PhilFAQS

Often times I get queries about the advisability of buying a home in the Phlippines now and leaving it sit until retirement comes … as a hedge against inflation and a way to assure you’ll have at least that much of your retirement already in place.

This may work for some people but in general I counsel strongly gainst this idea.  Basiclaly, for three reasons:

1. Poor Investment Vehicle: A single-family home, not producing income, is a poor invetsment.  In fact, it’s a liability, not an asset.  The US has lived in a dream world for 20 years or so with peple making buying decsions in the belief home prices will always go up.  Historically, they don’t, and the US and the rest of the world’s economy are paying dearly right now for this fairy tale assumprion.
2. Squatters: Sometime refered to as undocumented occupants.  this is a perennial problem here and there is no indication any long-term cure is in place to cut the problem down to size.  The population is growing by leaps and bounds, adequate housing is very hard to find for many and there is a common feeling among some Filipinos that if a person isn’t usng somehting, he or she doesn’t need it, anyway.  More common than someone actually breaking into and occupying a house are “barnacles”.  Like the marine aninal, peple may see your property wall or even the wall f your house as a convenient ‘starting point’ for a little hovel they throw together out of cardboard and cast off plywood.  Once this happens you are in for exspense, protracted negotiations, exspense for sure (you at the least will have to provide another place for these folks to live in ordert o get them off your land) and even violence if you try to exert too much pressure too fast.  Getting into a situation where you are hosting squatters is not a place you want to be.
3. Looting: Rather than squatters, or concurrent with illegal occupancy you may return from a stay abroad to find your prize home gutted.  Pipes, electric wires, doors, windows , stairways, all are fair game.  Got a wall and heavty steel gates to protect the property?  The steel gates sell like hot cakes at so-called “junk shops” which buy all sorts of scrap without any  proof or origin required.  If your house falls victim to this, the more gates and grills there are, the more attraction the metal becomes.  Not long ago in the Philippine’s largest city, (population-wise) Quezon City, a mansion belonging to former president Estrada was torn to bits, leaving very little except the bare lot and a few broken concrete blocks.  Mr. Estrada was in jail at the time and unable to properly supervise.  The mansion had been ordered turned over to the governement by court order.  When queried about why this attrocity was allowed to occur, city officals stated, “Well, the title of the poperty was not clear until the court ruled, so we saw no need to propotect it.”

Does that logic give you a headache as it does me?  Well, welcome to the Philippines.  If there is not a legal owner onsite, and crooks and ner-do-wells start tearing a place to the ground, it’s quite likley that not a thing will be done by the authorities to protect the property.  I’m not writing about this to try to be negative, but many people think buying and owning a hosuse here in the Philippines is like what they already know by virtue of buying and owning property in the States.

As the words of the old song go, “It ain’t necessarily so”.

Popularity: 5% [?]

Well, it’s Friday again already, time for another installment in my questions series.   Better get started:

---

Q & A: 3 October 2008: Housing Inflation

---

Question: Larry wrote in with this one, thanks Larry and to all others who take the time to ask:

Maayong Buntag
From what I have read about moving to the Philippines it is by far better to rent. Almost all expats will tell you this. The only reason I could see in buying is to hedge against inflation. The thing is that I have been noticing rampant inflation in the Philippines on almost everything but housing. The price of houses and property seem to be going up but at a much slower pace than say food or petro. The rate housing in the Philippines seem to be going up is much slower than the return on investments. Could I get your assessment on the rate of inflation on housing in the Philippines?

Answer: It is very hard for me to give an overview on Philippine inflation that speaks with any authority.  I spend little and do not participate actively in the real estate market.  But the world is certainly entitled to my opinuion, so here it is   Dave’s opinion is, a single family house that you plan t live in is a liability, not an asset.  It produces nothing and is never guaranteed to go up in value.

It is true that you must live somewhere, so depending upon the ‘numbers’ and your personal preferences it may make more sense to buy than to rent, but buying a house as a hedge against inflation strickes me as a poor way to invest.  If you want a hedge against inflation, buy shares of stock in companies that actually produce something of value … yes, even today … anyone want to bet that Warren Buffett is dumb in buying up General Electric at bargain basenent prices, for example?

General Electric powers the world’s electric utilities, railroads and airlines … they actually produce product which is unlikely to evr suffer long-term drops in demand, so there is a money for future value equation.

A single family house may be worth more than what you paid for it years down the ‘pike .. or it may not.  Unlike something that produces consumable goods for value, a single family house produces nothing and consumes a lot over the years.  Philippine tax laws, especially capital gains taxes, are nothing at all like the US, where buying and selling houses are virtually non-tax events for home owners. (and of course you will be subject to Philippine capital gains and value added taxes even as a foreigner … you can’t escape taxation by the Philippines for transactions within the Philippines as you can with outside the Philippines income/profits).

