On Buying a House – Invest in Stocks First or Get a Home Loan?

I received this question earlier this morning from a fellow forum member and blog follower (name withheld for security and privacy reasons):

“Hi Burn! I’d like to ask for advice if it’s ok with you. It’s about our plan to have a house of our own. We’re currently renting an apartment for P6,500/mo so we’re considering taking a Pag-ibig housing loan of 2M with a term of 30 years, 8% interest per annum and a monthly amortization of about P17,000. Actually, P17,000 is almost half of our monthly budget already so we’ll be sacrificing a lot, maybe even our monthly 20% allotted for buying stocks..

So do you think it is much better to just put the P17,000 monthly in stocks and just withdraw from it when it reaches 1-2 M? Maybe after 5-10 years given the interest is 10% p.a.? However, the prices of labor and materials might have gone up considerably by then..

The loan seems more attractive now as the house can be built with in 6 months to a year so we also won’t have to pay for the apartment rent once we’ve moved in..

(By the way, the 100 sqm lot on which to build the house will be given to us by my father, though we’d like to pay for it as well (P2,800 per sq) since we know they also need the money for their retirement..)

Please help as we’re really confused whether to just invest or apply for a loan and the kids are growing up fast. Thanks in advance.”

Here was my answer:

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Hello friend,

I am not an expert on real estate and property but let me just give you my thoughts and unbiased opinion.

Personally, I believe 30 years of repaying a P2M home loan/financing with annual interest of 8% and monthly amortization of P17,000 is just too long, too expensive, too costly assuming that you and your spouse are earning less than P70,000 per month. Your P2M loan spread out in a tenor of 30 years would translate to around P6M!!

Even after a year that the house has been constructed, the next set of worries will most likely pile up. You will have to start spending for its maintenance, taxes, insurance, and other fees and surprise costs while you continue to pay for your amortization with Pag-Ibig.

If you said you can save up P17,000 per month, then you can actually have your first million pesos in 5 years’ time. We’re not even talking about investing in stocks, earning through compounded interest, or dividends yet.

See my nerdy computation below:

P17,000 x 12 months x 5 years = P1,020,000

I don’t know what type or how big the house that you would like to have but if you will ask me, that P1,020,000 would be enough to build a decent one for a family of 5 or 6 even in year 2018. And then perhaps you can ask your father to give you another couple of years after that to save up for the payment of the lot (P280,000).

Price of cement back in 2010 was at P210 per 40kg bag. It went down to around P180 to P190 per 40kg bag in 2011-2012 but hiked back to around P200 to 230 per 40kg bag. So with the example of the cement, the price of some construction materials may vary from year to year. The cost of labor and materials and construction should not be a reason for you to worry later on.

I’ll give you an example below of a house built recently in the province for just around P300,000 (US$7,500)

making-small-concrete-house-philippines-014

The house of fellow blogger “dutchpickle” in Leyte during construction in 2010 that was finished for only P300,000.

My nerdy recommendation is that you set a saving and investment program for the house that you have been dreaming of for your family.

With that P17,000 monthly savings, you can either place it in a Balanced Fund mutual fund or UITF for 5 years and have it grow by at least 10% per year. Or again, simply continue saving up P17,000 or more per month for 5 years.

But before you do that, make sure that you already set aside at least one year worth of household expenses as emergency fund. I also hope that you and your spouse are insured as well.

To have a more professional and intelligent answer to your question, I’m inviting you to attend our Innovative Real Estate Investing tonight (May 2, 2013) at 10:00PM (Philippine time) featuring Ms. Maves Salva-Angeles of Happy Homes Realty Philippines.

Continue receiving information on the basics of saving money for the future by subscribing to BurnGutierrez.Com for FREE.

P.S. 1. The OFW UsapangPiso Forum will be hosting a FREE webinar event on Innovative Real Estate Investing featuring Ms. Maves Angeles of Think Rich, Pinoy! and the Truly Rich Club this Thursday, May 2, 2013 at 10PM, Philippine time. Join the OFW UsapangPiso Forum for updates of this event.

P.S. 2. Bro. Bo Sanchez has appointed me as a coach for our young and new investors at the TrulyRichClub social site. It’s a fun, learning family with the purpose of “helping good people become rich”. I’m inviting you to join the TrulyRichClub too and email me at burngutierrezblog@yahoo.com.ph if you have any questions. Click here to join!

