Passive income is the ultimate goal that everyone wants to achieve. Making money without lifting a finger? Sounds like a pretty good deal!
As such, a growing number of investors are turning to real estate for conservative source of passive income. You can ask any landlord and they’ll tell you that having a couple of rooms to let can provide enough to cover for expenses well beyond their retirement years. The expanding population, booming economy and thriving tourism has made sure that the Philippines, especially Metro Manila has no shortage of tenants either.
And with new online shared-services like Airbnb and HomeAway, anyone with room to spare can now be a landlord, and offer lodging to a global market of tenants in exchange for cash.
Aside from the usual benefits of having a rental property such as having a steady monthly income, we’ve rounded up the reasons why it makes perfect sense to invest in a rental property in the Philippines.
1. High demand for rentals
The Philippines has a vibrant rental market which currently is experiencing a strong demand from both local and foreign tenants looking for places in pretty much every range. From budget to mid and high-end units.
A study released last year by property listing site Lamudi found that 69% of Filipinos prefer to rent than buy a home and majority of renters fall between the ages of 21 to 34 years old. These individuals are mostly fresh graduates on their first or second job, earning just enough for temporary shelter, rather than a permanent home.
In fact, a poll conducted by ZipMatch revealed that younger Filipinos delay purchasing their home because of financial constraints such as: having no savings for deposit (41%), being uncertain of their financial capacity (32%) and not making enough money (21%). While others simply do not consider buying a home a priority.
“For the younger generation in particular, renting allows flexibility, less commitment and less investment than making the big decision of buying a property,” Founder and Managing Director of Lamudi in the Philippines Jacqueline van den Ende said in a statement.
The Philippines has a young population with a median age at 23.4 years, according to the 2010 Census of Population and Housing. This means that half of the household population is younger than 23.4 years old, and will soon be joining the workforce.
Aside from the strong local demand, the rental market is also being driven by Manila’s foreign investors and multinational company executives, who prefer prime real estate. Foreign nationals who come from countries with a more mature real estate market may find accommodations in the Philippines relatively cheaper. They would be in a position to better afford the pricier rentals in the market. And executives from multinationals typically come with generous housing allowances to ease their transition into the Philippines.
“Buoyed by the demand from Metro Manila’s huge expat population, leasing activities in Metro Manila’s high-end residential market remain healthy,” said Claro Cordero, Jones Lang LaSalle’s Head of Research and Valuation in a separate Lamudi research, adding “premium locations are still very bullish, while we’re seeing healthy demand from the growing middle class for Metro Manila’s secondary locations.” When asked for comment about current conditions, Mr. Cordero told iMoney that prospects remain the same for this year.
2. High occupancy rates
The high demand for rental properties have pushed vacancy rates downward, especially in the country’s financial hubs. This means landlords can worry less that their property will sit for very long without finding a tenant — if they play their cards correctly, of course.
Vacancy rates for residential condos in Makati Business District dropped to 7.6% in the 2nd quarter of 2015, down from 7.9% in the first quarter and 8.1% in the fourth quarter of 2014, according to Colliers Research & Forecast Report. The same scenario can be seen across the remaining business centers in Metro Manila for the 2nd quarter: Rockwell (4.35%), Fort Bonifacio (7%) and Ortigas (9.5%).
3. Affordable property prices
Property prices in the Philippines are one of the cheapest in Southeast Asia. Prices of 120-square meter (sq.m) apartments located in financial centers around Metro Manila average $3,156 per sq.m., according to a study conducted by UK-based research firm Global Property Guide in 2014. In comparison, a similar sized apartment in the busiest part of Hong Kong can go as high as $22,814 per sq.m! This is more than 7.2 times its Philippine counterpart.
Global Property Guide also pegged the price to rent ratio of apartments in the Philippines at 13x. This means it would take 13 years worth of rent in order to buy a 120-sq.m apartment in one of Metro Manila’s business districts. This is one of the shortest globally, with 9 years (Jordan) being the quickest and almost a lifetime, or 64 years (Taiwan) being the longest.
This means that owning a property for rent is affordable and the rental yield is also very high. Allowing you to cover the cost of purchase pretty early on allowing you to net a pretty sweet profit should you want to sell the property anywhere down the line. This definitely can’t be said for a lot of other countries in the region.
