Equity vs Property
What is the best form of investment?
We
know that putting our money in savings account will make us poorer. If
we put them in fixed deposit, it is just enough to beat inflation and we
are not getting any richer.
We
can start our own business which is what most rich people do, but not
many of us possess the entrepreneur skills and perseverance to become
really successful.
This leaves many people especially the middle class to put their money in equity investment and property investment.
Between equity and property, which one is better?
This seems to be a burning question.
If
you ask someone who is successful and comfortable in stock market
investment, he will definitely say that equity is much better.
If you ask someone who makes a good fortune from property investment, he will tell you that property is much better.
There
are also some people who have their hands in both equity and property.
These people may tell you that one is better than the other but they
might not invest in the same way as you will in the first place.
I
myself invest in both stock and property, but I'm not in a position to
tell anyone that which one is better. It varies between each individual
depending on their risk appetite, interest and expectation.
Some people think that property investment has higher risk because of high initial capital and illiquidity.
Some people think that stock market has higher risk because of high volatility and uncertainty.
Some
people think that property investment has lower risk because property
price almost always appreciate with time if the location is not too bad.
Some
people think that stock market has lower risk because a good company's
share price almost always appreciate with time despite short-term
fluctuation.
Some people like property because of the feeling of land or building ownership.
Some people like stock market because of easy transaction and "faster" gain.
Some people don't like property because of hassle in tenant management, huge debts, higher fees & stamp duties payment.
Some people don't like stock market because of hearing stories that people get burnt or gone bankrupt in stock market.
One
thing for sure is, it is much easier to start investing in stock market
as it is simple and does not require a big sum of capital to start
with. If you make a bad decision, it is much easier to make amends and
start all over again.
If
you make a bad decision in buying a property, not only your initial
capital will be tied down, you still need to serve monthly bank loan
while unable to rent out or sell the property except at significant
loss.
So, both financially & psychologically, it is not easy to take a first step into property investment.
Personally
I started my investment journey by investing in equity, first in unit
trust in 2004 and then directly in stock market in 2006. However, I
have never been serious with it until 2013.
I started to look into property investment in 2009. In that year, I bought my first property which is my current house.
After
that, I constantly looked for properties for investment. I did quite a
lot of research on properties in Klang Valley and Penang.
I
registered for developers future projects, went to new property
launches, screened through property advertisement, viewed numerous
subsale properties etc.
I can feel the difficulty in taking a first step in property investment, as there will be fear of making mistake.
Even though I'm just a little tiny property investor, I still hope that it will help in my journey toward financial freedom.
If
I were to depend on stock market alone, I need to achieve at least 30%
annual return compounded for 10 consecutive years. Is it possible?
If
I can get 30% for 4 consecutive years but not careful enough to lose
50% on the 5th year due to big bear market, it is almost like back to
the starting line.
Property
investment sounds "more secure" in that sense. If I buy a property at
RM300k, take RM270k loan and get tenants to cover the monthly loan
repayment, I can just sit back and watch property price appreciates with
time.
After 10 years, I will still owe bank RM230k. However, I don't put a lot of cash into the property after the 10% down payment as long as the property get rented out without negative cashflow.
After 10 years, I will still owe bank RM230k. However, I don't put a lot of cash into the property after the 10% down payment as long as the property get rented out without negative cashflow.
If
I sell the property which lets say appreciates to RM600k 10 years
later (which I think is not impossible if property is bought before
2012), I can get a profit of RM370k after settling the outstanding loan
(excluding other fees). This will help my retirement plan significantly
if I have more investment properties.
For
me, when I was more active in property investment in 2009-2012, I think
that it is a good investment. Actually now I still think it is.
After
year 2012, I find it extremely difficult to get a positive monthly
cashflow from renting out newly-purchased properties anymore, as
property price has escalated much faster than rental & salary.
Furthermore, house price seems to appreciate more slowly now.
Even
though one can still make money in the long run, property investment is
no more attractive to me at the moment, compared to stock market.
Nevertheless,
I am still alert on current property market. I still view new and
subsale properties once in a while hoping to get a bargain.
Perhaps I will only buy property again when property price falls significantly.
Is this possible?
After the US subprime mortgage crisis in 2007, I will not assume that house price will never fall massively.