In almost all aspects, real estate is a good investment. To many, it is the safest.
We see, and time proves, that the value of land, for example, appreciates significantly year after year. We don’t see it going down.
Most Filipinos don’t look much into that aspect but rather into just having a place owned and livable until old age and retirement. Real estate is seen more as just an asset than an active investment.
It has always been a dream of every Filipino adult, i.e., professional or ordinary worker, single or married, rich or poor, to buy and own a house and lot. OFWs often take it as a priority.
This dream has been deeply rooted in our culture. Elders always advise young people to seek this, although this may sometimes be found more of a pressure.
In this article, I’ll identify and describe nine of the biggest reasons why many ordinary Filipinos still shy away from investing in real estate despite its promising returns and other advantages.
High Capital Requirements
People have developed a mindset that investing is only for the rich, much more real estate investing.
If you’re living paycheck to paycheck and your definition of being rich is having at least a disposable income after all the bills, then it is entirely true. It is for the rich people.
But you can also invest these days in real estate even with a small capital, just like investing in stocks, for example, through Real Estate Investment Trusts (REITs).
REITs, like those of DoubleDragon Properties, Robinson’s Land, and Ayala Land, are corporations that own, operate, and finance income-generating real estate properties such as apartment buildings, cell towers, offices, retail centers, and warehouses.
With a few thousand or even hundreds of pesos, you can already buy shares of these REITs, which are publicly traded like stocks, and earn income from dividends, but little in the way of capital appreciation. You still need a big capital to maximize the investment opportunity and returns, though.
Suppose you want the other and the more popular way, i.e., directly acquiring property and using it as an income-generating instrument. In that case, you need a large sum of money, or maybe a hundred thousand pesos, at least for the down payment. This down payment is sometimes distributed to a few months or a year for lighter payments.
You might have come across TikTok videos where a simple real estate investor leverages bank financing to acquire and accumulate multiple properties over time. Rental income is used to cover the mortgage.
While this is a good investment strategy, there are still important things to consider, such as qualifying for bank financing and steady income from rentals.
Property Location
If you’re renting an apartment near your workplace at the heart of the city, investing in a real estate property miles away or somewhere in the province is perhaps the least of a priority, at least for now. It is, thus, justified.
You might have checked nearby housing projects, but units are already very expensive. The reality is that what you’re paying for in a real estate property in the cities is its prime location. It may be nearly impossible for you to afford a real deal if you’re earning a minimum.
You might have also looked for cheaper options, but they’re already outside the metropolis, like in Cavite, Laguna, or Bulacan. The property and your current job locations do not just match, and this prevents you from taking the initial steps to invest.
Technical and Tedious Process
Real estate investment is technical and complicated. Apart from the terms, various legal documents and tedious processes require serious attention and decision-making.
To illustrate, the long and tedious process normally involves property ownership and document verifications, deed of sale processing, BIR payments, transfer taxes assessment and documentation, processing of Certificate Authorizing Registration (CAR), acquisition of new Tax Declaration copy, and issuance of new land title.
Depending on the nature of the property and acquisition process, standard real estate documents to prepare and process include a contract to sell, deed of absolute sale, certificate of title, and declaration of real property tax.
Some instances also require a letter of intent (LOI), a reservation letter, a deed of adjudication with sale, a letter of guarantee (LOG), and a conditional contract to sell.
If you’re buying a parcel of land from the direct owner, the process may be less complicated but demand a lot of leg work. You need dedicated time and resources to process documents by yourself.
This is quite different if you’re transacting with a real estate developer because you can have the assistance of a broker and the developer, but convenience also comes with a cost.
High Transactional Costs
Aside from the long and tedious process of acquiring a real estate property, there are lots of transactional fees, taxes, and other charges to pay on top of the contract price paid to the owner or developer.
These legal fees include registration, notary, documentary stamp tax, local transfer tax, capital gains tax, and real estate broker’s fee, among others. Some of these fees, however, are paid by the seller.