P.S. 3.  I’m inviting you to attend our financial coaching/Q&A session with Jess Emerson Uy, a Filipino financial consultant based in Singapore who conducts financial literacy seminars at the Philippine Embassy there, on October 9, 2013, 7PM at Starbucks Paseo de Roxas in Makati City.  This Q&A session dubbed as “Starting in Global Investing” will also be webcast LIVE over at the OFW UsapangPiso Webinar site. If you are based abroad and want to interact with Jess Uy live online, then register here. Those who are in Metro Manila may get in touch with Mr. Mon Lao at 09173262077 if you want to attend the coffeetable coaching sessions for FREE with Jess Uy at Starbucks Paseo de Roxas.

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23 Responses to On Buying a House – Invest in Stocks First or Get a Home Loan?

  1. Rogie says:

    great advise bro. 30 yrs is indeed too long. since they already lived too long on apartments, might as well continue while investing. They’ll never know, maybe one day they wake up with enough money to buy cash in only a few years by investing in stocks first. :)

    • I had second thoughts of suggesting that she invest her 17k per month on stocks. The bull run is tempting but scary as well. 5 years is too short a timeline for investing in the stock market. I’m afraid she’d get caught up in a possible crash or major bear run by then.

      That’s why I recommended to invest in Balanced Funds (mix of stocks and bonds) instead. Moderate risk, moderate returns for a 3 to 6-year investing horizon.

      But yeah, if she’s brave enough to decide to get a 30-year home financing, why be scared in investing in stocks? :)

  2. I have to agree with Rogie. Your advise is just about right. Personally, I wouldn’t want to be tied up for that long as well. I invest in stocks as well, btw.

    • Thanks Patrick! Would you suggest that she invest her monthly savings in stocks as well?

      • addiaz says:

        I was once stuck up with this 25yrs monthly amortization housing loan ten years back. Even though the monthly amortization was not much (P12K) as an OFW, however after 4-5yrs, it was unfortunate, I lost my job in KSA due to some reasons and went back to a local above average contractual/local employment in the Philippines for almost 2 yrs. while searching another opportunity abroad.
        Missing to pay for almost a year this monthly amortization was extremely, horrible considering penalties, other the bounced cheques(12months issued PDC cheques).

        I decided to settle with my real estate to cancel this loan, again the Maceda (real Estate) rule has totally ruined my dreamed home for my family, surprisingly I only refunded almost 15% (as far as I remember) of my total payments made.

        The question to you my Friend, think about your job security, and of course your age factor; can you sustain to work up to 30 years in your company esp. if you do not have other resources other than your current Job?

        I did promise to my wife I will not ever enslave my self to any monthly amortization (more than 5years term) loan.

  3. This is actually a good advise esp for those who are still starting a family or on the way to getting married. It’s like save/invest first before spend.

    • Thanks Sheila! I think it’s okay to desire to own a house instead of renting. However, as you said, it is better that we save and invest for it instead of getting one soon on “utang” that’s not even considered a leverage.

  4. Carlos says:

    Hmm… I guess I’m in the minority here. For me it’s always better to buy your own house. Rent can go up, and you’ll spend to repair anything you break. So you can have maintenance expenses too.

    Plus, in thirty years – even in just ten years – 17K won’t buy what it can today. And if you’re employed, you’d have gotten raises or found a higher-paying employer already. So the cost “shrinks” relative to your budget and relative to what it can actually buy.

    Plus, at some point, the loan is paid, and you don’t have to pay the mortgage anymore.

    Plus you don’t get value back for your money when renting. When owning, you can eventually sell it, gaining back more or at east part of what you spent on it. Or leave it to your children (for them to sell, rent or live in), ensuring that the money you paid is passed on to the next generation – allowing better wealth accumulation over generations.

    True, there are lots of fees and taxes with owning real estate. So you can’t just acquire one without checking if you have the financial means.

    But I’d still rather take out a loan now if i can make the monthly payments, so I can enjoy my house now. If the point of my investment is to by a house, then I’m “paying” a portion of my money to save up for it while another portion is just given away as rent. If both portions are enough to meet the house payments, it wouldn’t make sense for me to delay acquiring the house I want.

    But I do have a hard time believing a 2M loan will cost you an additional 4M in interest payments. And if that really is the case, then I’d rather pass on the loan too. But I might try a bank loan, and see if they give better terms (though they only go up to 20 years).

