Tips for Getting the Best Rental Yields from Your Condominium Investments
Are you looking for the prospects of owning real property that you are not going to use yet and monetize wherever possible? If yes, a condominium is your best bet. A property like a condominium is appreciated in value, so that is a guaranteed profit already. But if you want to earn more from your condo unit, think of buying one as an investment.
Condo as an investment
Let’s be clear about condominium investment first. Condo as an investment means you are going to:
1. Buy a condo unit and resell it for an immediate and one-time profit
2. Buy a condo unit and rent it for ongoing monthly income, Airbnb style or not
3. Buy a condo unit, improve the interiors and sell it (also called flipping) for a one-time profit
Although you may have the intention to use it after several years of earning from it, it means you are letting someone else use it. You are still the unit owner. Or, if you are going to sell or flip it, it means you are giving up ownership of the said condo unit.
Ways to monetize a condo investment
There are at least three ways to monetize your condo unit investment as discussed above: selling, flipping, and renting. There is nothing wrong with the first two. However, please be reminded that this offers one-time profits. You will earn more from your investment if you choose to rent it out. Indeed, the best condominium investment would depend on the unit’s rental yield.
Rental yield is defined as the amount of rental income the condo unit, for instance, generates on an annual basis against its total value. The formula is: Gross Rental Yield = Monthly Rental Fee * 12 / Total Unit Cost * 100 The total costs include the auxiliary fees including stamp duty, monthly association dues, maintenance fees, etc.
Sample computation of ROI
For instance, you have a unit you acquired for Php2,000,000. The calculation would be
Gross Rental Yield = Php20,000 * 12 / Php2,000,000 * 100
= [Php240,000 / Php2,000,000] * 100
= 0.12 * 100
The annual gross rental yield is 12%, the highest rental returns in the Philippines.
Reasons for investing in a condo
From an investment perspective, a condo unit is ideal because of higher rental yields. On the other hand, the task of handling the condo unit for rent is not without difficulties.
Pros of investing in a condo
There are several pros of investing in a condo unit.
For ready for occupancy (RFO) condo units, turnover will be fast, and you will have an available place to rent out.
Residential buildings are equipped with facilities, amenities, and other features that you can use as selling points.
Cons of investing in a condo
Some cons are involved as well.
Unless you are going to enroll it on the developer's property asset management unit, you need to DIY including preserving the unit to keep it attractive and marketable.
Following, the sample computation above, higher rental yields mean higher investment and condo prices start from Php1,000,000.
However, we, at Amaia Land, would not suggest jumping into condominium investing without the right knowledge about how to go about the process. The tips below should be your starting point, but these are not everything you need to know about this type of investment.
Tips for getting the best condo rental yields
Tip #1 - Develop a long-term plan
Don’t go investing in a condo unit just because some of your relatives or friends are doing the same for the money. If your heart is set in it, the next best thing is to develop a long-term plan. Condo unit investment is a serious business, and you cannot move on without planning for it properly. Acquiring the condo unit is the short-term plan and extending it to find renters is the mid-term plan. Selling or flipping the condo unit is also part of a short-term plan. The long-term plan shall include strategies to maximize the renter’s stay, minimize rental costs, vacancies, etc.
Your goal is to build cash flow. The long-term plan is to acquire a condo unit in Year 1, acquire the second unit in Year 2, the third unit in Year 3 and so on. Renting them out is the best way to make the units pay for themselves through monthly income while generating more cash flow.
While at it, the income must be regular. The next part of the long-term plan is to devise strategies, so the vacancies are minimal. Introduce upgrades and offer freebies, for instance, for the snowball effect.
Tip #2 - Decide for an investment budget
Each residential building has units priced at different price points. Definitely, prices also differ between two residential buildings albeit being on the same location. What this price difference tells us is that your decision must not be based on price alone. After all, it may seem silly to compare two condos fairly on this basis. Remember: condominiums are not built equally. It all boils down to the details - the facilities, amenities, unit sizes, maintenance, and monthly fees, among more.
While at it, “leverage” is the magic word. It means maximizing the use of money - yours and others’. You may use your existing property for compounding leverage. Financing institutions offer higher loan amounts for loans with collateral.
At most, you will need Php20,000 plus the down payment, which is usually between 10 and 20% payable from 6 to 40 months. These details vary from developer to developer.
After completing the downpayment, you may choose to secure a loan from Pag-IBIG or a bank to pay the remaining balance or the 80 to 90% of the total contract price.
Ask the developer if they offer in-house financing, which is your third option since while this is the most convenient path, this payment scheme tends to have higher interest rates compared to banks and Pag-IBIG.
Just make sure that you are going to earn from the rental fees to cover the interest rate of the loan as well as the monthly payments. This is how you can maximize the buying power of the money you have and the money you owe or the good debts.
Tip #2 - Decide for a target market
A common practice among condominium developers in the Philippines is building with specific groups in mind. Every condominium project seems to have clear target markets set early at the design phase.
So don’t ever think that the luxury and high-end market are the most lucrative targets because it’s not always the case. Some mid-range condo units tend to be more profitable because of lower rental fees.
It works in two ways. First is you determine your target market and look for the right condo building to suit the purpose and second is you choose a condo and decide for the target market later. Although in practice it is best to know your demographics first, so you have a steady investment decision reference.
If still undecided, try to observe certain neighborhoods. Ask around. If you have friends who are currently looking for rentals, ask what they would want from a condo rental - know their non-negotiables. If most of the inquisitive renters prefer a fully-furnished condo unit, then focus on this aspect when looking for would-be renters.
If you can cater to the needs and preferences of your target market, you can have a better leeway in charging premium rental fees. Other than that, this knowledge allows you to focus your capital on the most important things (or the non-negotiables) such as additional storage or brand new appliances.
