Stocks versus property. Why I prefer stocks over property

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#1
There is substantial anecdotal evidence that more Singaporeans made more money from property than stocks. Just ask and look around. Our parents' generation who dared to invest in property have secured their retirement. It is small wonder the next generation will do the same thing since property investments have worked for decades for so many people.

I have peers who took the plunge and invested a second property 5 years ago. I am sure they are doing quite well. Some have urged me to stop hoarding my money and take a plunge into the property market. Another told me I will never become rich because of my steadfast refusal to take the risk to buy a second property. I probably look stupid to these people. However, I think it is fine to look stupid for good reasons which will be explained here.

In one sentence why I refused to buy an investment property - I cannot control risk with property investments with the same ease as stocks.

Given the very high property prices in Singapore and my own financial resources, I only have enough money to buy 1 property for investment. Only 1. What can be more concentrated than that? The lack of diversification makes it hard to manage risk. With stocks, I can construct a portfolio of 30 stocks with not a single one taking up more than 5% of my net-worth. I can afford to make several mistakes without facing financial ruin. Can the same be said with a concentrated property portfolio consisting of only 1 property? To make matters worse, this single property has to be bought with leverage. How many Singaporeans can buy a property with cash? When an investor uses leverage, his margin of error is greatly reduced. The mortgage debt is usually quite substantial because it can take 20-30 years to repay with today's high property prices. It is quite common to pay 25% cash with the rest using borrowed money to purchase a property. The investor loses 20% when the property drops 5%. Leverage introduces the risk of margin call. Although banks seldom ask borrowers to top up their mortgage loan when property price drops, they are legally allowed to do so. If the borrower misses the interest payment because he loses his job, the bank may foreclose and force-sell his property in a battered-down market at a lousy price. With stocks, there is no need to use leverage. One can build a diversified portfolio with as little as SGD30000 with cash.

Value investors tend to steer clear of bubbles. I do not shun participation in a bubble if the underlying asset is liquid. The end period of a stock bubble is historically characterized by a parabolic rise of stocks in a short time. Being out of the market at this stage means missing out the opportunity to make lots of money in a short time. Thus, I will join in the crowd despite knowing that it is a stock bubble, although only a manageable portion of the net-worth will be inside the market. (Don't try this if you are a newbie in the stock market, particularly if you have yet to suffer gut-wrenching losses) The reason why I dare to join the bubble is that stocks are liquid. The moment danger is sensed, one can get the hell out in a single trading day. This is one of the advantages of being a retail investor with a small fund to manage. It makes risk management much easier. Properties are illiquid with high transaction costs. Unlike an equity investor, there is no way for a property investor to get the hell out even if he desperately wants to because of property's illiquid nature.

If a hired fund manager shows me a portfolio with a highly leveraged, super-concentrated and illiquid portfolio, I will sack him straightaway so that I can sleep better. How to manage risk with a portfolio like that? Middle-class Singaporeans who took on a 20-year mortgage to buy an investment property are doing just that.

Besides the inability to manage risk, there is another good reason to avoid property investments. I hate debt intensely. The only time I overcame this hate was to buy my first residential HDB Singapore flat so that I can marry the love of my life. While this article frowns on property investment, a HDB flat is highly desirable. One motivation foreigners convert to become a Singapore citizen is to have the privilege to buy our HDB flats. Particularly for Singaporeans who have sacrificed for National Service, don't ever miss your privilege to buy a HDB flat. It is almost a sure-win as it is subsidized by the government. Besides, everyone needs a roof over our heads that provides the stability for us to marry and start a family.

Buying an investment property today usually involves taking on a huge debt that requires at least 20 years to repay. This makes a person a financial slave. If the goal of investment is to be financially free, then does it make sense to take on so much debt for an investment that it risk making one a slave for the next 20 years? It is not just money anymore. It is freedom. With a heavy debt, a person has to tolerate bullies at work. It is easy to slip into mental depression if a person has to drag his feet every day to work in an environment that drives him crazy. Although my present workplace is wonderful and I am working with and for pleasant and smarter people at the moment, there is no guarantee that this can continue. The advantage of investing and saving hard is to accumulate enough "f**k-you" money to have the freedom to show the middle finger and quit when faced with unreasonable behavior at work. Buying a second property at this point will take away all the "f**k-you" money that I have painstakingly accumulated over the years.

