Shares vs Property
Most people I know prefer to invest in Property as compared to Shares.
But if you have seen a Unit Trust presentation before, you will know that Fund Managers have all sorts of charts showing how shares are a superior investment compared to everything else. So who do we believe?
OK let’s take this scenario…
1. You are in your mid 20s
2. You have been working for 5 years
3. You have saved up RM50,000 in Fixed D
4. You have a degree and a decent job
With this new-found financial freedom, you are ready to make an investment. You hear of friends making money on the stockmarket and are keen to get in on the action.
If you’ve never invested in shares before and don’t own your own home, you should seriously consider buying a house first.
A house is a no-brainer way of making money in the long term. There might be some exceptions, for example if you happen to buy a house built on sinking sand or a condo in a fancy neighbourhood that takes a dive when all the speculators dry out, but in 99 out of 100 cases, a house will be a money maker.
How many times have you heard your friends say “I am a louzy property investor”? The fact is that even the most amateur of investors have invested brilliantly in real estate. Compare this with amateur stock investors, and it’s no accident that people who are geniuses in their houses are hopeless in their stocks.
Figures will show that shares outperform other asset classes in the long run. However when it comes to houses, the system is rigged totally in favour of homeowners. Banks in Malaysia let you buy a home for 10% down, giving you tremendous leverage over a little amount of equity.
So if you bought a RM450k house with a RM45k deposit and your house went up to RM650k, your humble RM45 has made you RM200k!
Do that on the stockmarket long enough and you’d be worth more than Uncle Lim’s family.
Leverage aside, there are other reasons to go for your dream home.
Houses (like good shares) are usually profitable if held for some time. When you get your dream home, you’re not likely to flip it the very next month. Most probably you sweat and toil over the renovation process, visited IKEA no less than five times, and along the way battled with huge weekend crowds all over the place. When you finally move in, you are satisfied!
Even if next day the headlines read “Home Prices Take a Dive” (which in all my years of investing has never happened once), you wouldn’t be loosing sleep… you’re there to stay! Unlike the stockmarket, you won’t see your house price running on the Bloomberg or CNBC ticker. There’s no conspiracy to make you panic.
Finally, Property is better than Shares because you know how to do your research and poke around before buying. Property analysis is really a no-brainer, all it takes is a lot of time and effort to drive round, check out different places and compare prices. You might even hire experts to check for termites, whether the roof is leaking, or whether than crack in the wall will bring the house down and so on.
No wonder people make money buying property and loose money buying shares! They spend months choosing their home and minutes choosing their stocks.
You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.
Peter Lynch
June 24th, 2009 at 3:46 pm
Not really sure thing.
1. If you buy at peak of bubble
2. You wake up one day & find a graveyard next door (Note: a certain condo got major whack when graveyard pop up)
3. If you are property investor, get ready for tenants from hell. If you lucky & able to kick them out, you may have to pay a bomb for repairs
Moral of story, no such thing as sure thing in investments
June 25th, 2009 at 12:47 pm
The returns may not be so attractive after deducting bank loan interest, legal fee, maintenance fee and gain tax if sell it within 5 years from the date signing S&P agreement. Futhermore, you may get the risk of no buyer also.
Every investment does not guarantee returns
June 25th, 2009 at 4:55 pm
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Cheers.
June 28th, 2009 at 10:10 pm
I been following ur blog for some time. Thanks for sharing ur learnings generously & it really helps for newbie investor like me.
However, I have strong doubts on what U posted this time for following reasons,
1. deposit 10% & take a 400K loan will incure huge interest and quite impossible to make any meaningful profit.
2. U will have to folk out 2K~3K per month just paying for the interest for begining few years before U can reduce the loan principal amount. The property doesn’t belong to U until the last installment & bank cud sieze the property anytime if U just failed to pay 2~3 installments.
The only viable possibility is U rent out the property at good price & the tenant pay U very consistenly. This i feel is definitely more difficult than finding a good stock.
June 29th, 2009 at 12:27 pm
Hi Guys, I just need to clarify something… the above post refers to a situation where you are young and don’t own a property yet, and you are deciding whether to buy a home or invest in shares. As a starting point, I believe that property will work better for most people because they do not yet have the right pyschological mindset to invest in shares. Actually property is a form of forced savings and when you are young, your loan can even be more than 30 years, which means a RM400k loan can be taken for less than RM2k per month which is affordable for many young couples. As for me, I personally prefer shares because it’s more liquid, less headache to get dividends (compared to rental), doesn’t involve huge fees/stamp duty, and a lot less work! But if I did not have my own home, then I’d think twice. It’s always good to build some equity in your own home first.
