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One of the most common dilemma for a first time property owner is whether to sell or lease their first house, apartment or condo unit.  This usually happens when for employees who need to relocate due to circumstances in their careers. They might have been offered with a job that pays better but is located elsewhere. Another circumstance would be for newly wed couples who decided to purchase their dream home.  One of both of the couples may have already purchased a property before they got married.
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So the basic question comes into play. Should we lease or sell the property?

It really depends on what you are planning to do.  For an instance, you have decided to settle down by purchase a much bigger home.  

Now as an example, you have a Php 1.2M Studio Condo unit with a mortgage of Php 300k and you decided to purchase a townhouse with a price of Php2.5M and a required downpayment of Php 500k.
Scenario 1: You decided to sell the property.

In this scenario, you sold the property for Php 1.2M and paid the remaining mortgage of Php 300k. This gives you a net of Php 900k that you can add up to pay for the downpayment of the townhouse.  You will then have a new mortgage of Php 1.6M. 

Townhouse Value: Php 2.5M
Total Mortgage:  Php 1.6M

Scenario 2: You decided to lease out your property for about Php 15,000.

In the second scenario, you have two properties with a total value of Php 3.7M (Php 1.2M and Php 2.5M respectively). You paid for the Php 500k downpayment and took a mortgage of Php 2M. This brings your total mortgage debt to Php 2.3M. However, the monthly rental income of Php 15,000 can help you in paying your total mortgage 

Condominium Value: Php 1.2M
Townhouse Value: Php 2.5M 
Total Property Value: Php 3.7M
Total Mortgage:  Php 2.3M
Total Rental Income: Php 180,000/annum (Php 15,000 per month)

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At first look, you will notice that Scenario 1 is better because you only have a mortgage of Php 1.6M versus Scenario 2 where you now have an outstanding mortgage of Php 2.3M. But let us also consider a long term approach.

Let’s assume that the value of the properties increased by 10% per annum. See the new future values after 10 years. Assuming that you have saved all the rental income then there is a significant difference in the net worth.
Scenario 1: Sell the property 

Townhouse Value: Php 6.5M
Total Mortgage:  Php 1.47M

Total Net Worth Increase: Php 5,030,000

Scenario 2: Lease the property 

Condominium Value: Php 3.1M
Townhouse Value: Php 6.5M 
Total Property Value: Php 8.6M
Total Mortgage:  Php 2.1M
Total Rental Income: Php 180,000/annum (Php 15,000 per month)
Total Rental Income Earned: Php 1.8M

Total Net Worth Increase: Php 9,300,000

Both options can be taken and it is just a matter of preference depending on the owner. Scenario 2 presents a much bigger risk by taking an extra mortgage versus Scenario 1 which is just replacing the initial mortgage with a bigger one. As the property owner it would best to understand the type of risks that you are willing to take and future goals that you are aiming for. If you are looking to sell in the future then maybe leasing your property is the best option. If the budget is tight and you cannot afford to take out a second mortgage then probably selling is the way to go. It all depends on what works best for you.

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The Author
Joel Dennis has a weakness for chocolate. Chocolate cake, choco bar, choco pretzels, chocolate drink, either hot or cold, you name it as long as its chocolate. Choco... choco...choco.... Even Chocobo.. hahaha.

Email me at: Broker@JoelDennisMuyco.com

 
 
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Advantages

Paying for a property in cash has a lot of advantages. In this 2nd part of the article, we will focus on the pros and cons for paying for a property purchase in full. Both the buyer and the seller can greatly benefit from a cash transaction.

Most sellers prefer cash buyers.

As a cash buyer, you are on top of the sellers list. Every seller prefers smooth transactions that only cash buyers can provide. Cash buyers have a greater leverage and negotiating power when it comes to the price, turn-over date, repairs, and so on. On top of that, most sellers are willing to lower their prices in favor of cash buyers. 

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You avoid the risk of low appraisal for your housing loan.

As a buyer, you are at the mercy of the appraisal based on the comparative sales within the market area of your chosen property and the condition of the property that you are buying. A low appraisal means a higher equity/down-payment is required to be paid to the seller. 


Avoid the risk of a disapproved housing loan.

Lets face it, every loan application goes thru a very strict process on determining if the risk for the bank is acceptable in granting you a loan. If a person’s credit score is not favorable then there is a very big chance that your loan will not be approved. If this happens then you need to find another source to fund your purchase or risk losing your reservation or even the paid up equity in favor of the seller.

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You save on time, money and effort.

A 30 year housing loan mortgage can add up to twice or three times the price of the original purchase due to interest. Aside from that, you need to pay additional bank charges such as appraisal costs and loan application fee. As a cash buyer, you save valuable time in closing the deal thereby eliminating the hassle of gathering the required documents, applying for a bank loan, going back and forth to follow up. As a cash buyer, you only meet with the seller up to a maximum of 2 appointments. 


