REAL ESTATE FINANCE

Chapter 1: Real Estate Finance Overview

What Is an Estate?
An estate is everything comprising the net worth of an individual, including all land and real estate,
possessions, financial securities, cash, and other assets that the individual owns or has a controlling
interest in.

Understanding Estates
The word estate is colloquially used to refer to all of the land and improvements on a vast property,
often some farm or homestead, or the historic home of a prominent family. However, in the financial
and legal sense of the term, an estate refers to everything of value that an individual owns—real
estate, art collections, antique items, investments, insurance, and any other assets and
entitlements—and is also used as an overarching way to refer to a person's net worth. Legally, a
person's estate refers to an individual's total assets, minus any liabilities.
The value of a personal estate is of particular relevance in two cases: if the individual declares
bankruptcy, and if the individual dies. When an individual debtor declares bankruptcy, their estate is
assessed to determine which of their debts they can be reasonably expected to pay. Bankruptcy
proceedings involve the same rigorous legal assessment of an estate that also occurs upon an
individual's death.
Estates are most relevant upon the death of an individual. Estate planning is the act of managing the
division and inheritance of your personal estate, and arguably represents the most important financial
planning of an individual's life. Generally, an individual draws up a will which explains the testator's
intentions for the distribution of their estate upon their death. A person who receives assets through
inheritance is called a beneficiary.

KEY TAKEAWAYS
An estate is the economic valuation of all the investments, assets, and interests of an individual.
The estate includes a person's belongings, physical and intangible assets, land and real estate,
investments, collectibles, and furnishings.
Estate planning refers to the management of how assets will be transferred to beneficiaries when an
individual passes away.
Estate taxes may be levied on the value of one's estate at death.

What Is Real Estate?

Real estate is the land along with any permanent improvements attached to the land, whether natural
or man-made—including water, trees, minerals, buildings, homes, fences, and bridges. Real estate
is a form of real property. It differs from personal property, which are things not permanently attached
to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.

KEY TAKEAWAYS

• Real estate is a class of "real property" that includes land and anything permanently attached to it,
whether natural or man-made.
• There are five main categories of real estate: residential, commercial, industrial, raw land, and special
use.
• You can invest in real estate directly by purchasing a home, rental property or other property, or
indirectly through a real estate investment trust (REIT).

Understanding Real Estate

People often use the terms land, real estate, and real property interchangeably, but there are some
subtle distinctions.
• Land refers to the earth's surface down to the center of the earth and upward to the airspace above,
including the trees, minerals, and water.
• Real estate is the land, plus any permanent man-made additions, such as houses and other
buildings.
• Real property—one of the two main classifications of property—is the interests, benefits and rights
inherent in the ownership of real estate.

Broadly speaking, real estate includes the physical surface of the land, what lies above and below it,
what is permanently attached to it, plus all the rights of ownership—including the right to possess,
sell, lease, and enjoy the land.

Real property shouldn't be confused with personal property, which encompasses all property that
doesn't fit the definition of real property. The primary characteristic of personal property is that it's
movable. Examples include vehicles, boats, furniture, clothing, and smartphones.

Physical Characteristics of Real Estate

Land has three physical characteristics that differentiate it from other assets in the economy:

1. Immobility. While some parts of land are removable and the topography can be altered, the
geographic location of any parcel of land can never be changed.
2. Indestructibility. Land is durable and indestructible (permanent).
3. Uniqueness. No two parcels of land can be exactly the same. Even though they may share
similarities, every parcel differs geographically.

Economic Characteristics of Real Estate

Land also has some distinct economic characteristics that influence its value as an investment:

• Scarcity: While land isn't considered rare, the total supply is fixed.
• Improvements: Any additions or changes to the land or a building that affects the property's value is
called an improvement. Improvements of a private nature (such as homes and fences) are referred
to as improvements on the land. Improvements of a public nature (e.g., sidewalks and sewer
systems) are called improvements to the land.
• Permanence of investment: Once land is improved, the total capital and labor used to build the
improvement represent a sizable fixed investment. Even though a building can be razed,
improvements like drainage, electricity, water, and sewer systems tend to be permanent because
they can't be removed (or replaced) economically.
• Location or area preference. Location refers to people's choices and tastes regarding a given area,
based on factors like convenience, reputation, and history. Location is one of the most important
economic characteristics of land (thus the saying, "location, location, location!").

