The Bucket Theory

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I came across this theory back in 2005 through the book Millionaire Real Estate Investor by Gary Keller. This and Larry Gamboa’s book Think Rich Pinoy got me started with real estate investing.

The theory is this: Everyone has control over three “buckets”. Each buckets represents financial priority. The first buckets takes care of the basic needs such as food, shelter, education, health care, emergency fund, life insurance and other day to day necessities and monthly expenses of life. Once this bucket is full or taken care of, you can move on filling up the 2nd bucket which represents long term investments. We are talking about investments that will generate passive income. Bucket 2 will only be full once it generates enough passive income to take of all the needs of bucket 1.

When bucket 2 is stable and already generates more than enough to keep bucket 1 full, the excess can flow to bucket 3 which now represents the right to play and have a little bit of luxury and toys.

The problem is that people start backwards, and because they start with the play bucket, they aren’t able to fill bucket 2 and create substantial wealth by investing.

We did this the other way around. While my wife and I are earning on our I.T. job, we were careful and conservative financially. For example, we paid down the mortgage of our home which I acquired in 2006 so we can own it free and clear as fast as we could.

Rental Property #1

We started working on our long term investment. Our bucket 2 is investing on rental properties and it all started back in 2009 at Grass Residences by SMDC.

Since we didn’t have enough capital that time, we invested on pre-selling properties. This allowed us to invest with minimum cash outlay. Monthly we are setting aside our excess cash as down payment for our first rental property. It’s like forced savings with a hedge against inflation.

By the time we are done with the down payment (I think that was around 2013) plus some 6 months delay in turn over, our first rental property is immediately rented out and it started paying itself with a small positive cash flow.

Our amortization is Php11,000 per month and we are renting it at Php15,000 per month. Having our first rental property rented frees up our budget to invest in another rental property.

By the way, I didn’t mind the 6 months delay because I think that’s the industry’s average. Several others are way more delayed.

Rental Property #2

Our second rental property is a 60 sqm 2 bedroom penthouse unit at Flair Towers by DMCI Homes. We also bought this at pre-selling from someone else below market value on 2013.

The property is set for completion 1stQ of 2014, that means the previous owner already put up a significant equity which we have to pay them. That is why it is always a good idea to have an opportunity fund so you can take advantage of great deals .

I’m not used to on time delivery so it was a surprise that this one was delivered on time (hooray DMCI!!).

We used it for a few months before renting it out because we really like it. We started renting it on Nov 2014 to a lovely couple. Our monthly bank amortization is Php18,000 per month and we rented it for the same amount, without any furniture. The couple bought brand new furniture for their temporary happy place.

Fast forward to 2018 they are still our tenant and is already renting the place at Php23,000 per month.

Rental Property #3

Ok, rewind back to 2014. After renting out our penthouse unit at Flair Towers, our great mentor Mr. Rj “Premo” Serra sniffed another great property in Makati. The Rise Makati promoted by Shang Properties.

It’s supposed to be completed this August 2018. It got moved to year 2020 (huhuhu!). That’s fine, at least we are done with the down payments and we are not expected to settle the balance until the unit is delivered.

Rental Property #4

The latest, our 4th rental property investment was back in August 2017, Kai Garden Residences, another DMCI Homes community. We got a 36 sqm 1BR unit and it’s set for completion on Jan 2023. Our conservative projection is around Php21,500 rent per month (Fully furnished).

We stopped acquiring at this point and will probably focus on paying down the mortgage of our rental properties. So we can own it clean and enjoy receiving the monthly rent in full

A snapshot of our property portfolio:

  • Sta. Rosa House & Lot – Our primary residence near Nuvali
  • Grass Residences – Self Liquidating with small positive cash flow
  • Flair Towers – Self Liquidating with small positive cash flow
  • The Rise Makati – Done with the monthly down payment
  • Kai Garden Reisences – Ongoing monthly down payment

We are happy with it’s performance, specially the capital appreciation.

There were plenty of mistakes along the road. One of which is disposing really great properties that we had before, but that’s for another story.

Our personal portfolio is not that huge but we believe we are on the right track and we are getting there.

To end, the goal is to fully pay it all so it can take care of our life – bucket 1. Hopefully some excess for our bucket 3. But to put more meaning to this, we should create bucket 4, budget for helping our loved ones and friends in need.

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