The following post is excerpted from the newly launched Secrets of Singapore Property Gurus, in an interview with Dennis Ng, Director of Leverage Holdings. Click here to get your copy now.
In 2006, when the market was still in an upward trend, I had 80% of my money invested into stocks. However, in 2007, when I felt that the stock market was in a bubble stage, I decided to sell most of my stocks, and thus avoided the 2008 stock market crash.
I also invest in real estate. In fact, investing in property has its own risks and characteristics. Let me share with you the differences between Stock Investing and Property Investing:
1. Property investing gives you more leverage than stocks
If you own stocks with a market value of $1 million, the maximum loan that financial institutions might be willing to grant to you, using your stocks as collateral, would be a maximum of 70% of the market value of the stocks.
On the other hand, when you buy a property, Banks are willing to grant you loans up to a maximum of four times your equity. For instance, if you put down 20% of the property price as a downpayment, the bank can grant you up to maximum of 80% financing, or 400% of your equity, to finance the property purchase.
If stock prices fall, and the value of your holdings drop from say $1 million to $800,000, the banks would call you and ask you to “top up” $140,000, to keep the loan to collateral ratio of 70%. This is technically known as a “Margin Call”. If you fail to top up the amount in time, the bank will force you to sell your stock to meet the shortfall.
However, if you buy real estate, even if property prices fall, usually as long as you can pay the mortgage instalments, the bank will not bother you at all.
The above differences in the treatment of loans for stocks and property clearly show that to the lender, the risk seems much lower for real estate compared to stock investing.
2. You may lose everything in stock investing
If you have the ability to hold for more than 10 years, you will usually not lose money in real estate, since in the long run property prices typically rise and can keep pace with the rate of inflation.
But if you buy stocks, when the company runs into financial or cashflow problems, even if you “faithfully” hold the stock for 10 years, it is still possible to make losses to the tune of 80% to 90%. For instance, in year 2000, during the technology bubble, many stocks relating to technology were trading at high prices. In year 2010, 10 years after the technology bubble burst in March 2000, the current market value of some of these stocks are just about 10% compared to its peak in year 2000. There are even some listed companies that faced the misfortune of closure, and the company’s stock holders may get back nothing from their investment in the stocks.
So if you want to make money in the stock market, learning how to choose and select the right stocks to invest in is very important.
However, for many people who have no knowledge of investments, if they hold on to real estate for decades, they might still be able to profit from it, because it is impossible for the value of a property to fall to zero, while a stock might actually fall to zero if the company collapses.
3. You can pay lower than market price to buy a house
If the price of a stock is $1, there is no way for you to pay below the market price of say, $0.90, or 10% lower, to buy the stock. However, if you buy real estate, it is possible for you to buy 10% lower than the market value of the house.
Why do some property owners sell the property despite the sale price being 10% lower than market value? There can be many reasons: ignorance of the current market value of the property can be one reason, they may be in a desperate need for cash might be another reason, or there can be other reasons, such as sale due to divorce or other situations.
4. You can enhance the value of the property
If you purchase a stock today, and let’s say the share price is $1, can you do anything to increase the value of the stock by 10%? The answer is no.
You can only hope that the company’s business will improve after you bought the stock and its share price would rise when that happens.
But if you buy a property, there are many ways you can enhance the value of the house. It can be as simple as giving the property a fresh coat of paint, division of space to add a room to increase rents, or even doing some minor retrofitting and renovation. All these actions are likely to enhance the value of the house.
5. You can let others help you pay for your property
Imagine if you want to purchase an item, but are only willing to pay the downpayment, and let someone else help you pay the balance. Can this be done for stock investing? Of course not. But if you think about it, when you invest in real estate, you just pay a 20% downpayment, and the balance of up to a maximum of 80% of the purchase price can be taken as a loan, and the monthly housing loan repayment can be “reimbursed” from the rents collected. As a result, the balance of up to 80% of the price of the property is actually “paid” by the tenant for you!
Let me use a simple example to illustrate. For instance, you buy a $1 million property and borrow 70% of the purchase price, or $700,000. Suppose you choose a loan period of 25 years, and the average housing loan interest rate is 3%, the monthly housing loan repayment is $2,655. If you can rent out the house for $3,000, then your tenant actually is helping you to pay the housing loan instalment!
“Is McDonald’s in the business of selling hamburgers?”
When asked whether McDonald’s business is to sell hamburgers, management replied that they are really investing in real estate, and using the sale of hamburgers to earn money to buy real estate!
Most people dream of being Warren Buffett. However, most stock investors are losing money. According to CPF data, most people with a fund investing in stocks have ended up losing money. On the other hand, except for some special cases such as buying a house at the peak of the market, it is difficult to find a real estate investor who has held for more than 10 years who is still making a loss.
