by Ernest Ian Jagorin 
This article serves as an informative guide on investing in condominiums, with a specific focus on studio units or other entry-level properties. We will explore real-life pricing scenarios and examine a typical real estate investment opportunity within Megaworld’s Iloilo Business Park, a renowned township in Western Visayas.
It is important to note that this discussion is solely centered on acquiring real estate for investment purposes, not for personal use or other reasons. The content is tailored for individuals seeking to invest their money and generate returns through real estate.
Furthermore, the article will delve into the effectiveness and viability of investing in studio or smaller condominium units. By analyzing the potential returns and associated risks, readers will gain insights into whether such investments are worthwhile endeavors.
Why Smaller Units Such as Studios are the Best Condo Investment
Generally, smaller units are the best investment options for two main reasons:
- Rentability – Small units get rented easily because they serve the renter’s purpose at a considerably affordable rate.
- Resellability – Studios and one-bedroom units are the easiest to resell in the future, a great quality when you want to exit the investment.
With these advantages, you can be flexible in your decision to either exit the investment or continue earning passive rental income.
How do you earn via real estate investment
1. Property Appreciation
The concept of property appreciation is based on the premise that you can sell the property at a higher value in the future compared to the price you paid when you initially purchased it. In essence, the higher the appreciation rate, the more favorable it is. However, it is important to note that the process is more intricate than it may seem at first glance, as there are several factors that need to be taken into consideration. These factors include the inflation rate, taxes and fees associated with the property, and the overall demand for the specific property in question. Understanding and accounting for these variables is crucial in accurately assessing the potential appreciation of a property over time.
This is a real life example but the figures are rounded for simplification purposes:
The Lafayette Park Square studio condo property you purchased in 2014 during the pre-selling period cost ₱2,500,000. Typically, buyers opt for staggered pre-selling payment terms, which is considered the most advantageous approach. However, for the sake of simplicity, let’s assume you made a cash/full payment in 2014. This property acquisition serves as the basis for our discussion.
Over the past decade, the Philippines’ annual inflation rate has been 3.1%, reducing the purchasing power of money by that percentage each year. As a result, ₱2.5 million spent 10 years ago would be worth around ₱3,397,250 today due to cumulative inflation. This adjustment is necessary to accurately assess the real value of past expenditures in the current economic context.
The average appreciation rate of Lafayette Park Square is around 7.5%. At this rate, the average studio units would cost around ₱5.2 million today (2024) and would typically rate at around ₱5 million on a cash term when offered by the developer.
If you want to exit the investment and get your returns as quickly as possible, you would want to sell it at a price lower than the market offer. Realistically, you would sell it at say, ₱4.5 million. It should sell easily for at that rate, but this is also why demand for the property is important.
This is why “location, location, location” is one of the most important factors to consider in real estate investment. Prime locations have higher property demands.
Considering the capital gains tax and selling fees such as seller’s commissions, you should be getting around ₱4 million net.
Before we can really analyze your net ROI on this investment, we should consider the fees and tax responsibilities of owning such property. If the property was acquired 5 years ago (in 2019), a generous estimate of the total expenditures for the real property tax and association dues would be around ₱200,000.
Here’s the math on what you get after 10 years of simply relying on the inherent appreciation of your Lafayette Park Square studio. Keep in mind, there is no attempt to furnish, beautify, or use the unit for earning purposes – just the appreciation rate.
(Net Sale) – (Cost of Property) – (Taxes & Fees) = (Return of Investment)
₱4 million – ₱3,397,250 – ₱200,000 = ₱402,750
Sure, the gains (₱402,750) might not seem huge, but as that area keeps being a prime location, the returns are going to grow over time. The demand and appreciation could even skyrocket in the future. Just keep in mind that the degree of returns depends on continuing progress of the area or township.
It’s almost a no-brainer that putting your money into a property located in a place like Iloilo Business Park is going to pay off financially. You can practically bank on it.
But there is a much better way to leverage your studio unit to earn more from it — and that is to rent it out.
2. Rental Income
Value appreciation alone provides a return on investment for the investor over time. However, to maximize the potential of a condo unit, furnishing and renting it out is the best way to go. Whether it is for long-term tenancy or transient stays, the key factor is generating a cash inflow. This approach allows the investor to capitalize on the property’s earning potential in addition to its appreciation in value.
Nowadays, ₱200,000 is plenty enough to furnish a small unit. As for the rates, renting out studios for ₱30,000 monthly is standard. Transient stay should be around ₱2K to 3K per day.
Already considering rental management fees, you should earn at least ₱300,000 annually. If the unit was turned over in 2019, you would have already earned ₱1.5 million from five years of rental income.
Let’s subtract the capital for furnishing the unit,
₱1.5 million – ₱200,000 = ₱1.3 million
You would have already earned a net of ₱1.3 million from your condo rental business.
Add the ROI from the appreciation which is ₱402,750, you should be ₱1.7 million richer from your studio unit in Iloilo Business Park.
It’s important to note that the potential for increased returns grows as you continue renting out the property. However, it’s advisable to sell the property before reaching the saturation point, where demand and appreciation are no longer optimal. A timeframe of around 15 years is generally considered sufficient.
Additionally, please keep in mind that the example provided is based on a real-world estimate, leaning towards the conservative side. The scenario outlined here is highly likely to occur if executed as illustrated, but it wouldn’t be surprising to achieve returns that exceed the estimates presented.
Summary…
- Pure investors should focus on smaller units since they are easy to rent out and resell.
- Value appreciation alone ensures ROI as long as the property is located in a prime location.
- When investing, one should consider inflation rate, taxes, fees, and the demand for the property.
- Furnishing and renting out the property will provide optimal cash inflow and maximize earnings.
