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 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.