    P.S. With a bank, even at 9% annual interest, a 1M loan spread over just five years costs about 21K per month in payments. The “total” interest payments come up to only 26% of the loaned amount. So I’m not sure why a pag-ibig loan gets 200% interest over 30 years.

    • anonymous says:

      I agree with Carlos on the other viewpoint. My relative had already secured a 2M loan for 10 yrs and only paying 25k per month.

      She was able to save 15k in a
      monthly rent because of the financial decision to take out a loan. Of course, she has other options inorder to ensure that loan will be fully paid before
      the 10th year.

  5. Jax Mijares says:

    We should be smart in making decisions. Investing in your own home may not be the best investment. A home does not give back any financial returns. As Robert Kiyosaki wrote in his book, Rich Dad Poor Dad, if you consider your home as your biggest investment, you’re in trouble.

    Why not invest in income generating asset? Stock Market is a good choice if you know what you’re doing, and if you have the emotional fortitude when the market tanks on you.

    There are other alternatives. I found this website (www.forbeshall.com) and I’m contemplating on investing in it. The return may not be as high as the stock market but it’s definitely less risky.

  6. olivia says:

    i regret that i buy property before i invest
    :-(,,,,,,,,,,, but its not too late,tnx tgfi:-P

  7. Pingback: BurnGutierrez.Com

  8. You don’t understand. Owning a property is an investment that grows in significant value. Don’t be fooled when someone thinks a good investment should only returns financial cash returns..period (such as Robert Kiyosaki , a fraud: http://www.johntreed.com/Kiyosaki.html)

    Lots of historical studies have prove that real estate outperforms stocks in many occasions such as leverage and stability: http://ontarioaptbldgs.hubpages.com/hub/Real-Estate-vs-Stocks-How-Profitable-is-Real-Estate-as-an-Investment

    And the above studies is done in North America where it is a developed nation. Real estate value tends to even increase on developing nations (like Philippines) as opportunities of future economic or population growth in the future is greater.

    Owning a property is more flexible in building wealth as you have more options. You might want to live on your property. Or either rent or sell it when it grows in value (long term), etc.

    Wealth is measured in value not in cash you have on hand. Cash returns is prone to inflation and issues with currency and government. Traditionally only Gold and Real estate are the real forms of investment that already exists since mankind learns to trade goods, thousands of years ago.

    In fact, buying a property before any forms of investment (stocks, bonds, etc.) is a wise decision that you have made. Real estate tends to steadily increase in prices than stocks (that is volatile with much highs and lows). You have fewer real estate investment choices in the future.

    While Real estate has the power of leverage over stocks and other forms of investment, think twice how you are going to buy the property. If the loan percentage exceeds the rate of return for real estate property, be warned. You end up losing the leverage power. A good example is what Burn said, that buying a property for 2 million for 30 years, ends up actually paying 6 million. The question now is, does your 2 million property worth more than 6 million after 30 years??? Well it depends.

    Supposing an annual rate of return at 12%. This will double in value six years. Your 2 million worth of home would become 4 million after six years. But if you are paying the loan more than or equal to 12% interest rate, you end up losing or just breakeven (not good). This where the investment in real estate can go wrong.

    The secret of Real estate investment is buying what you can afford. Usually most people take the housing(lot + house) loan route because they want it now but they cannot afford to pay it now. But the interest rates of the loan might beat up the real estate rate of return.

    • Carlos says:

      Thanks for the link. I’ve heard Kiyosaki was a fraud, but never had seen the evidence before, so to speak.

      I’m glad I haven’t read the book; though a little sad as I know some and heard of a lot others who praise it.

      Cashflow wasn’t such a bad game, though it was heavily biased towards real estate.

    • addiaz says:

      I agree with you 100% Codex…well said… You are totally right!

  9. Chantee says:

    Salamat po

  10. Ben Alagnam says:

    For me, buying a house is a good investment specially to a young family. Yes it would be too costly for maintaining the house but you have to consider the future value of the lot that you have, we all know that prices of most lots are increasing in value every year. I am not sure why they don’t consider it as a good investment when you can sell it for a better price value once you get the lot title in the future.

    Invest in real property first and enjoy the benefit of the low monthly payment of P17,000/mo as of this year. I’m sure that this amortization will increase in few years from now.

    You can renovate your house at any time, but don’t invest in luxury things though.

    I have a small house and lot bought in 2003. The cost is P5,600/sqm. and paid through mortgage. It is now valued at P8,000/sqm. It grew 43% in 10 years, not a big investment, but it’s still good as I was a young and single working guy at that time and was living with my relatives’ house.