Disadvantages

Less liquidity

Paying for a real estate purchase in cash requires a lot and you are trading liquidity for long term gains. Always remember that it takes a while to sell a property and should the need arises, you cannot immediately trade your property for cash unless you sell at a loss.

Giving up on other opportunities

There is a bigger chance that you might deplete your cash reserves when you commit to an all out cash purchase.

Price depreciation


There is also a chance that the value of your property depreciates after a cash purchase if it is located on a depressed area.

To sum of the pros and cons, it is always best to consult with your financial planner / advisor and to weigh in your options. This will vary depending on the type and the use of the property that you are planning to purchase. 

Have you read Part 1 of the Article?Should I pay in cash when buying a property? Part 1

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The Author
Joel Dennis is a mixture of Tyrion Lannister's brain with a the looks and brawn of John Snow and Khal Drogo and a secret admirer of Daenerys Targaryen, the First of Her Name, Queen of Meereen, Queen of the Andals and the Rhoynar and the First Men, Lord of the Seven Kingdoms, Protector of the Realm, Khaleesi of the Great Grass Sea, called Daenerys Stormborn, the Unburnt, Mother of Dragons.... whatever...   

Email me at broker@joeldennismuyco.com

 
 
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Most Filipino buyers especially yuppies would jump directly into property investment, the same way as jumping into a hot tub. Most of us are easily captured especially if the monthly amortization payment is very affordable; say roughly around PHP 5,000.00 to 9,000.00 monthly. But for those who would able to save cash through down-payment or in full, there are perks that come with it. In this two-part article, we will tackle the advantages and disadvantages of paying the down payment in full or in staggered basis.  It is a option between a full cash payment and getting a housing loan mortgage.
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Equity

Equity or mostly known as down payment in Real Estate is the amount of cash that you pay directly to the seller. In general real estate sales transactions, the buyer is required to pay for the equity. He/she has the option to pay the residual balance in cash or thru mortgage from any financial institution.

In most Western and European property markets, the buyer is always required to pay the equity in full. This is because the property has already been built and awaiting for occupancy. In our local market, developers offer pre-selling properties. This means that the property is not yet built and the land is not even prepped up for construction.  As a buyer, don’t expect to see anything in the early stages of the project.  As a young broker, I was astonished to see new projects sell like pancakes even though you can only see scrubs, trees and a few birds chirping.

Some pre-selling projects take about 2 to 3 years before the turnover. Hence, the developer offers a longer payment period for the equity/down payment. The payment period corresponds to the number of months until the property is ready for turnover. Once the property is built, most developers would demand full equity, which typically ranges from 15% up to 30% depending on the developer’s initial offer.

If a person does not have the capability to pay the equity in full but has the luxury of waiting, he/she can opt to buy pre-selling properties. Equity payments are mostly interest free. But if you decide to pay the equity in full, most developers offer about 3% to 10% discount on the equity total. After paying the equity, the property is now ready for turnover and then the financial company, either the Home Development Mutual Fund (Pag-ibig), bank or thru in-house financing would take over the remaining balance as housing loan or mortgage and of course, subjected to interest rates depending on prevailing market rates.
Pag-ibig usually offers the longest payment term which is up to 30 years. Banks usually offer up to 20 years depending on the initial agreement with the developer. In-house financing usually offers 3 to 5 years and in rare cases, 10 years.
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In some instances, even if you pay the equity in full, the buyer would still have to wait for 2 or 3 years because that is the set timeline for the developer. In this case, a person can opt to fully pay the equity and get a percentage income and continue to pay a certain amount on a monthly basis. In this process, you are generally increasing your equity, which is more than the required amount. However, you also minimise the balance, and in turn lessens the amount to be mortgaged when the property is turned over. Always take note that the remaining balance is taken over by your mortgage loan and subjected to interest.

Should I pay my equity in full?

YES!

  • If you need to move-in asap, then a big yes! You need to pay the equity in full before you can use the property. This is required by most developers and sellers for properties that are already built or ready for occupancy.
  • If you have enough money to cover the whole equity and you want to save by getting the discounted rate then YES.
  • If you want to increase your equity and then reduce your remaining balance while you wait for the turnover, which in turn helps you lessen your monthly mortgage, then YES.

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The Author
Joel Dennis loves to eat Munggo Beans topped with Malunggay Leaves on Fridays. It would be great if there is a fried Bangus or Galunggong on the side. 

Email me at: Broker@JoelDennisMuyco.com

 

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    Joel Dennis is a Geek, Web, IT Professional, Broker and a Mentor on investment matters. If you want to talk about some cool ideas then feel free to send me a message at Broker@JoelDennisMuyco.com

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