Bring Him Home ASAP!!!

A friend of mine has asked me for advice about buying a Lot in a nearby village. She and her husband have managed to save about 250k and were ready to make the purchase. Her husband has been working overseas and sends money back on a regular basis. They have young children and can save about 10k a month. They currently live in a small unit which they own.

Sounds like a good move right? Invest in the Lot so that one day they can build their dream house. Land prices never go down diba? Well... It’s not bad but it’s not what I would do... Here's why:

• The Lot once they buy it doesn't generate any income or benefit. It just sits there doing nothing. Remember if the asset doesn't earn any money I don't consider it an investment.
• I estimate they will need 1m to 2m to build a house. Saving 10k a month they will need 8 to 16 years of saving!!! That's a long time not to generate any income or benefit from an asset.
• The general assumption is land prices always go up but this is NOT ALWAYS TRUE. When the time comes that you want to sell the land, there is not always a ready buyer AND if there is, it’s more often below market value.
• They will also have expenses in maintaining property - real estate tax and some maintenance costs. Imagine it doesn't generate income and you still have expenses!
• This last point is the most important. They already have a place to live. The husband works overseas and therefore he has to endure the suffering of living away from his family. He can't generate the same level of income here so he will be away from his family for at least 8 to 16 years just to save for the house. Remember this is just for the house, they still need to save for their retirement income!!! That will probably take another 16 years. At this rate his kids will grow up without their dad! (See Apr. 9 Blog - It's Hard to Say Goodbye)

At this point, they have to ask themselves what is more important to them. Living in a nice house (which the family may never enjoy) or being able to bring her husband home as quickly as possible and live as a family? If the answer is the second then here is what I would do:

• Focus on the saving, not on the lifestyle. Make do with what you have. REMEMBER!!! Every peso saved brings him home just that little bit sooner! Think that way about everything you spend from now on because every peso counts. (See Jan. 4 Blog - Na Libre Ka? Invest Mo!)
• Invest the 250k and the 10k a month. At 12% p.a. compounded over 16 years it will grow to 7.3m!!! Enough for them to retire on already! Once you have the cash then you can go out and buy your dream house. If you pay in cash, I promise you, you will get a better deal!

So remember it's ok to buy a Lot but you have to be able to generate a good income or benefit from it from day one, and that means you need to have the money to build a house on it. If you don't then you might be making one of the worst investments you will make.

For more information on how I can help you email me on hoover@barongroup.com.ph.