4. High rental yield
A high demand for rentals and shortage of supply will surely bump up prices (presently). This makes the Philippines a bright spot in the rental market. Condos can be leased anywhere from P590 to P1,135 per square meter per month, according to Colliers International, who estimates rates to rise by as much as 6.08% in 2016.
According to Global Property Guide, landlords of condo units in Eastwood City, Makati Business District, Ortigas Business District, Rockwell, and Global City can earn back a gross rental yield of 7.5% from their investment, which is the highest in Asia. In contrast, Taiwan landlords gain little from their city center rentals at 1.57%.
Simply get the sum of the rent you collect per year, and divide it by the total cost to buy your property and multiply it by 100. (This means older homes will have a higher rental yield than newer ones!) If you haven’t bought the property yet and don’t know how much it rents for, you can canvass prices at online listing sites such as ZipMatch for similar sized rooms or homes around the same district or city.
Example: You buy a 35 sq.m studio condominium for P3.3 million, and rent it for P20,000 a month. This will get you a rental yield of 7.28%. P240,000 ÷ P3,300,000 x 100 = 7.28%
5. Growth potential as more tourists opt for budget, or cultural accommodations
The rental game is no longer just for those who have specific rental properties either. Homeowners can now have their shot at a chance to play hosts to foreign and local travellers with the introduction of online services like Airbnb and HomeAway. Now, you don’t have to buy a separate property investment if you want to collect rent. An extra room in the house can be booked easily through the homestay websites much like a hotel room.
Data from the Department of Tourism (DoT) showed consistent growth in tourist arrivals to the Philippines. A total of 3,109,349 visitors, arrived in the country in the first seven months of 2015 posting a 8.66% increase, compared to the 2,861,572 visitors for the same period in 2014. And from the 4.83 million international tourists who came to the Philippines last year, about 3% or 145,001 visitors opted to stay in a rented home or apartment, according to DoT’s 2014 Profile of Visitors to the Philippines from Select Markets.
Bookings to the country’s thousands of rooms and homes made through Airbnb skyrocketed in 2015, after surging to a 300 percent growth year on year, Airbnb Managing Director for Southeast Asia and India Jia Jih Chai told reporters in July. While majority of travelers came from Europe and the United States, Airbnb has also found a sweet spot with the local tourists who travel around the country, Mr. Chai said.
According to a Senate Economic Planning Office report, the DoT estimates domestic tourism to grow to 47.7 million in 2015 and 56.1 million in 2016.
“Unlike hotels, staying in a house of a local gives travelers a sense that they belong in the place,” Mr. Chai said. “There’s also convenience in location since hotels are concentrated in a strategic locations.”
Renting out rooms in your house is a great way to earn passive income to cover the cost of your mortgage or to just have extra cash if you’ve paid off your house completely.
Cons to consider
Much like other investment channels, renting property also has its downsides, which you also need to consider. Buying a property, although affordable by international standards, requires a huge amount of initial investment, especially if you’re looking to buy at prime locations.
Some condominium developers go about this by offering installment payments on down payments before the completion of the project allowing you to lock in a lower price at the start of the project. However, you’ll have to bear the risk of the project not completing or if the area doesn’t appreciate as much as you were expecting. So always keep that in mind!
Aside from the initial cost, you also have to consider other expenses such as maintenance and upkeep, and prepare yourself for a round of bad tenants who do not pay on time and even run away from you leaving a large amount of unpaid rent and utilities.
You’re also susceptible to supply spikes which can result in more difficulty in securing a tenant. Colliers estimates vacancy to pick up in the third and fourth quarters and finally settling at 11.7% by 2016 with condominium projects being completed at the latter part of the year — which in turn, add more units into the market. “With 5,500 new units set to be delivered in the second half of 2015, landlords must brace for a more competitive environment,” the report said.
Also always remember that properties are the first to suffer during asset bubbles. Real estate in the Philippines was one of the worst affected during the 1997 Asian Financial Crises, and land values in Makati and Fort Bonifacio have only recovered to pre-crisis level in 2014, according to data from Colliers International, with Ortigas barely reaching that mark by 2016.
However, there are ways you can take to get around the downsides like stepping into the game early and managing your overall investment portfolio well. And if you play to the strengths of the Philippine rental market right, then you can easily step aside and watch your rental property earn extra income for you.