For high net-worth individuals with enough money to buy up multiple properties with cash, property is an appropriate component in this investment portfolio. It is easier for the rich to manage risk in their property portfolio. For the majority of middle-class Singaporeans like me, I think they should think twice before committing to a highly leveraged, concentrated and illiquid investment that can potentially make a slave out of them for the next 20 years.
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Trust yourself only with your money
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#2
Key point is that through a "pte property" condition, u can get a easy leverage aka loans from bank.
Leverage cuts both ways, maximise the profits and worsened the debt!
If you have a sure bet, i'm sure you will use leverage to maximise your returns! Tongue
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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#3
(05-06-2013, 05:13 PM)brattzz Wrote: Key point is that through a "pte property" condition, u can get a easy leverage aka loans from bank.
Leverage cuts both ways, maximise the profits and worsened the debt!
If you have a sure bet, i'm sure you will use leverage to maximise your returns! Tongue

No one knows when interest rates will go up. Once it does, there could be massive property dumping. But doubt it will happen soon. When that happens, it might be a good time to sell stocks and buy property
My Investing insights: http://www.investingsgx.blogspot.com
My sale blog: www.888sale.blogspot.com
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#4
Quote:No one knows when interest rates will go up. Once it does, there could be massive property dumping. But doubt it will happen soon. When that happens, it might be a good time to sell stocks and buy property

Lets examine this a bit. Say you bought a house for 1 million with 80% borrowing then down the road they raised interest rates in many increments.

Usually bad recessions property prices will come down. Say your property is now worth 700k. You owe the bank 800k and if you sell you are out of money by over 100k. You will nothing and still owe money to the bank

I think many people will hold and try to wait it out.

There will be extreme cases whereby people get laid off and no longer able to afford so they are desperate sell off but I don't think we will see massive property dumping.

The bank also have vested interest if the borrower bankrupt they are stuck with an asset in a depreciating market.
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#5
Simply put "leverage" is a double-edge sword. The higher the leverage the sharper the two edges. So many Wall Streets Instituitions used this sword to make them so rich until caught by their own over-leveraging and disappeared forever- The latest was of course the "Sub-Prime-Loan CDO" fiasco. And i believe it will just going to repeat because Wall Street can not exist without high leverage.
i still don't know how to use this sword. i would gladly learn from anyone who has been successful in dodging the unpleasant edge of this sword.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#6
My opinion is better not to use too much leverage esp. on property purchase. It can either 'make' or 'break'. I have heard of ppl buying not 2 but 3rd and 4th properties, using relative's names. So long as they can afford the deposit, they are willing to take the gamble. Well, i think if the tide goes out, we will be able to see who is swimming naked!
As in animal mass migration to other side of the river looking for food, most will survive, but some will be stampede to death or eaten by crocodile!

(06-06-2013, 12:09 PM)Temperament Wrote: i still don't know how to use this sword. i would gladly learn from anyone who has been successful in dodging the unpleasant edge of this sword.
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#7
(06-06-2013, 11:07 AM)investingsgx Wrote:
(05-06-2013, 05:13 PM)brattzz Wrote: Key point is that through a "pte property" condition, u can get a easy leverage aka loans from bank.
Leverage cuts both ways, maximise the profits and worsened the debt!
If you have a sure bet, i'm sure you will use leverage to maximise your returns! Tongue

No one knows when interest rates will go up. Once it does, there could be massive property dumping. But doubt it will happen soon. When that happens, it might be a good time to sell stocks and buy property

According to historical cycles, stock market leads the property market by around 3-6mths, so unless you had already liquidated the stocks before the downturn, you may not be able to do so.

(06-06-2013, 12:09 PM)Temperament Wrote: Simply put "leverage" is a double-edge sword. The higher the leverage the sharper the two edges. So many Wall Streets Instituitions used this sword to make them so rich until caught by their own over-leveraging and disappeared forever- The latest was of course the "Sub-Prime-Loan CDO" fiasco. And i believe it will just going to repeat because Wall Street can not exist without high leverage.
i still don't know how to use this sword. i would gladly learn from anyone who has been successful in dodging the unpleasant edge of this sword.

The key phrase is "do not over leverage".

Some points which I can share regarding leveraging with investment property loans:

- Keep enough liquidity to pay for at least 3-5years mortgage and other expenese even if the interest goes up.

- Rent out the place as soon as it is vacant, even at a lower rent.

- Make sure the tenants take care of the place to reduce maintenance.

- Get an interest-offset mortgage account if possible as it benefits from a higher interest rate.
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#8
(06-06-2013, 02:44 PM)Penguin Papa Wrote:
(06-06-2013, 11:07 AM)investingsgx Wrote:
(05-06-2013, 05:13 PM)brattzz Wrote: Key point is that through a "pte property" condition, u can get a easy leverage aka loans from bank.
Leverage cuts both ways, maximise the profits and worsened the debt!
If you have a sure bet, i'm sure you will use leverage to maximise your returns! Tongue

No one knows when interest rates will go up. Once it does, there could be massive property dumping. But doubt it will happen soon. When that happens, it might be a good time to sell stocks and buy property

According to historical cycles, stock market leads the property market by around 3-6mths, so unless you had already liquidated the stocks before the downturn, you may not be able to do so.