    Now I have a house that I can consider as my own and started investing to funds. This plan is most applicable to those who have limited resources like me.

  11. Ace says:

    Burn, I totally agree with your advice. Not counting the actual interest payments, risk is the greatest factor that your friend should consider. 30 years is a long time, and a lot of things can happen between now and then that could potentially be detrimental to your friend’s original plans. Sickness, job loss, death, among other things. As with any liability, the shorter the timeline, the better it is.

    Another thing that I might add is that your friend should consider scaling down his goals. Does he really need a 2M house? Most probably he can make do with 500K, considering the size of his lot. If he does indeed raise 2M, he can invest 1.5M in financial instruments and be wealthier than he started.

    Based on personal experience, I was able to build a house in the province with a 90 sqm floor area for a little less than 500K. The house was finished just 3 months ago, so the pricing I used here is very recent. Also, the cost of materials are a bit more expensive in the Visayas, so your friend should be able to build a comparatively sized house for the same amount of money. Going minimalist with the design is also key, as I always notice that houses in the Philippines would have a lot of unnecessary design features which generate a lot of waste materials, and wasted space, which of course adds up to the cost.

    It is good to spend a lot on a house that you plan on flipping in the near future, as it will be building equity. But if you plan on living in the house until you die and if you plan on giving it to your kids as inheritance, there is no real investment value on the house. Your friend also needs to consider the lot location. A 2M house will be a waste if nobody would even look at it since it is in a poor area.

  12. Bert Mendez says:

    Enjoyed reading the good arguments over the subject. In my case I applied for PAGIBIG housing loan payable in 15 years. The land is mine. Paying the monthly amort is enough in return for security of the family imho. I wont be worrying anymore of the monthly rents and the lipat bahay thingies should something wrong comes in the way. I +1 the point of Carlos and can relate very well. I have several parcels of land in my possession that may be idle for now but definitely will be of use in the future. I just need to be patient and find the right timing to decide what to do with this idle investment.

  13. MC Hammer says:

    Borrow money, invest in stocks, mutual funds, etc., then use the earnings to pay for your monthly amortization. That is how you make your money work. Enjoy life! Cheers!

  14. Great advice Mr. Burn. Why complicate life by getting into debt enslaving yourself to the lender and have no peace of mind?

    The rich rule over the poor, and the borrower is slave to the lender.(Proverbs 22:7)

    Problems arise if we stray from the wise teachings in the Bible.

    Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you.(Proverbs 22:26-27)

    Better not to be too eager to own a house, anyway people don’t die because of renting. I am not saying not to buy a house, but better to plan it well, save up, and invest for it first until there is enough money to pay it in full. There is always a proper time for everything, rushing things will only result to trouble due to poor planning.

    “Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’ (Luke 14:28-29)

  15. Rommel G. Gomez says:

    If he is going to Save/invest for the purchase/build of his dream house this will be the scenario; Lets use P17K as the maximum amount that he can spend from his Monthly budget.

    P17,000 – 6,500 (House rental) = P10,500 (This is the amount that he can save/invest)

    P2,000,000 / 10, 500 = 190.5 months or 15.8 years. ( He has to save/invest for 15.8 yrs for 2M)

    If he is going to invest his 10,500/month to UITF / MF to grow for at least 10%, then good. But prices of construction materials are also growing by approximately 8-10% PA, So The increase in the investment are almost equal ( or a bit higher) to the increase of material price. With this rate, he still need to save/invest for 15.8 years (or a bit less) for him to buy/build his dream house.
    Then he lost money on paying rent; P6,500 x 190 months = P1,235,000 (assuming that the rent will not increase in 15 yrs span, which of course won’t happen)

    So in my opinion it is better to take the home loan now instead of saving/investing then buy later. the following are the reasons;

    * His family will have to live on their own house without waiting for 15 yrs.
    * He won’t loose money on rental payment
    * The property will increase in Value over the time. Of course taking into consideration of the taxes and maintenance, but this are manageable.
    * Later if he has extra money ( Bonus, Salary increase, etc.) he has the option make a “Baloon” payment directly to the principal only ( interest not included) to reduce the paying time.

    And by the way, a home loan worth of 2M with 8% at 30 yrs term is P14,675/month base from the amortization table mostly use by the lending institution in the Philippines. If 20 yrs term, P16,729/month.

    Hope this could help..