I hope the above helps you understand better the differences between stock and property investing. But if you want to get rich, learn BOTH. The Really Rich and Smart ones, invest in Both Stocks and Properties.
There are times when Stocks are a Better Investment, and times when Properties are better investments. So invest in the Right thing at the Right Time.
For instance, for the next year or so, I personally think there’s more upside to investing into Stocks than Property. Let’s look back in time in future to see whether I’m right on this.
In Secrets of Singapore Property Gurus Dennis Ng also shares:
- Are banks still willing to do property lending?
- His top property financing (and refinancing) tips
- How to maximize your chances of getting a loan
- How quickly should property owners pay off their loans?
- Whether you should get mortgage insurance
- His personal investment philosophy
- The worst and greatest property investments he has heard of
I personally feel that many of the points in this article is bias towards property which could give readers some wrong perspective. Therefore I’ll try to reply with one that is bias towards stocks.
1. Property gives more leverage than stocks.
Not entirely true. There are brokerages that allows up to 5 times leverage when you purchase certain stocks using the margin accounts, depending on the riskiness of the counters you purchase. It is also not always true that you can get 80% financing for your property. This is dependent on the valuation of the property, your credit rating, as well as government/bank policies.
The calculation of margin call isn’t accurate. There is usually an initial margin and maintenance margin level to be kept. In real estate, should a property bubble bursting occur, believe you me, the banks will come and bother you. In stocks the margin call limits your downside, but in real estate, if property prices collapse and you are unable to service your monthly installments, you can lose alot more.
2.You may lose everything in stock investing
This is true. A listed company can file for bankruptcy and you may lose everything in your stock. The value of a property never drops to zero, but as I’ve pointed out previously, it is possible to lose everything in property investing as well. Just think negative sale.
3.You can pay lower than market price to buy a house
Totally untrue. In the stock market, with a well regulated and controlled exchange, the price of a stock is the end result of supply and demand, meaning to say it will be transacted ONLY at market price. You can’t pay less but you surely cannot pay a single cent more as well. If the price of a stock is $1, you can still queue to buy at $0.90. Because the stock market is liquid and “live”, a $0.90 price can possibly be hit. The only difference is, if you manage to get it at $0.90, you’re still buying it at market price. The same reason of “some owners selling property 10% lower than market value” is the same reason why a $1.00 can drop to $0.90.
The “market value” of a property is hard to measure which is why there is no way to measure if it is 10% lower or 10% higher. The “value” of a property can depend on many factors such as, past transacted prices, the condition, the facing, the floor, the age, the valuation (which can be inflated), the asking price, amenities, facilities, location etc etc. Nobody can put an exact figure on a value of a property, and this is why a stock market actually protects investors from overpaying.
4. You can enhance the value of the property
At a cost which does not necessarily translate to an equal increase in the value of your house.
5. You can let others help you pay for your property
This is possible only when price of property is low and rental yield is high. As of current moment, the price of property in Singapore is at a rate that makes it very difficult to do this. In an ideal world, this concept is lovely, but in a practical world, there are many risks involved.
Let’s look at the example given, $1mil property with a 70% loan for a period of 25 years at 3% interest rate. The monthly repayment should actually by more than $3000, approximately $3,300, not $2,655. If you can rent if out for $3,000 you will not be able to cover the instalment. If you can rent if out for $3,500, you might still not be able to cover. Why? $3,500 rental includes your monthly maintenance fees. An average monthly maintenance fee in Singapore is about $250-300 per month, meaning you only pocketed about $3,250. You will need to pay property tax every year and for such a property, we can estimate the property tax to about $2,500 per year. That makes your net profit from rental merely $3,042. On top of this, you can expect your property to be tenanted 100% of the time. There will be period where you’re advertising for new tenants, or period where you’re renovating your house. You still have to pay your installments during these no income period. Money is also spend on renovating/cleaning/repainting etc everytime an old tenant vacates. Conclusion is, it is almost impossible to let others pay for your property in current times as how you’ve mentioned.
I do however agree with your final points that there are times when one form of investment is better than the other. With all due respect, I’m writing such a comment only to let your readers see the other side of the coin.
Thanks for your comments. They are well argued. Here are my responses:
1. On leverage, I think for the majority of people they will still be able to get more leverage with a property.
As for “margin calls”, it is unlikely for the bank to ask for a top up unless prices fall more than 30%. If you are 5x leveraged on stocks, your margin call will DEFINITELY come much earlier.
2. It is true that you can lose all your equity in a property investment and more. But as long as you can hold on and you don’t get asked for a top up by the bank, your property is very likely to recover in the long term (unlike a company that has gone bust).