Types of Real Estate

There are five main types of real estate:

1. Residential real estate: Any property used for residential purposes. Examples include single-family
homes, condos, cooperatives, duplexes, townhouses, and multifamily residences with fewer than five
individual units.
2. Commercial real estate: Any property used exclusively for business purposes, such as apartment
complexes, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants,
shopping centers, stores, and theaters.
3. Industrial real estate: Any property used for manufacturing, production, distribution, storage, and
research and development. Examples include factories, power plants, and warehouses.
4. Land: Includes undeveloped property, vacant land, and agricultural land (farms, orchards, ranches,
and timberland).
5. Special purpose: Property used by the public, such as cemeteries, government buildings, libraries,
parks, places of worship, and schools.

How the Real Estate Industry Works

Despite the magnitude and complexity of the real estate market, many people tend to think the
industry consists merely of brokers and salespeople. However, millions of people in fact earn a living
through real estate, not only in sales but also in appraisals, property management, financing,
construction, development, counseling, education, and several other fields.

Many professionals and businesses—including accountants, architects, banks, title insurance

companies, surveyors, and lawyers—also depend on the real estate industry.

Real estate is a critical driver of economic growth in the U.S. In fact, housing starts—the number of
new residential construction projects in any given month—released by the U.S. Census Bureau is a
key economic indicator. The report includes building permits, housing starts, and housing completions
data, divided into three different categories:

• Single-family homes
• Homes with 2-4 units
• Multifamily buildings with five or more units, such as apartment complexes1

Investors and analysts keep a close eye on housing starts because the numbers can provide a
general sense of economic direction. Moreover, the types of new housing starts can give clues about
how the economy is developing.

Example: Housing Starts

For example, if housing starts indicate fewer single-family and more multifamily starts, it could indicate
an impending supply shortage for single-family homes—which could drive up home prices. The
following chart shows 20 years of housing starts, from Jan. 1, 2000, to Feb. 1, 2020.

How to Invest in Real Estate

There are a number of ways to invest in real estate. Some of the most common ways to invest directly
include:

If you buy physical property (e.g., rental properties, house flipping), you can make money two different
ways: Revenue from rent or leases, and appreciation of the real estate's value. Unlike other
investments, real estate is dramatically affected by its location. Factors such as employment rates,
the local economy, crime rates, transportation facilities, school quality, municipal services, and
property taxes can drive real estate prices up or down.

Pros
• Offers steady income
• Offers capital appreciation
• Diversifies portfolio
• Can be bought with leverage

Cons
• Is usually illiquid
• Influenced by highly local factors
• Requires big initial capital outlay
• May require active management and expertise

You can invest in real estate indirectly, as well. One of the most popular ways to do so is through
a real estate investment trust (REIT)—a company that holds a portfolio of income-producing real
estate. There are several broad types of REITs, including equity, mortgage, and hybrid REITs. REITs
are further classified based on how their shares are bought and sold:

• Publicly traded REITs

• Public non-traded REITs
• Private REITs

The most popular way to invest in a REIT is to buy shares that are publicly traded on an exchange.
Since the shares trade like any other security traded on an exchange (think stocks), it makes REITs
very liquid and transparent.

Like many stocks, you earn income from REITs through dividend payments and appreciation of the
shares. In addition to individual REITs, you can also invest in real estate mutual funds and real
estate exchange traded funds (ETFs).

What We Like
• Liquidity
• Diversification
• Steady dividends
• Risk-adjusted returns
What We Don't Like
• Low growth/low capital appreciation
• Not tax-advantaged
• Subject to market risk
• High fees

Mortgage-Backed Securities
Another option for investing in real estate is via mortgage-backed securities (MBS). These received
a lot of bad press due to the role they played in the mortgage meltdown that triggered a global financial
crisis in 2007-08. However, MBS are still in existence and traded.

