A strategy for creating passive income in the Philippines

    

May 2, 2008 by Mindanao Bob  
Filed under Bob

I have talked a number of times about strategies about how I make money in the Philippines. To this point, I almost exclusively make my money through e-Commerce and advertising on my various websites. Any kind of investment adviser or financial planner will tell you one things when they advise you on how to build your wealth – DIVERSIFY. Put your money into a number of different venues and it will be safer for you. Let’s say that you decide to put your money into the stock market, and you put it all into one company. If you do that, you could be in for trouble. If that one company runs into trouble, your money could go down the tube. If you spread it around to a lot of companies that is safer. If you put some money spread out in the stock market, put some into real estate, put some into other investments – that is true diversification, and in doing so you are offering your money a chance to grow and be safe at the same time.

At this time, I have my money and my efforts tied up into the internet. It is diversified to a point in that it is spread out into different activities and subject areas on the net, but it is still on on the net. I realize that I need to venture into other areas to make additional investments for my own protection, and also to take advantage of growth areas that I am currently ignoring. With that in mind, lately I have been doing some thinking about what I would want to do with my money to help me achieve my long term goals and enable myself to be comfortable as I get older.

Let me sidetrack for a moment, if you don’t mind. About two and a half years ago, I moved to a new home in Davao. I am in a different part of town from where I used to live. When you move to a new location, you tend to shop around and see what kind of houses or apartments are available on the market. My wife and I did quite a bit of shopping around for a place to live. One thing we noticed was that rental property goes quickly. If you see something that you like, you better snap it up, because if you wait even a few days it may be gone already. We found this particularly true of apartments, and especially for upscale apartments. Our family is too large for an apartment, so we rent a house. We did look at apartments, though, because a friend was moving at the same time and wanted one. We figured that we might as well include apartments in our search, just to know what was available. Every time that we found a nice apartment, it was either already rented, or rented quickly after we looked at it.

So, going back to my search for the right investment vehicle, and combining that with my observation about apartments, it seemed to me that building a small apartment building might be a good strategy for me. One saying that I’ve heard often about real estate is this – “they aren’t making any more of it!” It’s true. Real estate can go up or down in price, but the trend is always up over time. Keep in mind too, if you are a foreigner you cannot own land here. In my case, I am in a long term stable marriage to my Filipina wife. We’ve been married nearly 18 years now. I have no fears of the marriage breaking up, even in the long run. Because of this, I have no qualms about buying the property in my wife’s name.

In my case, here in Davao City, there are number of foreigners. My target would be to rent the apartment units to foreigners. When renting to foreigners, you need to provide a more premium place, not just something that is built to the minimum standards. However, the rent will be higher. Generally speaking, a foreigner will probably take better care of the place as well. With the better building standards and the better care given to the unit, it will also mean that your investment will last longer. The units that I have in mind would be maybe 5 or 6 apartment units in the building. Let’s say 6 units. I would rent 5 of the apartments on a long term lease for around P20,000 per month (minimum one year lease). The sixth unit, I would reserve for short term rentals to foreigners visiting Davao. I get lots of e-mails from people planning to vacation here and want somewhere to stay other than a hotel. I would rent this last unit for P13,000 or P15,000 per week.

An apartment building like what I have in mind would probably cost around P7M for the land and construction costs. That is equivalent to about $166,000. Let’s say it costs $175,000. If I have full occupancy on the rentals, my monthly income would be:

Five units at P20,000 = P100,000
One unit at P13,000 per week = P13,000 x 4 weeks per month = P52,000
Total income for the month P100,000 + P52,000 = P152,000

Of course there will be expenses involved too. It is also possible that the unit for weekly rent may not be occupied all the time. Let’s just say that my monthly take from the building after paying expenses is P120,000. That is enough income for a family of 4 people to live on easily.

My personal goal is to build four such apartment buildings. Four units, with each earning me around $3,000 per month, and I have an income of $12,000 per month. Why did I choose four units? I have four kids. When my wife and I pass, it would be my plan to leave one building for each of my kids. I have one child who is mentally challenged, and I doubt that he will ever be able to hold down a job that will make the kind of income that he will be needing. Something like an apartment building would make perfect sense in providing an income to sustain him.

In the United States, I had friends who were into these kind of real estate investments, and did well. I had never thought of something like this in the Philippines. Given my experience in searching for rental property, though, I believe that this is a good strategy.

About the Author:  Bob Martin is the Publisher & Editor in Chief of the Live in the Philippines Web Magazine. Bob is an Internet Entrepreneur who is based in Davao. Bob is an American who has lived permanently in Mindanao since May 2000. Here in Mindanao, Bob has resided in General Santos City, and now in Davao City. Bob is the owner of this website and many others.