In the two years I have been living here I have had my ‘eye on’ three houses in my local community that I would be happy living in.  All were already for sale when I arrived.  All are in the 4 to 5 million pesos asking price range.  All are also occupied by caretakers as the owners are elsewhere already … thus the monthly costs for keeping these homes ‘alive’ are all in the red as far as benefits to the owners.  (You can not, by the way, safely leave a house unoccupied here, it will likely become occupied by squatters and getting them out could prove expensive, problematical and even deadly if you try to throw your weight around.)

Last month, one of the three sold for 2.8 million.  Would you want to be the owner of one of the other homes waiting more than 2 years to get nothing, or would you rather be the owner of the one that just sold at about a 30% discount?   Frankly neither situation holds much attraction to me.

Places where a lot of expats congregate … Angeles City is near me and a good example … are just loaded with very attractive homes built … even overbuilt .. by foreigners and now for sale at greatly discounted prices.  The type of home that most middle class Americans would lkely build here is way too much house for the very tiny Philippine middle class and the Filipino rich are highly unlikely to buy in other than exclusive”way, way spendy” areas that midedle class Americans can’t afford.

You are likely to get stuck waiting for another willing American to come along if you want to unload it.  Houses that buy and sell readily here in the Metro Manila area are not what the average foreigner wants to live in.

I realize that is a lot of words for a pretty non-definitive answer, but in the long run it is all up to each individual anyway … if you want to buy a home as aplace for you and your family to live, for your kids to grow up in, more power to you … but a house as an investment? There are no guarantees, good or bad.

Commercial real estate is another story completely … I’ve written about it here before and likely will write more.  You might like It Can Be Done or It Can Be Done —Part 2

Popularity: unranked [?]

Most anyone knows that the expression I love to hate about the Philippines is, “If Only”.  Recently I tried to help a reader of this blog find a home to rent here in Marilao.  Wow!  I failed.  It was tough.  There were some homes to rent … Mita and I looked at a number of them.  But everything we looked at was horrible … several didn’t even have a working bathroom.  The person showing the unit would say something like, “Oh, the owner plans to fix that, after the lease is signed.”

Hello!  Most people want to move in after the lease is signed.  And most people expect to move into a house that at least has a working toilet.  A common cry heard hereabouts is, “if only someone would offer some decent rentals”.  Well, who might that someone be?

My friend Bob recently made a post that tied in with this thought … Bob was thinking about some  non-Internet related investments that might provide an ROI now and something for a family legacy in the future.  This has been on my mind a lot, also.

Things aren’t all as bad as the houses without toilets, though.  Here’s an investment made by a local fellow who is related to my across the street neighbor.  he picked up three lots at a nearby corner , razed the dilapidated single family homes that were there and built an investment property.

As you can see from the pictures, it isn’t bad.  What’s more, all the units were leased before the contractor was finished with the build … I did mention there was alack of decent rental units here, didn’t I?

I can’t tell you the actual cost of the lots … I believe the man owned at least two of them for many years.  But let’s say he started from scratch with the investment.  Because two of the lots fronted on a main road (Jeepney route, very convenient) they would have been worth more than the average lot around here.  the third lot was what they call a ‘key lot’ in US real estate terms …the first lot on a side street, very undesirable in the Filipino mind set.  So let’s say PhP 4,000,000 plus about PhP 9,000,000 for the first-class construction you can see. PhP 14,000,000 to allow for incidentals, let’s just figure.  About $333,333 USD at today’s exchange rate.

We don’t have those sub-prime, “never-never” loans that have broken the back of today’s real estate market in the US … here in the Philippines you need a healthy down payment and you can expect to pay a hefty interest rate, especially for commercial property.  Conservatively you could do, $83,000 USD down (~25%) and $2,750 USD a month (about PhP 115500 for monthly amortization on a 12%, 20 year loan.  I am no expert, nor wheeler-dealer, one might do much better, but these figures are ones I know would be attainable.

If I have my ducks in a row, there are 8 rental units total, and the total gross monthly income is in the PhP 140,000 range … about $3,300 USD … so there’s close to $600 USD per month positive cash flow.  I have no idea what the insurance would run, but insurance here is generally cheap … and the taxes aren’t enough to bother with, probably 3 to 5,000 per year, total (that’s 5 times the taxes on our single-family home nearby), so even with an allowance for occasional vacancies, this is a pretty good deal.  If you had more money to put down, found better loan terms, etc., it would be really great … if this were my property I would be working on the second one already.

Popularity: 4% [?]