The most accessible way for the average investor to buy into these products is via ETFs. Like all
investments, these products carry a degree of risk. However, they may also offer portfolio
diversification. Investors must investigate the holdings to ensure the funds specialize in investment-
grade mortgage-backed securities, not the subprime variety that figured in the crisis.

MBS Examples
Two popular ETFs that give ordinary investors access to MBS include:

• The Vanguard Mortgage-Backed Securities ETF (VMBS): This ETF tracks the Bloomberg
Barclays U.S. MBS Float Adjusted Index, made up of federal agency-backed MBS that have
minimum pools of $1 billion and minimum maturity of one year.
• The iShares MBS ETF (MBB): This ETF focuses on fixed-rate mortgage securities and tracks
the Bloomberg Barclays U.S. MBS Index. Its holdings include bonds issued or guaranteed by
government-sponsored enterprises such as Fannie Mae and Freddie Mac, so they are AAA-rated.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on
race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are
steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or
with the U.S. Department of Housing and Urban Development (HUD).

The Pros of Real Estate Investment

1. Real Estate Appreciates Over Time
Well-chosen real estate appreciates over time, generally at a rate that far outpaces annual inflation.
Yes, there are occasional market corrections, and people can buy the wrong type of property at the
wrong time. But I've found there is always a chance to buy a quality property at a discount, make
improvements to increase equity and eventually sell for a profit. It's the real estate equivalent of the
stock market mantra to “buy low and sell high.” And real estate always has an intrinsic value. A stock
can go down to zero, but a property is a tangible asset that will always have value derived from both
the raw land and the “improvements” (the building structures attached to the ground).

2. Real Estate Has Unique Tax Benefits

Real estate's unique tax benefits allow investors to grow their wealth over time. Rental income is not
subject to self-employment tax, and the government offers tax benefits to real estate investors. These
include depreciation and significantly lower tax rates on long-term profits. And depending on your
income level and classification as an investor or real estate professional, there is a good chance your
rental property will give you an overage of tax deductions you can use against your other income.
Rental real estate is a business, which means many expenses, such as travel costs to check on your
properties, are tax-deductible expenses of running your business.

3. Real Estate Provides a Steady Cash Flow

Rental properties can provide a steady flow of monthly income called “cash flow.” This is the extra
money that is left after all the bills have been paid. Once your property is set up, cash flow provides
ongoing, monthly income that is mostly passive, allowing you to spend your time building a business,
spending time with family, or reinvesting in more real estate.
If you're looking to buy a rental property and need help figuring out the market, you can use a free
service like HomeLight to find a real estate agent in your area who can help you find the best deal
for you.
4. Real Estate Lets You Use Leverage
You can use the power of leverage to quickly grow your real estate holdings and accelerate your
wealth-building results. Leverage is the use of borrowed capital to purchase and/or increase the
potential return on investment. Leverage, when used wisely to minimize risk, is a powerful advantage
of real estate investing. Using a conventional loan, you can buy an investment property with a 20%
down payment. So, for example, with an initial investment of $30,000, you get the opportunity to
control — and get all the benefits of owning — an asset worth $150,000. Done with proper due
diligence, you can build your wealth exponentially using leverage, especially in the low interest-rate
market we're currently enjoying.

5. Real Estate Builds Equity

When you use leverage wisely, your tenants are essentially buying the property for you. Rental
income pays down your loan each month and builds equity for you. When you buy a rental
property using a mortgage, your tenant is the one paying the mortgage payment, thus increasing your
net worth each month. Think of it as a savings account that grows automatically without your
depositing money each month.
Today you might owe $200,000 on a rental property, but next year you might owe only $195,000
because the tenant is making the payment for you, making you $5,000 richer. Thirty years down the
road (or whatever the term of your loan), it's paid down to $0. You own a significant asset that you
can sell or continue renting, all thanks to your tenant paying the mortgage.