Tip #3 - Choose a location
Location, location, location is the real estate mantra you probably heard before. The truth is, every location can be a good location, depending on the purpose and outlook of your investment. Accommodation needs vary, so the choice of the location moves along with this reality.
Other than that, no property developer would build a residential building on an otherwise unprofitable location. It does not make sense especially that the development would take years to complete and millions of pesos to develop.
Your only task now is to pick a location that is most suitable for your target market’s needs, preferences, and circumstances. If you are targeting BPO employees and hear the news that the industry will spread out and create a presence in key cities in the Philippines such as Davao, Cebu, Pampanga, Baguio, and so on, you need to position yourself accordingly.
Locations with the highest rental yields
Speaking of which, some locations tend to have higher rental yields than the others. Places with the highest rental yields in the Philippines are as follows:
1. Parañaque - 7.98%
2. Manila - 7.91%
3. Las Piñas - 7.56%
4. Pasay - 7.38%
5. Mandaluyong - 7.3%
6. Quezon City - 7.25%
7. Taguig - 7.06%
8. Makati - 6.94%
9. Pasig - 6.51%
10. Muntinlupa - 6.64%
Majority of the places are located in the western and southern part of Metro Manila.
Additionally, residential buildings near shopping districts, commercial complexes, business districts, and transport terminals tend to command higher rental rates. If you can find a condo unit to buy in an up and coming neighborhood, the better since this will appreciate in value higher and sooner than expected.
Tip #4 - Consider the project developer
This is very important especially if you are going to buy a condo unit on a pre-selling phase. For example, a university is going to open up new bachelor degrees in the next five years. A nearby residential lot is being prepped and where a condo building will rise. You need to make sure that the developer can deliver the condo units as promised.
If the developer fails to do so and you bought a unit or more, you are seeing a loss here. Return on investment (ROI) would be slow if you would be able to recuperate your investments at all. That is if the developer completed the project despite the delays. If the developer failed to finish the project, you could not expect to see any ROI. That’s the bitter truth about it.
The same goes with if the developer was able to finish the project on time, and yet there are so many issues with the unit, the management, the paperwork. The quality of the condo project may suffer if it was finished hastily just to meet the turnover dates. These units are not as “saleable” as they should be.
So, don’t you think that choosing the most reliable and reputable real estate developer is a mundane task--it’s not. The brand, its history, and track record are a better assurance than the deed of sale or any contract for that matter. Choose wisely and stay away from mediocre developers because some developers do their jobs much better than the others.
Tip #5 - Know the financing and payment options
Good for you if you can pay for the unit upfront. If not, you are going to need the help of financing institutions. As already noted above, your options are Pag-IBIG housing loan and bank housing loan.
Some developers also offer in-house financing. It is their way of getting more people to acquire condo units with limited available funds.
You need to perform a pro forma analysis to determine if you can really pay up for the condo you are eyeing for investment. A pro forma analysis is a way to determine whether your rental yields are at par with the market average. As already noted above, rental yields vary because several factors are at play. A realistic gross annual rental yield for Filipino condo owners is between 1 and 12%.
Build the highest credit score possible
If you took out a loan, make sure you are paying the monthly amortization diligently. Late payments reflect on credit scores, and the banks’ most important factors are 1) capacity to pay and 2) credit scores. Higher credit score means accessing higher amounts of loans in the future.
Keep yourself updated
The real estate industry can also be considered ‘fast-moving,’ depending on which perspective you use to look at it. So be in the know. As an investor, it is your responsibility to keep abreast of the changes, trends, and innovations within the industry particularly those that apply to your specific circumstance. Knowledge empowers you to make the right decisions to keep the cash flowing.
Introduce key renovations and upgrades
Part of being in the know is staying updated on the latest interior designs to optimize your rental properties. Minimalist and Zen homes are the current trends, so introduce these elements to your condo unit. Target the bathroom and kitchen. This attracts the right renters. While at it, please don’t cut costs; this should be integral to your long-term plan too.
Integrate long-term trends in furnishings
Increasing the monthly rental is only possible if you, as the landlord, work on giving your target audience what they need. Most people would willingly pay a premium for convenience. Although there is no exact science as to what permanent fixtures can feasibly help in commanding higher rental fees, your focus is integrating quality fixtures and furnishings. Have the condo reassessed after every major renovation.
Offer free utilities to minimize vacancy
A vacancy is the biggest cost every landlord needs to face as you could have earned thousands of pesos monthly, but you are paying monthly repayments and association fees from your own pocket instead. This diminishes the actual effective return. You need not experience this by offering free utilities. These are a water heater, energy-efficient air conditioner, thermos flask, etc. The paradox is you need to minimize expenses whenever possible. For instance, the thermos flask would reduce the costs compared when electric pots are used repeatedly.
Be amenable at all times, if possible
Unfortunate events happen, and the Philippines is prone to natural disasters. If you have a renter whose family suffered from the effects of typhoons or earthquakes in the province or if the place where the rental is located had massive unemployment, it would be better to offer lower monthly rental for a few months. In this way, they need not find another rental at a lower rate. The same goes with if you need to implement a higher rent. Think of the economic circumstances of the location.
As an investor, you might have reservations in purchasing your first condo and renting it out. This is a valid concern as well as handling the unit, looking for tenants, mending vacancies, shouldering renovation costs, utility/services payment, unit inspection, etc. With these tips, you should at least cover the basics of condo investment. The #1 is to do your due diligence so you won’t end up acquiring a condo that would be vacant for months more so when you stick zealously with your ideal rental rate.
Be ready. Be flexible. Learn more.