(06-06-2013, 12:09 PM)Temperament Wrote: Simply put "leverage" is a double-edge sword. The higher the leverage the sharper the two edges. So many Wall Streets Instituitions used this sword to make them so rich until caught by their own over-leveraging and disappeared forever- The latest was of course the "Sub-Prime-Loan CDO" fiasco. And i believe it will just going to repeat because Wall Street can not exist without high leverage.
i still don't know how to use this sword. i would gladly learn from anyone who has been successful in dodging the unpleasant edge of this sword.

The key phrase is "do not over leverage".

Some points which I can share regarding leveraging with investment property loans:

- Keep enough liquidity to pay for at least 3-5years mortgage and other expenese even if the interest goes up.

- Rent out the place as soon as it is vacant, even at a lower rent.

- Make sure the tenants take care of the place to reduce maintenance.

- Get an interest-offset mortgage account if possible as it benefits from a higher interest rate.

Sound interesting!
Can you share some practical tips on how to align the tenant's interests to yours for keeping your property in "good shape"?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#9
(06-06-2013, 06:13 PM)Temperament Wrote:
(06-06-2013, 02:44 PM)Penguin Papa Wrote:
(06-06-2013, 11:07 AM)investingsgx Wrote:
(05-06-2013, 05:13 PM)brattzz Wrote: Key point is that through a "pte property" condition, u can get a easy leverage aka loans from bank.
Leverage cuts both ways, maximise the profits and worsened the debt!
If you have a sure bet, i'm sure you will use leverage to maximise your returns! Tongue

No one knows when interest rates will go up. Once it does, there could be massive property dumping. But doubt it will happen soon. When that happens, it might be a good time to sell stocks and buy property

According to historical cycles, stock market leads the property market by around 3-6mths, so unless you had already liquidated the stocks before the downturn, you may not be able to do so.

(06-06-2013, 12:09 PM)Temperament Wrote: Simply put "leverage" is a double-edge sword. The higher the leverage the sharper the two edges. So many Wall Streets Instituitions used this sword to make them so rich until caught by their own over-leveraging and disappeared forever- The latest was of course the "Sub-Prime-Loan CDO" fiasco. And i believe it will just going to repeat because Wall Street can not exist without high leverage.
i still don't know how to use this sword. i would gladly learn from anyone who has been successful in dodging the unpleasant edge of this sword.

The key phrase is "do not over leverage".

Some points which I can share regarding leveraging with investment property loans:

- Keep enough liquidity to pay for at least 3-5years mortgage and other expenese even if the interest goes up.

- Rent out the place as soon as it is vacant, even at a lower rent.

- Make sure the tenants take care of the place to reduce maintenance.

- Get an interest-offset mortgage account if possible as it benefits from a higher interest rate.

Sound interesting!
Can you share some practical tips on how to align the tenant's interests to yours for keeping your property in "good shape"?

"Align" will be difficult. These may help:

- Keep renovation of place to minimal. Use hardy material like ceramic or granite flooring. Use granite on kitchen top may help too.

- Choice of tenant. Families with kid/s tend to upkeep the place better.

- Regular visit, say every 3months. Check on the aircon, kitchen and toilets.

- Impose high replacement cost in Tenancy agreement if possible. Usual first $100 is by tenant, and the rest by landlord. Better is the rest is shared 50/50 between landlord and tenant.

- When returning unit, lock all deposits until all checks are done, say within a week.
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#10
(06-06-2013, 12:09 PM)Temperament Wrote: Simply put "leverage" is a double-edge sword. The higher the leverage the sharper the two edges. So many Wall Streets Instituitions used this sword to make them so rich until caught by their own over-leveraging and disappeared forever- The latest was of course the "Sub-Prime-Loan CDO" fiasco. And i believe it will just going to repeat because Wall Street can not exist without high leverage.
i still don't know how to use this sword. i would gladly learn from anyone who has been successful in dodging the unpleasant edge of this sword.

For people who are in a hurry to get rich, leverage provides an avenue to achieve that goal. For those who are not in a hurry, leverage does not add value to the investment process in terms of risk/reward ratio. Reward goes up, risk goes up as well. The risk/reward ratio does not improve but risk management becomes more complicated. This is another reason why I see no reason to use leverage.

What was it that Buffett said about leverage? If you are smart, you have no need for leverage. If you are not, you have better not use it. Either way, don't use leverage. Unless you are in a hurry. But isn't patience a universal value attributed to successful investors?
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Trust yourself only with your money
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