6. Real Estate Gives You Control

You have a lot more control over your overall investment success with real estate than with other
investing classes. You can't sit in the boardroom and steer management decisions that influence the
value of the stocks you own. With real estate investing, you are in the driver's seat of a lot of decision
making. You can mitigate risks and grow your portfolio at a much faster pace investing in real estate.
As a real estate investor, I'm in control of my success or failure. When I want to find deals, I can
hustle. In a competitive rental market, I employ strategies to make sure the best tenants are attracted
to my properties. I can make strategic improvements to increase rental income.

7. Real Estate Provides a Hedge Against Inflation

Inflation is the economic reality that prices increase over time due to the value of money decreasing.
The annual inflation rate varies. For the 12 months ending June 2019, the U.S. inflation rate was
1.6%. In 2011, the inflation rate was 3.2%.

Inflation erodes the value of many investments. If your annual gain last year from your stock portfolio
was 5.5%, your actual profit was only 3.9%, with the purchasing power of your money decreasing by
the rate of inflation.

Real estate investments keep pace with inflation. As the price of a loaf of bread goes up, so do rents
and property values. The one thing that doesn't increase is the monthly cost of a fixed-rate mortgage
payment. So as your annual rental income increases, your cost of ownership doesn't. As inflation
pushes the cost of living higher, your cash flow increases. And inflation drives up the value of the
property itself. In 10 years, when I want to sell, my properties will be worth a lot more than they are
now.

The Cons of Real Estate Investment

Real estate Investing also has some disadvantages to consider carefully before jumping in.

1. Real Estate Requires Money

You need money to make money. Forget the gurus who promise, “You can get rich buying real estate
with OPM (Other People's Money).” While you can buy shares of stock with a minimal cash outlay,
real estate investing requires money. To get started, you'll need a down payment plus closing costs
and money to repair and update the property to maximize rental income. And once you own the
property, there will be ongoing expenses like property taxes, insurance, mortgage payments, and
property maintenance.

2. Real Estate Takes a Lot of Time

You need to spend time learning and managing your real estate investments. There's a learning
curve, and you can lose a lot of money in real estate if you don't know what you're doing. On top of
that, actively managing your rental properties can be time-consuming.
However, some services can do the “heavy lifting” when it comes to managing your rental
property. Roofstock is an online investment platform that lets you purchase turnkey rental properties.
That means, if you choose, you don't have to lift a finger. The service's certified property managers
can do all of the work for you. Plus, properties listed on Roofstock are pre-vetted and already cash-
flow positive.
3. Real Estate Is a Long-term Investment
Real estate should always be bought with a longer-term strategy. You're buying a tangible asset that
you can't quickly liquidate for cash if you need emergency funds. It takes time to sell a property, and
the transaction costs are higher than selling stock shares.

4. Real Estate Can Be Problematic

Tenants can cause problems and cost you money and valuable time wasted in court. If you own rental
properties, your cash flow can take a significant hit if you end up renting to a tenant who doesn't pay,
leaves the property in very poor condition when they move out, or both.

In Maryland, where I invest, the law is very “tenant-friendly,” and you must take a non-paying tenant
to court three times before you can seek possession of your property from them. And when you do
evict, you'll likely have to shell out money to repair the damage your unhappy tenant did to your
property.

5. Real Estate Benefits Don't Always Apply

At certain income levels, some of the tax benefits no longer apply. Before you assume you qualify for
any breaks, you should consult a tax professional with experience in real estate.

6. Real Estate Investing Has Unique Risks

Risks need to be understood and mitigated as much as possible. Following are a few of the
significant risks of investing in real estate:
• Buying the wrong property at the wrong time
• Increased liability for accidents that may occur on your property
• Getting stuck with a “professional renter” who knows how to work the legal system at your
expense
• Getting overleveraged. This is a pitfall that brings down many real estate investors. You need to
be able to make monthly payments on your debt despite market dips, tenant problems, property
vacancies, unexpected repairs, maintenance costs, and other expenses that are part of doing
business when investing in real estate.

Real Estate crowdfunding services such as Fundrise and RealtyMogul can answer many of the
issues raised above. We recommend that you check them out first.