3. Your point has really to do with the transparency and level of information in the market. Property is an opaque and imperfect market as there aren’t “live” prices like stocks. That’s where the opportunity is.
4. It’s up to you to evaluate if the cost of the enhancements will add even greater value to the property. If not, you can choose not to do it.
5. Yes of course it doesn’t apply for all properties. The smart property investor will look for a property that has a high enough rental yield to get positive cash flow (among various investment strategies).
Thanks for your comment!
The post is extremely biased. It’s obvious that Mr Propwise wants readers to invest in properties. If you buy an Emerging Market mutual fund or ETF, the returns are 18% per annum in the last 15 years. If you invest in Singapore residential properties, the returns are only 6% per annum. If you leverage 80%, the returns increase to around 15%, still lower than emerging markets ETF. If you buy any emerging market fund or ETF, e.g. Latin America, Indonesia, Russia, BRIC, CHina etc, the returns are around 18-20% per annum.
I am an investor of both properties and stocks for the last 15 years and I can tell you there are several advantages stocks have over properties.
1. Stocks are more liquid than properties. If the market turn for the worse, I can exit my stocks or unit trust portfolio almost immediately. For properties, it takes around 3 months to even 6 to find a willing buyer. Sometimes, you can’t even find a buyer in turbulent times.
2. If you buy an ETF or mutual fund, it comprises more than 50 stocks so the chances of going zero is virtually zero.
3. In a bearish market or recesssion, you can short sell stocks and make 20 – 50% in a year, whereas you cannot short the physical property market.
4. Transaction cost of property is around 2 – 3%, including legal, agent, stamp fees. Stocks cost less than 1%.
5. If the Singapore property market falls, you can’t easily move your investments overseas unless you do a lot of research. You can always diversify to overseas stocks easily. Just pick up the phone to call your dealer, log into your internet trading account or call your relationship manager to buy an emerging market fund.
Thanks for your comments. You make some good points. I’d just like to clarify that I did not write this post but it is an extract from my book which I got from an interview with Dennis Ng. As for your points:
1. Agree completely with you.
2. True that an ETF or mutual fund is unlikely to fall to 0. As for your return, well it all depends on your timing. I could not find an ETF or mutual fund that has returned 18% for the last 15 years (I think emerging markets ETFs are quite a recent phenomenon). Could you name some specific funds that have done so well over this time period?
3. True but short selling is both difficult and risky, and very few people can do it well.
4. Agreed. Transaction costs for property are definitely higher than stocks.
5. This has to do with the liquidity argument above.
As I’ve argued elsewhere, the smart investor will invest in stocks AND properties depending on where the cycle is.
BUT for the average person, property is the most trusted way to build wealth over a long period of time.
With regards to your second question, check out the performance of the Indonesian, Latin American, Russian, Chinese and Indian stock markets in the last 10 years. They will give you around 15% return per annum, without leverage. These countries comprise the BRIC markets.
Also, there are certain Commodities Trading Adviser funds (CTAs) that turn in positive performances of around 8 – 12% per annum regardless of whether it’s a bull or bear market because they long or short the market depending on the trend.
Hi Jeffrey, I’ve checked a few and the numbers don’t seem to bear that out for all of the markets. For example let’s take the Chinese SSE Composite Index (I used finance.google.com). The cumulative 10 year return is 27.1% (as of Jul 22 2011), returning an annualized ~2.5% return. Some markets, like India, have indeed done better.
Please check fundsupermart hyperlink above. I invested in most of them. Top 5 performing funds:
1. Aberdeen Indonesia Equity 23.88% per annum
2. Aberdeen Thailand Equity 20.05% per annum
3. LionGlobal Thailand 19.36% per annum
4. United Gold and General Fund 18.16% per annum
5. First State Regional India Fund 17.4% per annum
For indices over 10 years, check out:
1. Russian RTS Index 20.95% per annum
2. Brazil BOVESPA Index 16.09% per annum
3. Mumbai SENSEX 14.71% per annum.
4. Thai SET 13.83% per annum.
5. Hang Seng Mainland 100 11.15%.
Please take a look at the URA residential property index. Many Singaporeans swear by property as the way to become rich but I beg to differ. In 1997, Singapore’s property reached the peak and crashed 40%. It rose a bit in 1999 before crashing to a new low. It didn’t reach 1997’s peak until 2010. Mind you, the returns for property if you invested in 1997 was practically ZERO. Timing is everything and it’s not true that property is always a better bet than stocks.
One must remain nimble and buy property when the risk adjusted return is better than stocks and do the opposite when the risk adjusted return is better in stocks. Also, with CFDs, I can short the market and make 20 – 40% in a bear market while you can only long properties. I will have more bullets to buy properties and CFDs when the property and stock market crash in 2012/13 because I don’t just hold cash, but I made double digit returns then.
