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Why Properties Are Better Investments Than Stocks
It seems like every time we read the financial sections of newspapers, we would see “gurus” advertising how to gain financial freedom from stocks or properties. This is a reflection of how popular these 2 investment vehicles are for people with funds to invest in. Given that the paltry amount of interest banks are offering for our savings, it is no wonder people are desperately looking at vehicles to make their money work harder for them.
There are pros and cons for every type of investment. Investing in stocks definitely have it’s advantages over other forms of investments. But here are why I have a personal preference to to real estate over stocks on any day.
Properties give a a much higher leverage compared to stocks. If you buy a $1m property with $200k down payment and $800k loan, you are effectively getting 4 times your investment as leverage. It also means that you are taking control over a $1m asset for $200k. This is even when you are a first time property buyer with no previous relationship with a bank. Whereas for stocks, you usually have to pay full price with hardly any leverage when you are new investor.
You can also take up an equity term loan of up to 80% of the property value. Terms loans using stocks as collateral are much less than that. When the value of your assets depreciate greatly, there is also a higher tendency for a “margin call” for loans against stocks than compared to property loans. As long as your repay your mortgage fully and promptly, the banks is unlikely to bother you.
Properties in Singapore tend to appreciate in value over the long term. Even if you have picked a bad apartment, you are likely to see an appreciation in the long term. This is in contrast to stocks. Market darlings can become villains in a space of days. Companies built over decades can come crashing down and disappear in a short space of time. And if you have picked the wrong stock, you can potentially lose everything. You seldom lose everything when it comes to real estate in Singapore.
Deviation from market price
When the price of a stock is $10, it is near impossible to buy it at a lower price or sell at a higher price. This is not the same with properties. A lot of times, you can buy properties at a good discount from the asking price. As a buyer you can cite shortcomings of the property to negotiate for a lower price. From a seller’s perspective, you can also cite good locations for a better selling price. For stocks, no matter what the advantages or disadvantages associated with the company, the only indication that people are willing to trade is the last transaction price.
Play a role in value appreciation
There are enhancements that you can make to a property to help increase it’s value. For example, you could tear down the building and rebuild it with a few additional floors with approval from the authorities, buy up the back alley and build an extension for the building, rejuvenate the property with modern renovation, partition the layout to increase the number of rooms, etc. These are things that can increase the value of the property.
Whereas for stocks, there is nothing much you can do to aid it’s appreciation. You just have to wait and see the financial results coming up and hope that the market responds positively to it.
Getting returns on top of capital appreciation
Investment properties can contribute to your cash flow from rental income. Stocks can give you dividends. Both are cash inflows on top of value appreciation. Rental will give you a good yield on your investment each month as long as you have a paying tenant. While dividends are usually given out once each year and you have no control over how much of it will be given out.
Properties and stocks have made millionaires out of average individuals. Both have it’s pros and cons. Before deciding which investment vehicles to hitch a ride on, you have not only work out the advantages and disadvantages of each vehicle, but also assess your own risk tolerance to see which are most suitable for you. I have a personal preference for properties and may have skewed views towards it.