Rental Real Estate Passive Income in 3rd World - Good Idea?

[publicduende]

Title of thread itself is misleading: real-estate is not fully passive unless you own it as a publicly traded stock (REIT, timber and other natural resources companies that own lots of land, certain other businesses whose real-estate holdings dwarf the primary business, etc). Preceding statement is doubly true in less developed (aka 3rd world) countries. That is, directly owning real estate is effectively owning a business that has to be managed. As with any business, you can hire a manager to manage the day-to-day operation, but a manager cuts profits and can cause problems if incompetent or dishonest.

My main objection to real estate in less developed countries where you are a foreigner is that this is not a business where you are doing something a local could not do. So if it becomes known you are making big money, locals will push you aside by some crooked scheme. Maybe just kill you. Best businesses for foreigners are businesses that depend totally on the foreigner's personal involvement to be profitable. For example, the foreigner is who the clients trust and no local could ever gain that trust. In a business like this, locals can (and eventually will) milk the foreigner in some way but they won't cut him out entirely or kill him unless they are idiots.

Which brings up another point. Some foreigners like to surround themselves with idiots because idiots are easier to compete against. Problem is, idiots do idiotic things. For example, dishonest idiots might try to steal a business or kill the owner of a business that the idiot himself is incapable of running, but even honest idiots do dangerous things. Assuming your business depends on your personal involvement, better to be surrounded be intelligent thieves who understand that a milk cow has to be kept alive if they want to continue milking it.

I owned or own real estate in Italy, UK, and the Philippines. Assuming Italy not to be an emerging country (rather, a submerging country!), owning real estate in an emerging country is not different from any other place. There are mortgages and interest rates, rental yields and taxes, markets that may go up or down and, finally, a certain amount of fungibility for your asset - that is - how fast those walls can be converted back into cash, and at what profit.

So far I cannot say RE in the Philippines has been a good investment. In fact, it has been a pretty shitty investment. I was lucky enough to have never purchased RE on a mortgage, always cash up-front or full payment within 2 years. While this decreased my leverage considerably, it allowed me to take advantage of those rental yields with costs limited to taxes, dues, and occasional maintenance.

Still, I haven't had much luck with the 2 condo units I purchased. One of them, the Davao one, has been rented to a Japanese civil engineer for 3 years now. Chances are high that said Japanese tenant will renew for another 2 years. The underwriter of the contract is actually his company, a JV of large Japanese multinational and a Filipino local company. Said company pays me 12 months of rent in advance, and the rental yield is decent.

The problem is that, because of the massive oversupply of new condo units that plagues all large cities in the Philippines, primarily Manila but also Cebu and, to a lesser extent, Davao, a condo has to truly stand out to be spotted by the elusive tenant, let alone a long-term one like the one I came across.

And here's the problem: in order to make my unit stand out, I had to splash an inordinate quantity of money on things like centralised aircon, large TVs in every room, Bosch appliances in the kitchen, and quality furniture and accessories, down to mattresses and pillows. The whole renovation and fit-out costed me more than $40,000 dollars, or 2 million Pesos, equivalent to a good 20% of the cost of the bare unit.

This means that yes, I got the unit rented. And yes, the entire rental yield of the first 2 years only covered the cost of renovation and fit-out. I only started to have a return on the actual unit last year, and will probably continue for another couple of years. The Japanese tenant and his lovely family are obviously very happy to enjoy a place that is furnished and decorated beyond what they could even afford in Japan. They are not moving any time soon.

The takeway from this is: in an overcrowded market, it's either this extreme measures (20% of the cost of the asset just on beautification), or a unit that might stay unrented, making for an unproductive assets, for months, perhaps year, before finding its tenant. Or, as it happens, a unit that needs to rent below market rate to hope to entice someone in.

A RE market like this, as you may understand, is not a healthy market. Manila has its fair share of super-luxury 300 sqm houses or apartments catering the tiny number of legit expats moving there (e.g. the Country Manager of Unilever, or the Ambassador of Brunei). Apart from that, not many middle-class and even upper-class Filipinos can afford splashing 50,000 Pesos on a 2-bedroom condo for their families. And I think the message is reaching home, that Manila is an unlivable shithole that no foreigner in their sane mind would like to live in for more than maybe a couple of months.

[Shemp]

@publicduende : when I wrote about locals scheming to milk foreigners, I was thinking of really profitable deals, like developing a condo complex on raw land. To be a big fish, you typically need local political connections, which means cutting locals in on the deal, which means consenting to being milked that way. Right now, you are a small fish, and the developer already milked you (and the other small fish) when you bought the condo. It's bad for future business to over-milk small fish customers, so you are probably safe from further attacks by locals. But, as you point out, that is small consolation since the deal is not particularly good for you and the other small fish owners/investors.

People complain about being milk cows but the alternative is to be a meat cow: troublesome while alive and only produces value upon slaughter. Very important to put yourself more in the milk cow than meat cow category, meaning worth more to locals alive than dead. As owner of any form of transferable wealth (your bodily health is non transferable wealth), you are inherently a meat cow. But for something like condos, difficult for locals to extract value by slaughter. Normally it's wives who extract value from meat cow husbands by arranging his premature slaughter.

[publicduende]

Best businesses for foreigners are businesses that depend totally on the foreigner's personal involvement to be profitable. For example, the foreigner is who the clients trust and no local could ever gain that trust. In a business like this, locals can (and eventually will) milk the foreigner in some way but they won't cut him out entirely or kill him unless they are idiots.