Thanks for this – I’m happy to hear that you’ve had such great returns. You obviously have a knack for picking the top performing funds, and good timing to know when to short the market.
I can only speak from my own experience, and the observations of people around me. I know only a couple of people who have been as successful with the stock market as you have been, and a whole lot more (who didn’t necessarily know what they were doing) who built their wealth via property.
Completely agree with Mr Propwise. You are convincingly amazing!
Hi guys, after looking at the discussion. I was just wondering is it a good time to enter into property stocks which has the best of both worlds. For example, SC Global, isn’t it better to buy their shares now than buying their physical inventory? The shares k be put into lending scheme and enjoy extra return on top of dividends. It is fuss free compared with collecting rental.
Please correct me and advise thanks
Hi Curious, the problem with buying the shares of developers is that there could be a disconnect between the property prices and their share prices. For example, over the past year, even as property prices continued to appreciate, the share prices of most developers have fallen significantly.
After the 5th anti-speculation measure, I’m even more convinced in my argument that one must not invest in only properties but must diversify across different asset classes. Property prices in Singapore will always be subjected to government intervention because it is politically sensitive and has systemic banking risk. Stock market fluctuations are often left alone by the government. With this measure, I will be diversifying my money into overseas properties and stocks.
People have short memories. Those who bought properties in 1997 never broke even until 2010. That’s a good 13 years! The Straits Times Index was 1800 back in 1997, fell to 900 in 1998, rose to 2700 in 2000, fell to 1300 in 2003, rose to 3831 in Nov 2007, fell to 1450 in Mar 2009. Today it is at 2650. It has appreciated far more than real estate!
Hi Geoffrey, Even the straits Times Index goes to so high, we may not be able to make money. As for my expreince all of my stock brought in 1994 has never recover in prices till now. Even some I still hold it now. Remain only less then 10 percents in money, don’t forget the Malaysia Clob, all the money is freeze till when they return is all most less then 5 %, and the currency also had drop to rm2.45 equal to $1 sing. I had loss almost $400,000 at that time investing in stock market. I was almost broke.
My friend told told me where you fell, you had to get up from there, so I deside to go in to invest again I buy Capital Land two years ago at 4 to 4.20 I think you guy can see what is the prices now right. I loss again more then 100k. So my lesson is that even if you had a chance to make gain or profit in stock sold it to take profit. What ever goes up will come down in stock market this is where the rich make money from you.
But not in the property market.
For my view on property market.
And I buy my first 3 room flat 1996 at open market, as I was broke in the stock market and could not affort to buy bigger one, so I bourght a HDB 3 room at $158,000/ + renovation $40,000/ ++ Interst rate for 5 years $18,000/+ total $216,000/ After staying for 11 years for free, I sold it for $268,000/ If add the 11 years rental of $1,100 per month = $145,000 + $52,000 profit = $197,000/ Saved. Now that 3 room is $350,000/ if I can keep it.
Even during the property market cruse time, 1998 I saw my neigbhour selling his 3 room flat two floor below mine, same block as my at $180,000/
Then in 2006 I want to change my HDB to a 5 room flat. Simei Prices in 2006 $295k till I find one in 2008 the prices $400,000 so I quickly buy, now is around $500,000 +
So I started to invest in Private And Commercial Property 2010, The prices has go up 30 – 150+ percent in value. and had rental yeild every month not included in the percentage.
As for the private condo. that i had brought, the monthly rental cannot cover my instatment So I had to top up $100 to $300 per month. I still think is worth it. If I put in the bank of $180,000/ what is the Interst rate every body should know. But I put into the property after the collecting rental and deduct the the bank interst rate I still had $2,000 left over as a passion income or call it a Private CPF, ( as I had to pay to the Bank for the moragate).
So I would recommend Jeffery and Geoffery to come out and teach some course for the new invester if you are so good in the stock market, Y keep it to your self and recommend some to the student to make money.
But for my own comments only, is, if you are buying a home to stay no matter a HDB or Condo or Landed property, just buy within your own burget and home that you like. you sure to earn in value. It’s just that simple, don’t need like stock to value it, and keep worrying the europe and US or China up or down.
So for investment in property also within in your arm length, like if there is no rental to collect you can still pay the instatment that’s will be fine, that may be for a year. And one more thing investing in property is a very slow process don’t think over night will increase in value or income. Maybe some time have for flipping. But for stock market or cassino can.
Hope more people to commend and to share their ideals. Happy investing to all of you no matter in property or stock market. Not cassino ya… CHEERS