I choose to focus on Rental Properties because I like and understand the business. I am both a tenant and a landlord, so I know the issues and concerns of both.
As a property investor, rental properties serve my purpose of getting cashflow every month without having to work that hard full-time day to day. It also serves as a sound retirement strategy. Years from now, I will not have the energy I need to work and hustle, so having rental income will help me and my husband during our old age.
As a real estate broker, my listings are mostly rental properties too. I find it easier because I do not have to deal with title transfers and the tedious paperwork involved in property selling. Rental Transactions are also faster because renters tend to be less discerning than buyers since they know they are just renting and not buying the property.
Because of these reasons, I have chosen to focus on Rental Properties. Makes sense, right?
So now, the question that needs to be answered is how do we build a Rental Property Empire? I did some research and came up with a few strategies that can help us. Depending on the budget, situation and opportunity, we can use any of these if it makes sense.
Pre-selling units
Investing in pre-selling properties like condominiums or townhouses is not the best and fastest way to get into Rental Property Investing due to the long wait from construction to turnover but many rental property owners start out this way. Pre-selling units are usually offered with attractively low terms spread over 24-60 months for downpayment with an introductory selling price that usually increases over time, so if you do not yet have the upfront cash, this could be a viable way to slowly invest in real estate. I know of investors who invest in pre-selling units and sell the unit on or a little before turnover and make money. But since there is an over-supply of condominium units nowadays in Manila, you need to be cautious and find the most sellable properties, location and the best deal. If your aim is to invest in rentals, you must also financially prepare for all the costs involved in purchasing and maintaining rental properties..
RFO properties
If you have the funds, investing in Ready-for-Occupancy or RFO properties will allow you to hit the ground running. With RFO properties, you can immediately lease out your property and collect rent. RFO properties however are usually more expensive and the payment terms are steeper especially for newly turned over units. There are a lot of resale units that you can shop around for, some new while others are from older property developments. The thing with newly turned-over properties, however, is competition. Since there are a lot of condo investors who are also looking at leasing out their unit, you will have to compete for tenants.
Buy-Fix-Lease
Another strategy is to buy lots with improvements that are viable as rental properties. Depending on your budget, there are several properties that are readily available in the market with varying conditions. Some fix-it-uppers need minor or superficial makeovers while others need major renovations. The important thing is to buy low, add value by fixing up the property, then leasing it at a better price. Some investment properties already have tenants. If they are good tenants, good for your. But there is also the possibility of inheriting bad tenants. So be sure to check the term of contract. Is it a month-on-month contract or yearly? If yearly, how many more months are left before contract ends because as the new owner of the property, you are obligated by law to continue and fulfill the contract.
Buy-Build-Lease
This strategy is for people who want to purchase vacant properties and have the time, patience, financial resources and energy to develop a structure that they can lease out as rental units. It will take months or even years to hire an architect and general contractor, process the building permit, construct and get an occupancy permit. This is a somewhat like investing in a pre-selling property but riskier and a lot more complicated because you will be doing most of the work instead of the developer. The advantage of doing this, however, is that you can maximize the layout of the property because you have more control over the property. You get to decide how many floors, units and how to best use the property. The hard work will be in the first few years, then it gets easier. There are also ways to fast-track the process like going for prefab or container houses depending on you target tenants.
Lease & Sublease
A very viable strategy is lease and sublease. Instead of spending a lot of money to buy or build the property, you can just rent it for a lesser sum and still ask for competitive rental rates from tenants. The risk is generally lower if you lease and sublease. But just like in any strategy, there are pros and cons. For one thing, you do not own the property, so your control over it is limited. You will have to ensure that you are authorized to lease-and-sublease as many landlords do not allow this scheme. You have to pay for your rent regardless of your occupancy rate. And if you do not have a long-term iron-clad contract, your landlord can increase rent any time or even evict you under a few legal grounds or loopholes. The hard work you’ve poured in fixing up and getting tenants may end as soon as your contract ends.
Syndication or Crowdfunding
Even if you do not have a lot of capital, you can still invest in multi-unit Rental Properties by using other people’s money. There are several ways to format such a deal whereby as the project proponent, you can earn finders fees and project management income. By getting investors, you can enter at the big leagues level but you will need to make sure that you take care of your investors and give them good returns so that your name and reputation will be intact and remain highly regarded. If you are able to give decent profits for your investors, you will find it easier to convince people to invest in your succeeding projects.
Sharing Economy
A newer way of getting into real estate rentals is by getting into the sharing economy like creating your own airbnb or uber site. The beauty of this strategy is that you do not actually need to own real estate to be able to earn from rentals, you can earn from other people’s properties. However, becoming the next airbnb requires a lot of digital marketing, business development and technical IT skills, tech-start up funding, financial acumen and business development skills. There are a few who make it big in this arena, but there are many who do not succeed and fold up within a year or two of operations. If you will do this, be sure to study the market and have the right amount of commitment to follow through.
There are other investment instruments that allow you to get into real estate such as REITs, Stock Market, Coop Investing but these are essentially paper investing. You can earn good money from these, sure, but for this particular blog, we are just focused on real property investing—-rental properties that you can physically see and touch. That’s the kind of real estate investing that I find fascinating.
If you were a property investor, what strategy would you use given your current circumstance? Have you ever experienced using any of the above strategies? I’d love to hear from you, share your comments below.
Jhoanna Gan So is the co-founder and President of Businessmaker Academy and HR Club Philippines. She is a Property Investor and Licensed Real Estate Broker (REB PRC # 0029553). She devotes most of her time to business education, real estate and her amazing family.