This is exactly what I do in Manila. My sw consultancy is easily head and shoulder abive the generally lazy, incompetent competitors who cater for local clients. The problem is, everything depends on me and a small number of people (mostly from Indonesia, not even PH) who I have trained over the years and who I can trust.

Which brings up another point. Some foreigners like to surround themselves with idiots because idiots are easier to compete against. Problem is, idiots do idiotic things. For example, dishonest idiots might try to steal a business or kill the owner of a business that the idiot himself is incapable of running, but even honest idiots do dangerous things. Assuming your business depends on your personal involvement, better to be surrounded be intelligent thieves who understand that a milk cow has to be kept alive if they want to continue milking it.

Another good piece of advice. The problem is that, when one is alone and doesn't have much choice, they will lower the bar and give their trust to people who they know are borderline idiots. Some of such people then prove to be fully-fledged idiots but, in some cases, damage is done.

[kangarunner]

This is exactly what I do in Manila. My sw consultancy is easily head and shoulder abive the generally lazy, incompetent competitors who cater for local clients. The problem is, everything depends on me and a small number of people (mostly from Indonesia, not even PH) who I have trained over the years and who I can trust.

And can we see the website of your consultancy business? And what services does your consultancy provide?

[publicduende]

This is exactly what I do in Manila. My sw consultancy is easily head and shoulder abive the generally lazy, incompetent competitors who cater for local clients. The problem is, everything depends on me and a small number of people (mostly from Indonesia, not even PH) who I have trained over the years and who I can trust.

And can we see the website of your consultancy business? And what services does your consultancy provide?

You're lucky I am still posting here, at all. I disclosed 1% of my personal life in here and still got forum posts and web pages trolling myself and my wife. The same happened to MarcosZ and some others.

I would be beyond idiotic if I were to share any more than I already did.

I run a software consultancy. We write bespoke software for enterprise clients around the world.

[rudder]

And here's the problem: in order to make my unit stand out, I had to splash an inordinate quantity of money on things like centralised aircon, large TVs in every room, Bosch appliances in the kitchen, and quality furniture and accessories, down to mattresses and pillows. The whole renovation and fit-out costed me more than $40,000 dollars, or 2 million Pesos, equivalent to a good 20% of the cost of the bare unit.

This means that yes, I got the unit rented. And yes, the entire rental yield of the first 2 years only covered the cost of renovation and fit-out. I only started to have a return on the actual unit last year, and will probably continue for another couple of years. The Japanese tenant and his lovely family are obviously very happy to enjoy a place that is furnished and decorated beyond what they could even afford in Japan. They are not moving any time soon.

Sounds like you're doing great. 40Gs in the hole. Recouped in two years, and on track to net 20Gs per year for at least the next two years. Well done. Sounds like you will be in the green pretty hard from now on.

Are the locals banging down your door with pitchforks now to try and haul you off to the butcher? WTF. It's just real estate investing, it's not like you're trying to open up a brothel with the neighborhood teenagers.

How long have you owned the unit? You said it took two years to recover the cost of your renovation/fit-out. How many years of renting it out did it take to break even when also including the original cost of the unit, property tax, and whatever other overhead is involved?

On an unrelated note, have you seen the Bourne Legacy (2012)? It has some pretty nice Manila scenes towards the end of the movie.

[publicduende]

Sounds like you're doing great. 40Gs in the hole. Recouped in two years, and on track to net 20Gs per year for at least the next two years. Well done. Sounds like you will be in the green pretty hard from now on.

Are the locals banging down your door with pitchforks now to try and haul you off to the butcher? WTF. It's just real estate investing, it's not like you're trying to open up a brothel with the neighborhood teenagers.

How long have you owned the unit? You said it took two years to recover the cost of your renovation/fit-out. How many years of renting it out did it take to break even when also including the original cost of the unit, property tax, and whatever other overhead is involved?

Not so great, to be honest. I will take at least another 6 years to break even with the cost of the unit, which I paid in cash. RE investments are not so good, this part of the world. Whoever tells you otherwise is an idiot or has a condo to sell you

The reason why I have that condo is that I never bought it to rent it. Even in 2015 I wasn't stupid enough not to know that, with those 10 million Pesos, I could have bought 4 smaller units and rented them to Filipinos or foreigners. I bought the unit with the idea of living permanently in Davao.

Then, as it happens in life, my plans got scuppered up because:

1. the developer took an extra 5 years to complete the residential units (as of today, the building is only about 70% complete!), and
2. the first iteration of my software company, I was running in Davao, was a bit of a disaster and I decided to close it in 2018.

After I closed the company, I met my now wife C and moved to Manila. Here in Manila, I rented for a couple of years, until I was sure I wanted to remain in Manila. After I made up my mind, I bought my current unit and another unit for rental in a decent business district of Manila, called Ortigas Center.

Even the second unit I bought for rental, again in cash, has only been rented for a few years. It has stayed unrented for a year now and I am planning to renovate it and turn it into my own home office/man cave. The fact that it's maybe 20 meters apart from my main home (same building, same floor, opposite corridor) makes it pretty feasible.

And then I am done with RE investments. I will never buy another property in my life, no matter where it is.

On an unrelated note, have you seen the Bourne Legacy (2012)? It has some pretty nice Manila scenes towards the end of the movie.

Yes, I did. Everything that invoves Manila and the Philippines is an inevitable source of "Pinoy pride" among the locals. Even if, in the plot, Manila is the place where the villain scientist hides away, so not exactly painting it white