July 4th, 2009 at 10:42 pm
It all depends on how high a risk taker you are…..The return on shares are great if you are to choose a right portfolio of shares that are prudently selected.Prudent selection means that the shares are liken by GLC or Government investment bodies like Tabung Haji,PNB,EPF or any others bodies that depend on shares price escalation.Do a little study on the shareholdership of the company before investing.That will help you a little in wrongly purchasing a wrong stable of shares.A misselection of shares will cost you a great deal of losses as human nature are that they will hang-on to their portfolio in the hope that it will rebound.I have experience these kind of situation when I purchase 50lots of shares @RM6.40 and held on dearly to it until 10 years later I disposed it at RM0.60.Imagine the burn that I endured.It’s no more a burn……….it’s an inferno to my life-saving money.
Also,always remember that buying shares are not meant to be kept for long.Once you achived your target,exit the market and do not be greedy as you do not know what’s will the price of your share be tommorrow.If it is not hurt by the local sentiment,the global economic climate will definately have influence on our local bourse.So,good luck in whatever endeavor that you undertake!!!!
July 9th, 2009 at 3:32 am
Hi,
Shares and property do have their own pros and cons. If you ask me, I would prefer to investment 70% and 30% of my money into property and shares respectively.
For shares, I prefer to go for fundamental ones, at the end, it’s hard earn money. Within this 30%, I allocated some to big cap, resilient and prudent management bluechip while some to REITS. Sound very conservative right?
For property, location is the key. To lower the risk, I always look for completed property so that you know what’s happening or going to happen around it. Rental is the income. It’s a long term investment and should keep it as long as you can, at the end, it’s a passive income for many generations to come. Also, look for freehold.
Opinions are welcome.
July 20th, 2009 at 8:19 pm
I think it doesn’t matter whether it is property or shares. As long as you really keep track of what’s going on. I agree with Larry, have a property first especially if you are young. Once you have extra funds, than you can splurge on share market.
Of course some basic common sense must apply, check on the thing that you want to buy, whether it’s a house or a share stock. And then, of course it is very important to sell it when the price is higher, Only then you’re making a profit. Therefore, a property being physically big and heavy is not as liquid as shares(being pieces of paper or digital these days). That’s why I’m with Larry on this.
For example in the period from April to last month, a lot of people who invested in the Stock Market were able to make 20% to 30% or higher. That is considered a very short term in being able to make that kind of return. Then towards end June the market took a dip. Some investors lost the entire April-June gain. But then after that, in the last 2 weeks, the market gain momentum and the market is at its highest since the last 1 year. Regardless, whether they came in 3 months ago or two weeks ago, everyone makes. So, just don’t sell when the price is cheaper than what you paid for. And check your timing.
Also, If you want to buy shares, depends whether you want to be in it long term or short term. If you have all the time in the world, go get some blue chip. If you’re a short term impatient guy whose time is always running out, this is what I do. Subscribe to investment bank’s daily report, occasionally read financial newspapers and watch out for tips on what’s hot. Very likely, these will be the most active counters/shares traded. Watch the trend in prices going up and down for a while, catch it when you think it is low and sell when you’ve made at least a minimum 5%-10%. I used Maybank2u Online Stocks. Very easy and fast. One last tip: Don’t be too greedy. Good luck!
July 25th, 2009 at 12:31 am
Hi Jasni,
It’s really hard to predict when is the right time to buy. I wonder how many people can really predict the bottom like in March 2009, buy a lot and earn that amazing 20% to 30%.
Timing is really difficult, at least for me.
I always go for long term.
July 25th, 2009 at 12:53 am
I will have to totally agree with Larry on “buying property will work for more people… than buying shares”. On the issue of interest rate etc, take this actual case. I bought a low cost apartment in shah alam for RM70K. Paid a 20K down payment and servicing a monthly loan payment of RM470 (for 10 years). But the apartment gives me a RM500 monthly rental. Isn’t that just great? The rental pays for my installment.
If I purely look at the interest portion of the installment, it is only RM270/mth. I have been servicing my loan for over 5 years now, and another 5 to go. But like always, there is no sunshine all day through… in the midst of the good thing happening, I realised that the property has not inched upwards with regards to market value. After 5 years, it is still priced at about RM70K… if not lower, when actually sold.
So is this a good thing?
July 27th, 2009 at 3:20 pm
Hi Raymond, given the small capital outlay on your investment, you’re doing pretty OK mate. 5 years later, you would have paid off your loan completely. You’ve got some equity on which you can leverage into other investments.
From those figures, your property yield is around 8.6% compared to your borrowing cost of around 5 – 5.5% probably. So the bank is working for you here
PS. Not sure if you can, but if it is possible to refinance the loan at the current rate of 3.5 – 3.8%, you’d be looking pretty good!
July 31st, 2009 at 7:02 pm
Hi Raymond,
When comes to property, the most important factor is location. I don’t prefer to go for low cost because the price appreciation isn’t much. This could be due to the lack of awareness to upkeep the flat.
Try look for medium range apartment in good location, high occupancy rate, near to malls, shops, LRT, good maintenance body, etc. This kind of apartment has the potential to appreciate.
If the rental can yield approx 8% and can cover your installment and monthly expenses, then if the price really inches up, then it’s bonus to you