Short Term Loan versus Long Term Loan

A friend of mine messaged me how I was. He's an ex-colleague from a previous company I was working with. After some small chit-chat he was asking about the equity that I'm currently paying. Here goes our conversation which I translated in english. I also just picked the parts of our conversation that are meaningful.

Friend: I have a small question... you have 2 condo units in Philippines right? You're done paying the equity?

Me: Yep... I'm still paying it though...

Friend: What's your plan after paying the equity? Are you gonna take loan in Philippines?

Me: I'm gonna have it rented. Yep, I'll take a loan in the Philippines.

Friend: I checked the interest rates and its quite expensive...

Me: Yeah! It's really like that... how much is the interest rate? I'll give you a good link listing the interest rates of banks in the Philippines...

Friend: I checked BPI (Bank of Philippines Islands). I used their loan calculator. The amount of 2 million pesos for 10 years will become 3.5 millions plus after everything gets fully paid.

Me: I see... Just remember to negotiate with several banks to get the lowest interest rate. Mine... I'm planning to have the tenant pay the remaining balance.

Friend: Hmmm... it's really expensive though if the tenant will pay my monthly amortization... Let's say my estimated monthly amortization would be 25 thousand pesos so it would be too much for the tenant to pay this amount every month...

Me: Most likely you have to divide with the tenant your monthly amortization expenses. My plan though is to have a loan that is around 30 years to pay so that I will have an amortization of around 10K-12K per month which my tenant can shoulder.

Friend: What?! The interest should be quite high if it's a 30 year loan...

Me: Yeah! Interest should be high but the tenant will be the one to pay it anyways... :)

Friend: Hmmm... you're right... you have a point.

Me: In the long run you will also get some passive income since every year your rental fee should increase while your amortization will stay fixed... :)

Friend: Nice... hehehe! But I'll try to take a loan here in SG if they will allow... if not I will try to follow your plan. Is it ok? hehe!

Me: Sure! We can share some info with our friends who also invested in Condominiums back in our country. That would be cool... :)

My friend is planning to get a loan that is payable for 10-15 years to pay his Condo unit. My take on this is that it's better to have a loan which would be payable in 25-30 years. Yes, it will have a high interest rate. But with this strategy you can have the tenant pay the monthly amortization thus making your property self liquidating. Aside from that you will also get some passive income every year as your rental fee goes up. Of course your monthly amortization will stay fixed for 30 years.

Getting a loan for short term let's say payable in around 5-10 years would be ideal if you have some extra cash or extra savings that you can convert into solid asset. This is also an advantage since after fully paying your property you can negotiate with a bank to have your property as a collateral so you can get additional properties or assets. You can do this method infinitely which is the reason why I got interested in real estate investing compared to paper assets.

Short term or long term loan has its own advantages and disadvantages. Just be sure to understand what are the implications or scenarios before choosing which type of loan is appropriate based on you current financial situation.

I hope you learned something from it and hope it will help in your decision what type of loan you'll get in the future. Just be sure that loan we'll be invested in an asset and not a liability. Good debt versus bad debt if you get what I mean.

And lastly here is the link I gave to my friend. It's from one of my favorite sites. It's about investing in foreclosed properties in the Philippines.