It’s been a rainy two weeks here in Cebu. We got hit by a typhoon for the nth time this year. City streets get flooded after only a few hours of rain. These are unusual weather conditions for Cebu but we have to adapt.
My current net worth is:
PhP 4,394,994.26 / USD 84,519.12
It is composed of:
Real estate 45.66%
Stocks etc 19.79%
Car value 13.58%
When stars align
This 2019, FH and I bought a house. We had been looking for a house since 2017 but this year, somehow the stars aligned and we finally found one we actually liked at a price we’re comfortable with.
We had gone through several heartaches in the process of house-hunting such as finding a house only to find it had already sold just 10 minutes before we were to pay the downpayment for it! Or finding a house we liked but which, at that time, we felt was just way beyond our budget, having no idea that our incomes would rise as quickly as they did.
The house will be a new build by a developer, located right here in Cebu City. It’s one of those “pre-selling” houses where we pay the developer for technically just a promise that they’ll build such house. In return, we get a period of time to pay the downpayment/earnest money.* The developer gets to use our money interest-free.**
We considered buying a bare lot and building a house on our own. Buying a bare lot is certainly cheaper and you can just wait while you save for the construction cost of building your own home (i.e. hiring your own contractor), instead of buying one from a developer. After calculating the possible cost though and intervening rising cost with time, I figured that it made better sense to buy a combo of a house+lot.
We also scrapped this idea after hearing my mom’s horror stories about unexpected costs going way beyond budget and having to deal with absentee construction workers or delays in construction. You must also bear the risk or liability in case a construction worker falls or meets an accident at the site. That’s the scariest bit right there.
Lastly, managing a house construction requires your presence at your home x times a workweek, time which FH and I did not have.
The gross selling price of the house is less than 3 times our net annual household income. FH and I are making at least a 40% downpayment within a certain period of time prior to moving into the house. Hence, the 45% real estate portion of my net worth. We are sinking a lot of money into real estate right now and I have to admit, it is scary. I have always been of the position that homes are illiquid investments and especially so for a residential home which we will be living in that will not be earning us any form of income.
Everytime I contemplate early retirement though, a nagging thought always arises: Where are we going to live out our retirement years?
You can’t occupy your rental properties as you’ll forego the income from them. You can’t expect that your landlord will keep your rental rate steady for decades to come. And if your rental cost does inevitably rise, will your retirement income be steady enough to cover it? You run the risk of losing a roof over your head during your most vulnerable retirement years. And you cannot risk that.
Best case scenario, FH and I hope to make up to a 50% downpayment, leaving only a 50% balance which we plan to finance through government financial institution PAG-IBIG. By that time, we anticipate lower monthly payments as we already front-loaded the
stressful time of paying huge monthly payments (which we are doing now.)
We could have easily gone the easy route and paid only 20% downpayment, moved in, and financed 80% of the rest of the house price. But then we would be stuck with paying high monthly payments for the entire life of the future house loan–a longer period of time. Also, this costs more in interest. So we are front-loading. Hehe.
Construction is already underway and the house should be finished sometime in 2020.
Opportunity cost / Effect on early retirement
As there’s no house delivery yet, it does not have to be paid in full yet and there is no loan for us to take out yet. The period to pay the downpayment to the developer does not incur any interest and is consequently, not a liability yet. FH and I plan to do a 15 to 20 year loan term depending on our asset allocation at the time that we get the loan.
A 15-20 year loan term means that by the time that we pay off the house, FH and I will be in our late 40s to early 50s. Not extremely early but still a decent age to RETIRE.
On the downside, by buying this house FH and I incur the opportunity cost of investing this huge sum of cash in other income-generating assets instead. These assets could have exponentially grown our retirement nest egg or enabled us to retire EARLIER.
On the other hand, I doubt that I will be investing this aggressively in other assets if we had not bought a house. I doubt I will have that discipline. I will probably end up spending that money elsewhere–travel, bags, or other. House-buying certainly has the effect of forced saving. My year-to-date saving rate has certainly improved to 65.26%, up from 54.43% in 2018.
Also, a house and all its maintenance costs could end up inflating our fixed operating costs. We currently live a simple life with minimal monthly expenses. We will be acquiring four bedrooms and three bathrooms that we will have to maintain. We should be running an airbnb! Haha.
On the upside, FH and I are in that stage of our lives that we are finally ready for a home and to establish our roots. A place where we can grow old together. We are ready for a permanent address.
How do you feel about buying a home?
*Payment of earnest money SHOULD mean that there is already a transfer of ownership, at the very least for the parcel of land where the house is to be built.
**Under the Maceda Law, if you pay installment payments for at least 2 years or 24 months and you back out of the deal, the developer is duty-bound to return at least half of what you paid.
This law is the reason why most property developers require you to pay your downpayment for LESS than 24 months so that should your circumstances change or the developer fails to deliver the unit on time/breaches your contract, you WON’T be able to take back your money should you back out of the deal.
FH and I are lucky though that although our DP period is less than the statutory 24 months, our developer undertook to return at least 50% of the DP, should we back out. So we always have that option prior to delivery of the house.