The following post is excerpted from the Secrets of Singapore Property Gurus. Dennis Ng, Director of Leverage Holdings, shared the following insights:
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 loan that financial institutions might be willing to grant 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 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 a collateral ratio of 70%. This is technically known as a “margin call”. If you fail to top up in time, the bank will force 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 their peak in 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.
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.
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 market value of the property, or they may be in a desperate need for cash, or the sale is due to divorce or other situations.
4. You can enhance the value of the property
If you purchase a stock today, 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.
But if you buy a property, there are many ways you can enhance its value. It can be as simple as giving the property a fresh coat of paint, division of space to add a room to increase rent, 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 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. 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
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Comments
Timing of entry(TA) and sound business fundamentals(FA ) and news flow are obvious determinants of success. Do your homework and take responsibility for your decisions. Some experts say never follow the crowds; go contrarian. Some people seems to do well with property investments whilst some others swear by stocks and shares. To each his own.
"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."
I beg to differ, i believe 2012 will be a year of reckoning. We will see new low for all sector and market. I would suggest sell all by December.
What if interest rate go up??and property price come down?will the rent still be enough for u to pay the monthly loan?will the rent come down, since property price already come down most likely due to low demand for property.
if you cannot pay your loan, what happen to the down payment. And if the property price drop say by 25%, will your payment be totally forfeited. So isn't it same as going to zero like stock.
But if u buy blue chip, like SMRT , Singtel, SIA, u got divident to collect and it is as safe as the sun will rise. If these stock i memtion can go to zero, the world is coming to an end.
Lorna Tan
Sun, Feb 03, 2008
The Sunday Times
MR PATRICK Lim, the associate director of financial advisory firm PromiseLand Independent, recalls vividly the anguish he felt when he lost nearly $380,000 on the stock market in less than seven hours in 1998.
This was when Malaysia unexpectedly introduced capital controls on Sept 1, 1998 and declared the trading of Malaysian shares on Singapore's Clob International to be illegal.
This caused the value of Malaysian shares traded on Clob to dive steeply.
Before that fateful day, Mr Lim had borrowed cash to fund his stock purchases and had several equity margin accounts with banks and finance companies.
Almost all of the securities pledged were Clob shares traded in Singapore. All were speculative counters or penny stocks.
After Malaysia imposed the capital controls, banks and finance companies would no longer allow investors to borrow money using Clob shares as collateral.
Investors like Mr Lim had to either put up fresh collateral that would be acceptable to financial institutions or repay the loans.
And he had only one day to do it, failing which his shares would be forcibly sold on the open market.
"Because of the six-figure loan I had taken, there was no way I could raise the capital, so my whole Clob portfolio was sold off," said Mr Lim.
At the time, Mr Lim had Clob shares such as Idris, Promet and Berjaya, which were the hardest-hit and were sold down aggressively, no thanks to margin calls by banks and finance companies.
"Having lost about $380,000 during the Clob fiasco and paid humongous 'tuition fees', I have learnt that, in any form of investment, one should never indulge in speculation," said Mr Lim.
He cautioned investors not to borrow or leverage to invest.
"Invest only the money that you can afford to lose," he added.
“Leverage,” he said, “is the only way a smart guy can go broke … You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it’s reinforcing when the people around you are doing it successfully, you’re doing it successfully, and it’s a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at a quarter to 12? I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.”