Before anything else, I’d like to congratulate you on owning a rental property. You’re one step closer to financial freedom. If this was your first rental property then double the congratulations! Acquiring your first property is remarkably harder than your second or 100th property. Keep at it. You’ll find it gets easier down the road.
But what if you need cash? If selling your property seems like the only viable option, you may want to consider these options first.
Let me throw in some qualifiers:
- Financial freedom that aligns with your ‘why’ is your end goal.
- You’re looking to accumulate rental properties that generate enough passive income for your end goal.
- You’re in the accumulation phase; you don’t have a portfolio of properties yet.
- You’re unlikely to find a buyer at a price that covers a reasonably high required return to cover capital gains and other transaction expenses, as well as the value of your time. Say your property is valued at Php5 million and a buyer is willing to settle at Php50 million then that’s almost a no-brainer (almost).
- In reference to number 4, we’re assuming your valuation is correct.
In other words, if you can sell your property at a price that’s reasonably fair for both parties, but your ultimate goal is the accumulation of rental properties for financial freedom, these may apply to you.
Always review your options because there are other ways to get cash out of a property.
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Get equity through a financial institution
Most financial institutions allow you to take a loan out of your property. The loan is typically 60% to 80% of your property’s value, and you can use the cash to invest in another property. This is one way to get into the BRRRR strategy (here’s a primer on BRRRR investing in the Philippines). It’s worth noting though that not all financial institutions allow this. Large banks in the Philippines are generally more apprehensive and you might have better luck with smaller banks or cooperatives. Others occasionally allow specific loan-types for particular uses and you’ll have to state your purpose.
I’ve found the best way to do this for middle-income earners is through a smaller bank or credit union via a multi-purpose loan.
Lease-options
Personally not a fan of lease-options, more popularly known as rent-to-own, but it is a viable option. Rather than immediately selling for cash, your higher-than-market rental rate (at the paid advance and security deposit) might be sufficient to cover your cash needs and you can negotiate the terms of the future sale. This approach also allows you to get a higher ROI than a typical sale. If the tenant doesn’t exercise the option, the property remains in your name and you can repeat the process.
Tax exemption on CGT
I’d like to point out that if you do decide to sell, there is an exemption from capital gains on the sale of a principal residence. Please consult your lawyer on the technicalities but just know that this exists. Capital Gains Tax – BIR
Buy & sell vs. buy & hold
Buy & sell strategies (potentially) allow you to gain more profit and scale up faster. There’s no one strategy that fits everyone but my bias is in the buy-and-hold strategy.
Buying and selling may make you lots of income, but it doesn’t mean you’re free until you pay your debt off and hold for passive income – income with little work. You have to remember that in real estate,
the moment you stop buying and selling, your income goes away.
The buy and hold strategy doesn’t mean you’ll never sell. It just means you have a bias towards holding property rather than selling. If the potential return on a sale is substantial and it allows you to invest in more buy & hold properties, then that is a reasonable route that I’d argue falls into buy & hold.
Getting your equity out of your property through a financial institution is, in my opinion, the best way to get some cash and purchase another property. Seriously consider this option before selling your property. I talk about the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) in another post.
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