Buying strategy

The strategy we utilise to buy property depends on our objectives. The issues which will shape your decision are the following:

1. Your cash flow - Maybe you want to use your debt raising capacity to maximise returns. Maybe you need to pay cash, or buy only foreclosed properties because you don't have (or need) proof of income.

2. Your contingent cash requirements or surpluses - maybe you are setting up a business so need some certainty over returns.

3. Your risk-reward profile or sensitivity - maybe you want to stick to what you know

4. Your investment term - i.e. maybe you want to retire in X number of years.

5. The tax regime - Say that there is a capital gains tax upon properties which you hold for less than 3 years, or on property that you don't occupy (i.e. Investment property).

6. Your time - How much time do you have to manage the property. You can use a property manager, however this might have an unacceptable impact on your returns.

6. Your profit expectations - What profit are you expecting?

If you are living on an income, then I would suggest that you will want to maximise your capacity for passive income by maximising your lending (within sensible limits). You can buy cheap land and wait for it accumulate in value. Or you can develop it or buy developed properties. We are looking for maximum land value because rental returns are not acceptional in the third world because most people want the security of apartments, and environmental conditions are not attractive, as you neighbour will 'trash your planet', so you really need to buy a lot of land (4000m2) to escape the strench or visual pollution of your neighbours. Maybe a km2 if they have noisy cocks or poultry downwind.

If you are starting small, its amazing that there are still opportunities for you. In 2007, we bought a small 120m2 lot in foreclosure for P2700/m2. Today (Yr2010) it is worth P5500 because of the market turn of fortunes. Normally, we would not buy 'fully valued' subdivision land because its got less upside because its potential 'strategic' value has been fully gained by the developer. In this case, we were looking at buying the house next door, and we saw strategic value in the land. This particular property made sense because we could always flip it if we did not want it. We even found a buyer willing to accept no 'clear' certificate of title, which undermines a lot of confidence in Philippines title.

When you are developing your buying strategy, these are the issues you need to consider for maximising your value:

1. Inflation - this will benefit any property after interest rates have knocked any property owners who have excessive interest repayments (i.e. indebtedness). i.e. We can expect those at the bottom end of the market to be more vulnerable because of financial illiteracy, lack of income security.

2. Increasing incomes - results in stronger demand - this will benefit any property in a region, as long as incomes in that region are growing. i.e. Cities and satellite cities, and tourist areas, i.e. Where people like to spend money.

3. Strategic value add - this will benefit well located properties, i.e. Scarcity benefits, close to hubs, e.g. tourism, shopping, parks, future positive developments. The value of these benefits tend to slowly unfold.

4. Opportunistic buying - buying foreclosed lots, particularly in bulk, or as one of a package, when there is pressure to sell. Or in a climate of systematic financial crisis where a lot of people need to sell. It might only benefit a certain demographic, or it might relate to the failure of a person or corporation. This tends to offer only a one-off value, i.e. You have made the profit on acquisition, so flip this type of property (subject to capital gain constraints) and move on to longer term targets of a strategic nature.

I deal with the issue of strategic buying in my property books and other blog articles. The appeal of Asian countries is that, like Japan, they have greater capacity to increase incomes through productivity gains than other countries. This is because they benefit from 'Western' technology now, but also future gains. Their capacity to 'catch up' makes them a better investment prospect. There are tax advantages as well. Of course, I would prefer to live in the West (including Japan), but buying property in Asia makes a lot of sense, particularly in coming years when the USA/EU eventually break the mercantalist policy of artificially subduing the Asian currencies - pegged against the USD.

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Andrew Sheldon www.sheldonthinks.com