3 advantages of bonds over real estate
Question: Bonds seem to be unexciting as investments. Are there any advantages with investing in bonds?
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Answer: Real estate has been one of the main investments of today’s wealthy elite. Property appreciation was accelerated when investing in the Philippine economy came into fashion globally.
While foreigners still cannot buy real estate, they could buy condominium units for office space and houses for their expats in exclusive subdivisions. In the process, property sale and rental prices have shot up.
Unfortunately, investing in property requires huge amounts of money.
Yet, there is an alternative to investing in property. It is an investment that guarantees the payment of rent, the return of the property and sometimes even property value appreciation. This alternative is called bonds.
Bonds are nothing more than debt obligations of either the government or private sector companies that promise the payment of interest, alternatively called coupons, on a periodic basis (i.e. quarterly or semestral) and the return of the principal. You could say that the payment of interest is similar to the payment of rent but this time on the money you lend to borrowers, which could again be either the government or private sector companies).
Just like with property being rented out, the money you lend out through bonds is also promised to be returned. With property, the renter promises to return the premises in good order upon the termination of the rent or lease. With bonds, the full principal is to be repaid upon maturity.
Investing in bonds does not require huge amounts of capital as with real estate. You can buy bonds with just a few hundred thousand pesos. And bonds are as easy to purchase as other investments like money market instruments and stocks. You just need to talk to a certified fixed income salesperson who may be found in banks, Trust corporations, investment houses and even stock brokerage firms. With a fixed income exchange, just like a stock exchange, the buying and selling of bonds in the Philippines has also never been easier.
Bond investors can also benefit from capital appreciation. This happens when the prevailing interest rate on bonds versus the interest rate or yield at which you were able to buy a bond moves lower. In other words, your bond will be more valuable because it offers a higher interest rate than what is available in the market. And if you decide to sell your bond in such a situation, you will realize a capital gain.
Of course, the reverse can happen where prevailing interest rates are higher than the yield at which you bought your bond. If you decide to sell your bond in such a situation, you will realize a capital loss. But the beauty with bonds is that you do not have to sell. You can simply continue collecting your programmed interest income for the remainder of the term of the bond.
Are bonds safe?
Even with property, the guarantee is only as good as the guarantor. The good thing is that both the property owner and investor in bonds can choose with whom to do business. And the added advantage with bonds is that there is a third party that provides credit ratings of bond issuers (i.e. the borrowers) as to: economic risk, industry risk, market position, business diversification, management and strategy, earnings generation, cash flow and liquidity, capital structure, financial flexibility and asset quality. In the Philippines, the major rating agency is PhilRatings (www.philratings.com).
Investing in bonds is similar to investing in real estate. The added advantages with bonds are that huge amounts are not needed, there is greater ease in buying and selling and there is a third party that rates the credit worthiness of the issuer.
So, why not consider bonds as your next investment. INQ
Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. Become a Yaman coach. For details, email [email protected]. To learn more about personal financial planning, attend the 91st RFP Program this August 2021. To inquire, e-mail [email protected] or text at 0917-.6248110)
