Should I invest in stocks or property?

If we start to ask ourselves this question, great, we are finally #adulting.

Both investment vehicles have historically increased their value over the years.

Before we dive into which of the two is a better investment vehicle, in the long run, let’s compare their difference first.

I might not be the Guru for either of them but I am pretty invested in both vehicles. So let us look closely and compare the two.

Loan types

The loan for buying stocks is called margin financing. The loan for buying a property is called a mortgage. Collateral is needed as insurance or pledge for the financial institution to approve the loan.

For margin financing in stocks, the interest can be as high as 6.5% depending on the type of stocks you buy. You will need to use the stocks that you own to act as collateral.

Most brokerage firms require you to maintain a 140% margin ratio.

The formula is: [ (value of own investments today) + (value of stocks bought on collateral today) ] ÷ (the amount borrowed).

For example, you have $20,000 worth of CapitaLand Mall Trust stocks and you borrowed $50,000. This works out to [ ($20,000) + ($50,000) ] ÷ ($50,000) = 1.4.

This also means that a $20,000 initial investment could potentially allow you to own $70,000 worth of stocks.

On the other hand, for property, the interest rate ranges from 1.28% – 2.6% (as of the year 2021) depending on the financial institution. The interest rate is low compared to margin financing as mortgage loans are considered to be safe by the banks.

The property you buy acts as collateral to the loan.

To own a property, one will need to have at least a 10% downpayment (Using an HDB loan).

For example, with an initial investment of $50,000, you could potentially own a $500,000 property.

Ease to own and sell the investment

It is much easier to buy and sell stocks as most market transactions are done online, anyone can buy and sell stocks within seconds.

Property investment will take a much longer time.

There are some who claim that they managed to sell the home within 1 day but it is still a day too long as compared to selling a stock.

Given the ease to own and sell stocks, the stock market is very volatile.

You would see some stocks’ values double within hours and then drop to zero value.

It takes some time to own and liquidate/sell a property.

This affects the transaction volumes, hence, is one of the causes of property prices in Singapore being quite stable.

Carrying cost

Carrying cost is the cost associated with owning the investment.

In stocks, there is little cost in owning an investment.

In Singapore, dividends and profits earned from companies are not taxed.

For property, there are interest, taxes, maintenance, and insurance fees needed to be paid.

Direct Control in the ownership

In stocks, you are not in control of the companies even though you own the stock.

You can have a vote during its Annual General Meeting.

But you cannot influence the direction of the company.

In property investments, you will be running it like your own business.

You can choose the type of property, the property manager, choose the tenants, and dictate the price of rent.

Commission

In stock investing, the commission differs based on the type of services you want.

This is the most basic brokerage account where the transactions are based online and you have to buy the stocks only with cash.

Typically, the commission is about $25 per trade.

A $1,000 transaction will cost $25, which is about 4% per trade.

However, investors who have larger investment volumes or trade very frequently can enjoy substantial discounts.

In property investment, you can also engage a full-service property consultant like myself.

Typically, it cost 2% for selling and 1% for buying.

Additional Factors to Consider

One must be very careful when using leverage(or debt) on either of the products.

However, using borrowed money on stocks is riskier as a margin call can wipe out your entire portfolio.

A margin call is when you are required to sell your stock or pump more money into the account.

You are helpless once the institution/ lender decides as and when they want to take your money.

For property, the lender can’t force you to sell the house if the value of your property drop.

They can only do so if you can’t make your monthly installment payments.

Another factor to consider is the number of speculators in the market.

Speculators are defined as investors or traders who purchase assets for short periods of time and employ strategies in order to profit from changes in their price.

They don’t hold the stocks for a long period of time and this can affect your stock value.

The prices can rapidly rise and fall within a day as they will try to sell their holding as soon as they reach their price target.

For property, on the other hand, the prices steadily rise.

This is because most buyers are homeowners.

Homeowners, in general, lives in their homes for at least 3 years before planning to sell them.

Hence, we don’t see fluctuations in the property market where the prices rise and fall hysterically.

Start as soon as possible

I believe that both investments serve different purposes and for different profiles.

It is important that we start investing as soon as possible.

If you just started work, you should start saving first and build up your rainy day fund of at least 6 months salary.

Singapore is a place where the Government puts a lot of emphasis on OWNING a home.

There are a lot of grants available for first-time homeowners.

So do make sure you take advantage of these.

For me, investing is a long-term strategy using grit, focus, and hard work.

I personally would not be fool by the promise of making tens of thousands within days or even months.

All the best in your investing journey!

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