I find it amazing that besides these two posts (here and here) which more or less talks about the merits of purchasing a BTO flat, I haven’t really shared my views on property investment. Especially considering this is a Singaporean personal finance blog (Singaporeans are suckers for properties) and it has been 1.5 years and counting. 🙂
Even though my investment portfolio consists of only equities and cash at this moment, I am definitely not ruling out investing in a 2nd property. After all, I believe that almost any type of investment assets (including Hello Kitty and LINE plush toys) can be a good one if you purchase it at the right price and sell it at the right time. 😉
But would it be more worthwhile to get a second property or to invest the extra cash into more equities?
I guess that’s the ultimate question and instead of joining in the endless debate of which is better, I have decided to paint an equivalent scenario for comparison by making some (hopefully realistic) assumptions. So even though there’s still almost 3 years to go before we fulfill the Minimum Occupation Period (MOP) of the flat, here’s my findings:
In Jan 2018, Mr and Mrs 15HWW would have saved up $300,000 and their investment horizon is 30 years. There’s two potential investment options presented in front of them:
1. Invest $300,000 in equities
2. Use the $300,000 as a 25% downpayment on a $1 million freehold apartment
For the 1st option, if the average return on the equities is 9.5%, the couple would end up with about $4 million in 2048. Simple.
As for the 2nd option, things are slightly more complicated. The $300,000 would be used as a 25% downpayment ($50,000 for stamp duties, agent fees, furnishing etc) and the couple has to take a $750,000 loan. Assuming a fixed mortgage interest rate at 2.5% for a 30 year loan, the monthly repayment works out to be close to $3,000 a month. The monthly rental of $3,500 would probably just be enough to cover the mortgage and other miscellaneous expenses. So, cashflow is zero, just like the equity investment.
And interestingly, if the apartment appreciates at 5% per annum, it would be worth about $4 million in 2048, similar to option 1. The mortgage would also be fully paid off.
So in this example, if Mr and Mrs 15HWW are only focused on the value of the outcomes, they would be indifferent to the two options.
How realistic are the assumptions?
1. 9.5% appreciation for equities; 5% for properties
- The STI has returned close to 9% for the past 10 years and residential properties have appreciated >7% (which I argued was likely to be unsustainable here) for the past 3 decades.
- Businesses owners have to earn a higher profit than property owners. Otherwise, there’s no incentive to be innovative and everyone will just own properties (which should then lower yields of properties and make starting a business more attractive).
2. No cashflow from apartment and stock for 30 years
- Assumption made for easier comparison and for equities, one could just assume that the dividends were reinvested for a total of 9.5% return.
- As for the apartment, people who are more conservative towards property would pick on the 2.5% interest rate on the mortgage whereas those more bullish would argue that a positive cashflow is possible.
- I have to admit 2.5% is a bit arbitrary on my part and with the SOR rising rapidly in the past week, there’s some rationale to assume a higher rate of let’s say 3.0%. That would be about $200 more and even then, rentals should rise with inflation to cover the higher interest cost.
- On the other hand, theoretically, $3,500 of rental income should more than cover the $3,000 of mortgage. So it appears pessimistic to assume no positive cashflow. However, there’s rental income tax, property tax, repairs, maintenance fee and other miscellaneous fees to account for.
- I personally feel that 90% of property investors are in the game because of the potential for leveraged capital gains and any positive cashflow is just a bonus, and especially hard to find for properties with a 999 year or freehold lease.
Obviously, if you’re a seasoned value investor with >15% compounded annual returns, there’s no reason to invest the money in a property. Similarly, if you’re a believer that the Singapore property market will continue returning 7% per annum and that interest rates will be below 2.5% for at least the next decade, there’s little rationale to be investing in equities.
Ultimately, you need to know which investment vehicle you are more pre-disposed to and obviously, it would be good to have some diversification too. 🙂
P.S.: And before I end off, I thought it would be good for me to disclose that I am pretty much a noob in property investments (haven’t done any yet) and if there’s some glaring error in my numbers or assumptions, do feel free to point it out. I am definitely still in the learning phase. 😛