Summary
The main reasons people invest in real estate are to:

1. diversify their investment portfolio with an asset class that's not directly correlated to the stock
market,
2. generate monthly income from rental cash flow, and
3. benefit from long-term capital appreciation.

Active real estate investing isn't for everyone because there are unique hurdles and risks.

Purchasing and owning rental properties isn’t going to begin building wealth instantly. Real estate
can be an incredibly powerful wealth creation strategy, but only if you work it right. You must learn to
find, evaluate, and purchase good real estate deals. You need to build a team of go-to contractors,
lenders, property managers, and other professionals who provide competent services at reasonable
prices.

As you build your rental portfolio, you can put systems in place that limit the need for your active
involvement. Then your wealth steadily grows through passive income, increased equity through debt
paydown by your tenants, and long-term capital appreciation. It works for me!

(https://investorjunkie.com/real-estate/pros-and-cons/)
 Chapter 2: Philippine Government Programs for Housing

A. National Shelter Program

The NSP is our flagship program designed to assist the homeless—in particular, the informal settler
families (ISFs)—and the low- and middle-income Filipino families. It has three major components,
namely, regulations, finance and production.

As the primary agency mandated for the management of housing and the sole planning and policy-
making body for human settlements and urban development in our country, the Department of Human
Settlements and Urban Development (DHSUD) is so structured to meet the desired output of the
NSP.

The DHSUD, through its various bureaus and services, provides regulatory functions while our key
shelter agencies (KSAs)—composed of the Home Development Mutual Fund or Pag-IBIG Fund,
National Home Mortgage Finance Corp. (NHMFC) and Socialized Housing Finance Corp. (SHFC)—
are in-charge of the financing side. The National Housing Authority (NHA) serves as the primary
production unit.

As the regulatory arm, DHSUD conducts comprehensive, data-driven and evidence-based studies
and research, including practical approaches and strategies to craft housing and urban development
policies, plans and programs in pursuit of the NSP. We work closely with the private sector to ensure
coordinated and synchronized public-private efforts in the housing industry and a whole-of-nation
approach in addressing the gap.

As a personal advocacy, we closely engage other government agencies, non-government

organizations (NGOs) and housing partner-developers to align our policies and programs with them
and develop synergies in the process. In fact, we have forged partnerships with these groups and
other stakeholders in order to come up with more comprehensive, more effective regulations and
policies that will serve as a solid foundation of the housing industry.

On the other hand, our KSAs, as the finance and production arms, have been pro-actively adapting
to the challenges in close collaboration with the private sector and other stakeholders in order to
assist our member-beneficiaries, especially during the pandemic. This was proven by the three-month
moratorium implemented by the KSAs upon President Duterte’s declaration of the enhanced
community quarantine last March 2020.

Apart from finding ways to ease the burden of its members through the moratorium and adjustment
in loan rates, Pag-IBIG also increased its House Construction Financing Line to P10 billion from only
P2 billion, to serve as a housing stimulus package. This would assist our partner-developers,
especially small and medium developers, by sustaining their financial needs for housing construction
amid the pandemic. The SHFC, NHMFC and NHA meanwhile remain focused on improving their
services through innovative programs designed to provide easier access to housing.

All these innovations and collaborations are meant to ensure that our programs, guidelines, rules and
regulations are aligned with the policies, frameworks and strategies set by the department in pursuit
of the NSP.

After all, we consider house ownership as a right and it is our responsibility to assist and support the
81 percent of Filipino families who dream to have a house they can call their own.
B. Housing Agencies in the Philippines

Home Development Mutual Fund or Pag-IBIG

PAG-IBIG stands for Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya at Gobyerno, these
are the four sectors in the society that the agency continues to gear up in providing Fund members
suitable housing through the effective saving arrangement. This is an opt solution for the need for a
national savings program and financing Filipino workers for affordable shelter. The Fund was
established on 11 June 1978 by Presidential Decree №1530 to primarily address two basic and equally
important needs. The said law is to be administered by two agencies, the Social Security System
handling for the funds of private employees and Government Service Insurance System for the savings
of government workers. The principal functions of PAG-IBIG are to provide low-cost and socialized
house, use funds to provide decent budget-friendly condominium units, to stimulate competition for
better housing packages and other extended fund matter.

