Saturday, March 7, 2009

Stocks or residential property investment?

Needless to say, property and stock markets are the most unlikely places you want your money to be right now. But the question is, given that you have $300,000 to invest now, do you buy a private residential property beside a MRT or a blue chip like DBS for passive income?

Many would argue that in Singapore, buying property would never go wrong. Well, perhaps it is because you have not seen people who have got their hands burnt in property market to live and tell their stories?

Which one offers a higher return and lower risk?

Some parameters of comparison:

DBS: $6.80/share

Assuming you purchased 44 lots.

Dividend per quarter: 10 cents (conservative guesstimate, could be higher or lower)

Income per annum: $17,600

Probability of losing 40% of your $300,000 in 6 months time: 30% (my conservative guess)

Income tax payable: None, as it has already been taxed at source

Yield: 5.89%

Probability of selling and earning a profit in 20 years time: 90% (guesstimate)

Net dividend income at the end of 20 years: $352,000
Assuming a conservative adjustment of 30% error, net dividend income would be: $246,400.

The argument here is that even the best banks in the world can fail, can we even trust to put our money with Singapore blue chips?

There is still a fair chance to lose 100% of our money in stocks.


99 year leasehold Property: E.g: Kovan Melody/Compass heights

Cost: 1000 sq feet, 2 room property purchase @ $580/sq foot, costing $600,000 after stamp duties and other transaction fees. Minor renovations and fixtures have also been accounted.

Loan amount: $300,000 @ 2.5% for 20 years (interest is more likely to be 3.5% on average)

Monthly installment: $1500 (conservatively speaking)

Income from rent: $2100 (conservative estimate)x12= $25,200

Property tax: 10% of $25,000= $2,500

Agent expenses: $1,100

Wear and tear yearly maintenance: $600

Net rental yearly income: $3,000

Yield: 5,400/300,000= 1.0%

Probability of losing 40% of your $300,000 in 6 months time: 30% (my conservative guess)

(Should the property market falls another 20%, the fall in your property price will be $120,000, or 40%.)

Net rental income at the end of 20 years: $60,000

Probability of selling and earning a profit in 20 years time: 99% (based on historical records)

Apparently, property market is a more appealing investment as most people can tap on their CPF funds to finance their property while earning cash returns. From the above example, it is likely that the owner is able to sell the property 20 years later for at least $540,000 and earn a little profit, or carry on renting out the property for a $20,000 annual income.

This risk is considered “lower” as it is unlikely that the property will “fail” due to earthquakes or tsunami.

In the event that nobody wants to rent, the owner can simply move in and enjoy the home himself. You cannot even use the DBS’s branch toilets even if you are a major shareholder!

However, the short term risks are more or less the same. Yet the investment emotions involved are different. The feeling of seeing my property price falling 20% and pain of seeing my investment portfolio falling 50% is totally different even if the amount involved is the same.

Property gives people a sense of security. People need a roof over their heads, no matter what happens. It let investors feel that they can earn some rental income as long as they lower rent. However for stocks, investors do not see themselves owning an essential business. Actually, many businesses are also essential ones. Without them, people cannot own houses or even get a job.

Personally, I feel that property investment carries a higher risk of failure. The rental income might not be stable and one depends on rental income to service the loan. Tenants may default or destroy your house fittings, there might be unhappiness when negotiating new rental contracts or handle difficult tenants.

Still stocks for me for now.

Any inputs?

Thursday, March 5, 2009

Personal updates

Apologies to my faithful readers who have waited so long to read my post. I was literally struggling with work and studies these days, as many of you know. Now that I study part time, I have enormous respect for people who complete their masters and undergraduate degree the same manner. It is really sheer discipline, hardwork, time and stress management in one package.

Other than taking out time to attend lectures and tutorials, the most traumatising part is to prepare for tests and submit assignments on time. With little knowledge and limited time, I have to work like a bull almost every day just to put everything together.

Work definitely suffered as a result. I became more forgetful and careless at work, making several silly mistakes that caused sleepless nights for me. Luckily it is all over now.

I just got back my tests and assignments. I am really glad that all were above 80%! I always fear that I will fail the tests and have to put in extra hours to make sure that I pass. Compared to classmates who are already finance analysts, accountants and traders, it was a personal achievement just to do as well as some of them.

Going forward, I am really unsure if I can stand the stress of the many more modules ahead. The time, effort and price for a masters is taking a toil on my work and health. I might be considering other careers apart from finance when my bond ends.
Hopefully there is a better place for me out there, somewhere.