Most of these depend on the appraised and buying price of the property. For example, the registration fee is 1%, while local transfer tax ranges from 0.50% to 0.75%. Capital gains tax paid by the seller is at 6%.
Long-Term Commitments
Many are afraid of long-term commitments, whether in relationships or financial matters. We cannot deny that.
Real estate investment requires a long-term commitment unless you acquire the property in cash. It also stays a liability until such time that you start to profit from it.
It normally takes decades, that is, twenty or thirty years of monthly mortgage payments, before the actual transfer of ownership of a typical unit in a housing project. Throughout this period, however, your property should have appreciated in value.
The length of time may scare you off as an ordinary worker. Many what-ifs may come to mind, such as loss of job and income, migration, starting a family, and many others that may also preoccupy you and further prevent you from getting into real estate investment.
Scams and Fraud
Some real estate properties are just legally problematic. However promising they are, given the locations and the discounted prices, pursuing them may just be pointless as you may end up wasting your time, effort, and money.
Also, you might have heard about OFWs and ordinary Filipinos whose dreams were shattered by fly-by-night real estate developers who failed to deliver property based on contracts and eventually went missing. In other words, these buyers got scammed.
Many Filipinos get encouraged to invest in real estate properties that are sold way cheaper than market rates without checking if these developers are duly authorized and legally operating and if they have development permits and licenses to sell the properties.
If you’re buying a pre-selling subdivision lot from a less-known developer without such essential documents yet, it is a big gamble. If this is the case, you must seriously know your ins and outs in the investment.
Most real estate investment scams are related to pre-selling properties, unauthorized or colorum agents, land title fraud, foreclosed properties, and double sales.
While these scams are known to many, it is still quite a challenge to spot red flags at the initial stage of transactions. This also leads many to exercise extreme caution and fear investing in real estate.
Low Liquidity
Real estate property has lower liquidity as compared to other investments. It takes time to sell and cannot be converted to cash quickly.
It is nearly impossible for you to sell your real estate property overnight, hence the technical and tedious process of buying and selling properties.
Liquid investments such as stocks, bonds, and mutual funds can be bought and sold throughout a trading day. You can even sell your stock positions in minutes with an online trading account.
There is also a big difference between investing in real estate properties in the cities and the provinces, in your hometown, particularly in terms of liquidity.
While you can have more income opportunities with those in the cities, those in the provinces may have very low liquidity. You may not be able to find property buyers or lessees easily.
Construction and Maintenance Costs
Aside from the costs of acquiring properties, there are also other costs to pay should you decide to realize their active investment value.
For instance, you decide to have your properties for rent or lease. If this is the plan, then you may need to develop them first based on the purpose. An acquired building may be repurposed into an apartment, a warehouse, or something more commercial.
You may have already invested in the acquisition, and yet, you still need to release additional capital for the construction, development, renovation, and, even soon, maintenance.
Thinking about the amount of money, work, and time required in the project can be overwhelming and discouraging to an ordinary person or beginner with little experience in investment and business.
Known and Unknown Risks
Known risks can be identified, examined, mitigated, or prevented in advance, while unknown risks cannot be anticipated.
And any form of investment, even real estate, comes with risks, known and unknown. These risks include bad locations, negative cash flows, natural disasters, fire, physical damages caused by tenants, hidden structural problems, and an unpredictable real estate market.
Instead of taking these risks, others simply let their hard-earned money sit in their bank accounts or invest in other more liquid instruments.
Read also:
How to Check Your Developer’s License to Sell (LTS). This article answers frequently asked questions about a license to sell (LTS), a reasonable assurance that the papers are in order and the developer’s warranty, approved plan, ownership, and capacity to develop are in place.
How to Buy a House with Middle-Class Income. This short article provides an insightful guide and tips on how to start planning to buy a house with a middle-class income without drastically changing one’s lifestyle.
Top Cities Where Millennials Can Invest in Real Estate. This article identifies at least ten key cities in the Philippines (Luzon, Visayas, and Mindanao) where millennials can find convenience and comfort as homeowners while living close to financial and lifestyle urban centers.
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