Home Guarantee Corporation

HGC helps Filipino homeownership by seeking banks and financial institutions to lend out homebuyers
and housing developers. The agency assures lenders through issuing loans and securitization
guarantees. The corporation’s guarantee programs are: Developmental Loan Guaranty, covers
developers’ loan for subdivision, townhouses, dormitories, apartments and other residences;
Retail Loan Guaranty for loans and credit facilities extended to purchase for a single residential family;
Guaranty for Securitization Schemes assurance on securities and/or financial instruments or on the
receivables. The HGC guaranty is available for banks, government, private institutions, housing
developers, Building and Loan associations. The following potential applicants must request a
Guaranty Line from HGC and at the time of approval, grantees may then enroll their accounts.
Housing and Land Use Regulatory Board

Considered as the Philippines’ primary government agency, Housing and Land Use Regulatory Board
are assigned in providing technical support including but not limited to Housing Regulations, Land
Development and Homeowners Associations, and Settlement of Land Disputes. The operations are
through three strategies namely: policy government, planning, and regulation. Homebuyers,
developers, homeowners associations, brokers and local government units are the beneficiaries of the
aforementioned services. More of HLURB aids, this government agency is also responsible as a
mediator for land conflicts, assures the stability of housing projects, provides licenses to sell
condominium units and oversees the organization of homeowners associations. All its offered services
ought to achieve development and economic advancement toward equitable benefits.

National Housing Authority

Sole national agency’s National Housing Authority is administered in housing production for financially
challenged families. To develop a comprehensive and integrated program, housing development,
resettlement, sources and schemes of financing and delineation of government and private sector
participation are the functions of the agency. The programs of NHS are focusing on the following
concerns: informal settlers family that involves relocation and resettlement of families living along
troubling areas most particularly along waterways such as creeks, rivers, and esteros; regional
resettlement programs for families that are affected by infrastructure projects, it also entails the
provision of the housing units, community facilities, socio-economic and other support programs;
housing assistance programs for calamity victims; settlements upgrading program to address tenure
security , covers survey and titling of individual lots for disposition to qualified occupants; AFP-PNP
housing program to provide decent and affordable housing to low-salaried personnel of the Armed
Forces of the Philippines (AFP), Philippines National Police (PNP), Bureau of Jail Management and
Penology (BJMP0, Bureau of Fire and Protection) (BFP), and the Bureau of Corrections (BuCor).

National Home Mortgage Finance Corporation

If one is looking for home mortgage government guidance, National Home Mortgage Finance
Corporation has its sets of duties. NHMF is responsible for operating viable secondary home mortgage
market and monitor performance and implementation of the Community Mortgage Program (CMP) by
its solely owned subsidiary, the Social Housing Finance Corporation (SHFC). National Home Mortgage
Finance Corporation aims to provide liquidity to the housing sector through securitization of mortgage
and as well as assets through: promoting stability to the housing finance system starting with active
participation in the capital market; establishing efficient and effective organization with professional
workforce utilizing best practices; maintaining adeptness in operation and productiveness in financial
management to ensure program sustainability, and managing subsidiaries effectively.

Social Housing Finance Corporation

Social Housing Finance Corporation is the secondary of National Home Mortgage Finance Corporation
(NHMFC) that is tasked to handle the distributions of loans from the Community Mortgage Program
and other housing loan programs for low-income families and informal settlers. As mandated, SHFC
has programs that strongly aid the mortgage process such as the Community Mortgage Program
(CMP), funded by the government to help organize informal settlers secure land tenureship. A loan is
provided for qualified informal settlers to finance the acquisition of an undivided tract of land which
they are presently occupying. On the other hand, Abot-Kaya Pabahay Fund (AKPF) is also part of
such programs. It has two components specifically the amortization and development financing to
assist families in paying their housing loans and support private developers.

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