing a property that has a monthly payment of Php30K over the next four years. They were both told that if they pay a spot cash down payment equivalent to Php1.5 million, they will have a discount of 5% of the total contract price.
Thinking of the big savings, Person X went for the discount. He was happy because the investment grew by 20% in just 1 year. Including the discount, this gives him a total of 25% gain.
Meanwhile, Person Y didn’t go for the discount. Instead, he would be slowly using his 1.5 million to acquire another unit at Php30K a month over the same pre-selling period. Since he invested in two properties, he is enjoying the 20% capital gains for each property, instead of just one. As a bonus, after one year of using the part of the Php1.5 million savings for a second unit, he still has Php1.14 million in his bank account, majority of which can be used for some other purpose in the mean time since he knows how much of this amount he will be needing every month.
When it comes to investments, cash flow is king. Multiply your earning potential by maximizing what you can do with your money by projecting your long-term inflows, while minimizing your current outflows.
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ABOUT THE AUTHOR Edric Maguan is a successful real estate investor, an experienced and accredited Real Estate Broker of several top developers, and a Certified Public Accountant from University of the Philippines - Diliman. He found his passion in inspiring and empowering people to make the most out of their hard-earned money through real estate investment. Read full biography here.