Buy your second house first

Filipinos love houses. It’s no secret that the ubiquitous Filipino seaman pays for a window this month, a wall next month, the backyard the following month…all in the name of a happy house for his family.

Today’s Money Myth Buster is really easy. The tip is: Buy your second house first.

The common tendency is to buy the dream house on the first try. That means buying the one that has the ideal living room, the kitchen that opens up to the east, the house with a bath for every bedroom and two or more guestrooms. Budgets are stretched to the limits. A few months later, amortizations and other hidden costs and series of unexpected expenses become totally agonizing. This tip says this is not a smart way to buy a house.

Go for your second house first. Buy a simpler, more affordable one that will fit your cash flow and shelter your family without putting your savings and retirement planning in the backburner. When the cash flow gets better, then upgrade to a better house and lease or sell the first one.

Makes very good sense to me.

Also, be very careful in analyzing projected amortization costs, especially when you are considering in-house financing. These days, developers use balloon payment methods that make monthly amortizations appear very affordable. They will show a computation sheet that will put monthly payments at below P25,000 for example, and then require you to pay P150,000 on the 20th month. That’s dangerous because majority of Filipinos don’t have the discipline to program their spending.

In general, bank financing is cheaper than developers’ in-house financing. I heard that Megaworld’s financing deal with Security Bank is the most attractive deal in town. I haven’t seen the figures yet, but because the statement came from a competitor, I would say it’s worth taking a second look.

Don’t forget to budget for one-time expenses and hidden costs like transaction fees or broker fees, new appliances and furniture which you will surely buy for your swankier home, installation costs of these appliances, real estate tax, the cost of moving to your new home, among other things. These are smaller expenses, but taken together can set you back at least P50,000.

Remember the seaman? Contrast Filipinos with the traditional Chinese businessman, who puts off buying a ritzy house for his family. He will rent a P20,000 apartment, use the first floor as a warehouse or automotive supply store or whatever, then use the second floor as his family’s living area. His revenues from the store more than pays for the P20,000 rent and he doesn’t have maintenance and real estate tax payments to worry about.

I know not all of us will follow the footsteps of the Chinese businessman. There is nothing wrong with wanting to get a good home for your family. But go into the deal with wide eyes, well prepared for the expense. You may think it is an investment, but it really will be first and foremost, a sinking black hole of expenses if you are not careful.

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