Updated: May 16, 2020
So you have been considering the idea of buying your own home or investing in a property for quite some time now, but you end up delaying your decision because you think you need to save up millions and you don’t really need the property right at this moment. Maybe you're waiting for the time that you have saved "enough cash" or believe that there will always be ready for occupancy (RFO) properties that you’ll love right when you need them.
But delaying your decision is costing you millions and you’re at a high risk of not being able to get your dream property. By understanding the advantages of investing early under pre-selling terms, you not only save millions, but earn millions in the process.
Two Ways You Are Losing When Delaying Your Investment
1. It gets harder and harder to get your dream property due to rapid increase of property prices, alongside inflation
Based on the data and facts, the real estate market of the Philippines, and Metro Manila in particular, will continue to grow at a rapid pace in the coming years (For more on this topic: THERE IS NO REAL ESTATE BUBBLE… AND HERE’S WHY). In addition, there is also inflation which lowers the purchasing power of your money over time (For more on this topic: WHY A HUGE BANK ACCOUNT SHOULD SCARE YOU).
These two inevitable events put you at a high risk of not being able to afford your dream property by the time you badly need it. Not to mention the huge cash outlay that RFO properties require.
Purchasing properties that are RFO means that you will have to make an immediate, enormous cash outlay as the maximum a bank would lend you would usually be around 80% of the assessed value of the property. This also means that you have to start paying interest immediately. And even if you have a very huge financial capacity, it’s no guarantee that you can get your dream property because the best ones are the first to be sold out.
As opposed to pre-selling terms, where you lock-in your price once you reserve and pay a part of the whole contract price (usually 30% to 40%) over the pre-selling period, or while the project is under construction. This will allow you to not only save millions, but earn millions in the process. Plus, you get to choose the best unit at the best location when you start soonest.
2. You’re missing out big time on savings, capital appreciation, and more
Buying property under pre-selling terms comes with several benefits that you should absolutely take advantage of.
a. Big savings with lower contract price
The contract price of a property under pre-selling terms increases as the construction of the building is further along and especially versus when it is ready for occupancy, meaning the earlier you invest, the more you save.
b. Huge potential capital appreciation
Once you reserve your property, you are now locked into the price offered by the seller at that specific date. This means you get to enjoy the capital appreciation that your property gains over the years. In this rapidly growing real estate economy where some of the best properties grow at 20% or more per annum, delaying your investment will definitely cost you millions. As an example, one of my investments has already more than doubled in value in a matter of three short years.
c. Lighter cash outlay
When it comes to investing in any asset, cash flow is king. This is particularly true with real estate as pre-selling terms are a great way to minimize monthly payments.
The earlier you invest in a particular project, the lower the monthly payments. This in turn opens up more cash for you to invest more in real estate to at least double your earning potential.
d. Interest-free payments over the pre-selling period
Unlike taking out a bank loan, you do not have to pay for a single centavo of interest during the whole pre-selling period. The whole amount you are paying on a monthly basis goes directly to decreasing the remaining balance of your total contract price.
To understand just how big the advantages are when you invest in real estate now vs. later, let us take an illustrative example.
Illustrative Example: Buy Later vs. Buy Now
Person X and Person Y know they would need a 2-bedroom in 4 years. They both checked the 2-bedroom unit worth Php 7 million in the same development, under pre-selling term of 4 years. The monthly payments would be Php40,000 per month, which is within both their budgets.
Person X decided to pass on purchasing now since he does not need it yet, thinking that he will be able to get a property that he likes by the time he needs to move in. Person Y, planning his life in the next few years, decided to reserve a unit now.
Four years go by and Person X is now in need of a unit to live in immediately. He was shocked that the same property he was eyeing 4 years ago now costs Php12 million (approximating the actual growth rate in some of the best locations). He decides to purchase it anyway as he needs a property for him and his family. To acquire the ready for occupancy unit, Person X has to pay a spot cash amounting to Php2.4 million, 20% of the value of the property. Then loan the balance of Php9.6 million for the principal amount plus interest.
On the other hand, Person Y, who has slowly been paying for the property at Php40,000 per month and has paid a total of Php1.92 million to this date – almost Php 500,000 lower than the amount of cash Person X paid. Further, his total bank loan amount would only be Php 5.08 million plus interest, almost half the amount loaned by Person X.
As a bonus, by investing early, Person Y already has a capital appreciation of Php 5 million on his property.
Whether you are a first time home buyer or you are looking to upgrade your home, planning ahead will save you a significant amount of money.
The earlier you invest, the more you stand to gain.
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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.