A close friend of mine threw me a question – why don’t you divest all your stocks and buy a property instead. That was a few years ago, and the rental market was still relatively vibrant. That led to me ponder for a while. Certainly a few things crossed my mind to kill the idea:
Without doubt, both stocks and properties are good hedge instruments, but they can differ very much in their usefulness. If they are applied inappropriately, one may even suffer as a result of holding them. Property, for one, is a high-ticket item. In all likelihood, we need to take a loan to own a property. In order to service that loan, we likely have it rented out to at least cover the monthly mortgage payment. Certainly, it is a question of the bigger the loan, the greater the pressure. Even if there is no need to service the loan, we still have to find a tenant so that we can derive an income (hopefully a passive one). Otherwise, the property is only a dead asset, just like holding an art painting or hoarding gold bars. The only way to gain from it is a huge appreciation in price some years down the road, which may or may not happen.
Then there is a question of liquidity. It refers to the ease of converting the asset to cash especially during times of need. Unlike holding a portfolio of stocks, we can simply liquidate some stocks while leaving the other stocks un-touch. In other words, we can down-size our stocks portfolio to remain relatively liquid. In the case of a property, can we simply sell off a toilet or a bed-room? It is a question of either a whole property or no property, and not somewhere in between. Furthermore the time needed to liquidate a property during times of need may force us into selling a property at a not-too-ideal price. While we can also end-up in a fire-sale for stocks in times of need, we can at least time the sales such that all the stocks need not be sold out in a single go.
(3) Government curbs
Authorities around the world tend to be more decisive on clamping down property speculations and the Singapore government is no exception. Frenzy properties speculation usually end up miserably, just like what we have seen in the sub-prime situations leading to the global financial crisis, sky high properties that it takes three generations to fully pay for a property in Japan prior to the crash of Nikkei during the late 80s. Until today, the situations in Japan have still not fully recovered, and Japan had already suffered two ‘lost decades’. Whether in Europe, in China or in Hong Kong, the story is always the same. What about shares? Until today, I have not heard about curbs on shares trading, except for those on the watch-list imposed by the broking houses. They are not real government curbs so far. In fact, many governments would want to maintain their stock market as vibrant as possible. After all, the penetration rate is still very low, and to be seen as a real financial centre, it should be free from government intervention. Whether in China, in Japan, in Hong Kong or in US, we do not hear of government curbing stocking investing activities. In fact, they are the ones who help to prop up during a huge meltdown, just like what we seen during the global financial crises in 2008/2009.
(4) The exit
One of the considerations of a good investment, which a lot of people have overlooked, is that it can be exit as easy as we enter. (That’s why in the last two years, those held corporate bonds were not able to dispose their investments even at a loss because there were simply no buyers due to illiquidity! It was easy to enter by throwing in an enticing coupon rate, but to get out of it requires some form of cross matching between a seller and a buyer.) By the same token, it is also more difficult to get out of a property than on shares. It probably takes about 3-6 months to decently sell off a property at hand. In this period, there are a lot of advertising and selling activities such as bringing prospects to see the property, putting advertisements on the newspaper, talking to potential buyers and agents. It is only after all these ground-works that we are likely to find a prospective buyer to sell off the property decently. I admit that I have no patience for all these, and therefore getting a property for investment is out of question.
(5) Other considerations
Of course, there are other considerations as well. Leaked pipes, over-flow toilet bowls, electrical short circuits are teething issues that can make our tenants call us right in the middle of the night. Every night, we have to be on our toes and, every evening, we have to pray that nothing of that sort happens in the night.
After all these thoughts, I still want stick to stock investing. Unless, of course, I already have $2 million dollars cash sitting in the bank and is doing nothing for me at the moment. In that circumstance, sure, I may get a property without a loan.
Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.