I’ve had several concrete projects done at my house and my in-laws over the past 18 months.  There is also a lot of construction going on in my neighborhood so I often walk around in the morning (cooler) hours and make usee .. what we used to call being a sidewalk superintendent in the US.

I’ve heard a lot of foreigners complain about the quality of concrete work here in the past, and common theme of "those Filipino workers aren’t putting in enough cement" or words to that effect.

Frankly, there is quite a bit of poor concrete work that gets done here, but, from what I have observed, seldom is it caused by too little cement.  Many workers I have watched and talked to don’t really know much about concrete and how it works …so I thought I’d pass on a few tips so you can supervise your own small jobs and have them come out better.

Concrete is one of the world’s oldest and most durable building materials … it was already a material of choice when the Romans built the Colosseum from it,and the rules haven’t changed much.  It pays to know a little bit about how it works and what needs to be done to make it last thousands of years as the Romans knew.

Concrete is a blend of three or four major components:

• Cement.  Technically called Portland cement because of the process used, this is a mix of limestone and clay, heated in a kiln and then ground to powder.  Use a name brand product and keep it dry until use, you should be ok.
• Sand. In the US we specify ‘washed builder’s sand’.  here most people take what they get.  This is the number one problem I’ve seen.  The sand must be free of organic matter and free of silt of fine clay.  (here’s a good site about how to test sand for suitability).  If the sand is full of fine powder the concrete will not be good, no matter how much cement goes in the mix.  I also see workers using dry sand that has been out in the sun for days.  Sand should be damp enough to form a lump in your hand when squeezed before you start mixing … if it isn’t, you’re wasting your time in the long run.
• Aggregate.  Crushed gravel or stone.  You must use aggregate in all but the thinnest layers of concrete.  I see whole houses being built with sand and cement only … these will never attain full strength.  As with sand, the aggregate must be free of powdery silt, if necessary it must be washed.
• Water.  Perhaps the most important and least understood fact is that water for mixing concrete must be clean.  You can’t use water from smelly old tanks and drums ..especially if there is any petroleum or food residue.  The water you use for your concrete must be as pure as possible … drinking water quality.  If it is not, all the rest of the materials and the labor are wasted.  In my experience you’ll have trouble with Filipino workers on this issue at times.  Be nice, be open to suggestions, but use clean water … it’s your job and you are paying for it.

How much water?  This is much more important than how much cement.  Both too much or too little can ruin concrete.  best to use what is called a ‘slump" test.  see a good technical discussion here.

Last thing to remember is .. concrete doesn’t dry, it ‘sets’ which is a simplified term to describe complex chemical reaction (concrete will set very nicely underwater, by the way, where it technically never ‘dries’.  I see job sites frequently where fresh concrete is baking in the tropical sun.  It will dry before it sets properly and thus never attain it’s proper strength.

Great stuff this concrete,though, when you learn some simple rules and do it right .. it will last many lifetimes and provide a great return on investment.

Popularity: 3% [?]

There are many sayings I’ve heard from folks planning to move to the Philippines that show they just don’t understand  much about what such a move will mean … but one at the top of the list is always "When I get there I am building my own home, unlike the Filipinos, I know how it should be done."

Well maybe you do, and then maybe you don’t.  I led this article off with the picture of typical "stick built" homes under construction in the US.  You will almost never see such a scene here.  In fact, you will seldom, if ever, even see a 2×4.

One of the things many visitors from Asian countries find surprising when visiting the US is just how spindly and rickety the US home building model is … based on cheap wood from cheap trees, even for multi-storey structures.

When a hurricane strikes, or a tornado, etc., the typical US stick built method shows it’s true colors … houses literally explode, or fall down with not that much provocation.

In the Philippines, as in most Asian countries, reinforced concrete, or a combination of hollow "concrete" block and reinforced concrete is the norm .. except for extremely cheap "squatter" or slum homes.

Part of the reason for this is material availability … there is not a lot of lumber left in Asia.  Part comes from the knowledge that hurricanes (typically known as typhoons here … a hurricane or a typhoon is properly called a "tropical cyclone"), earth quakes and, in particular termites are going to come to visit regularly … and a flimsy, stick-built house is just a wasted investment.

My view is, a typical Filipino who has enough money to build a home in the first place knows that if he lose4s it, it’s gone forever, so rather than trusting to government handouts, he builds it to last.

Homes and home building are always a popular subject and I plan to write quite a bit more on the subject … so subscribe now, either by standard RSS reader (I love Google Reader myself) or by Subscribe to All the Facts Philippines by Email">Subscribe to All the Facts Philippines by Email’>secure email so that future articles land immediately in your inbox.

Just don’t expect much information on the price of a 2×4 here in the Philippines … we don’t find much use for them.

Popularity: 3% [?]