5 Surprising Truths About Investing in Real Estate

Singaporeans are absolutely crazy about property. Whenever I walk into a bookstore, I see shelves upon shelves of real estate investing books with pictures greasy men in business suits on the cover, wearing a big smile and screaming “I Got Rich Making Big Money Investing in Real Estate, AND YOU CAN TOO!!”

I hate those books. One day, I’m going to write a book with a naked picture of me on the cover, wearing nothing but a big smile and screaming “I Published a Book With A Picture of Me In a Birthday Suit, AND YOU CAN TOO!!” And I’m going to get the bookstores to stack ‘em right next to those damn real estate books.

I get really puzzled whenever I talk to someone my age about investing, and hear that they would rather “just invest in property”. Those greasy men in business suits can’t be that convincing, can they?

I’m probably going to piss off every single real estate agent in the world by writing this, but I can think of 5 reasons why real estate isn’t the best investment for young people:

1. Your first house isn’t an investment

Most people who buy a house more expensive than they can afford justify it by claiming that it’s an “investment”. Let’s be clear here – your first house is a place to live. It is NOT an investment. Even if your house rises in value along with every other house in the country, whatever you gained from selling your house would just go right back into purchasing another place to live in.

2. Property isn’t necessarily safer than the stock market

Most people think that property is “safer” that the stock market. But really, if you’re lumping ALL your savings into one house, how diversified is your investment portfolio, really? Compare that to investing in the Straits Times Index (STI), which immediately diversifies your investment into 30 stocks, each backed by a real, physical, blue-chip company.

By the way, you can lose money in real estate. Anyone remember 2008?

3. Property may not give you a better return than stocks

An SGX-led study showed that if you invested in Singapore property in 2001 and held it until 2010, you’d be worse off than if you had simply invested that same amount in the STI. Globally, stocks may or may not outpace real estate in any given year, but stocks have historically performed better than real estate over the long-term.

A New York Times article also described how real estate in the US has only barely managed to keep up with inflation, while stocks have risen comfortably above inflation for the past 200 years. As Yale economist Robert Shiller puts it, “from 1890 through 1990, the return of real estate was just about zero after inflation.”

4. Costs will destroy a large chunk of your returns

If someone bought a house for $250,000 and sold it 5 years later for $400,000, most people would think, “Great! I made $150,000!” But they failed to account for all the associated costs that go along with it: Taxes, agent fees, commissions, insurance, maintenance, stamp duties, renovation costs, furnishing, etc, which would add hundreds, if not thousands, of dollars to your monthly bill.

Let’s not forget the interest you’ll have to pay on the housing loan you took out, which is easily in the ballpark of tens of thousands of dollars. For Singaporeans, if you use your CPF to purchase a house, you’d have to pay back the amount you “borrowed” from CPF, PLUS INTEREST (It stands at 2.6% today, but it’ll rise once interest rates go up. I totally see the rationale of this policy from the government’s perspective, but am I the only one who thinks this is a crappy deal from an investing standpoint?).

The costs I pay for investing in a low-cost ETF? A commission of $25, and an annual expense ratio of 0.3% (For every $10,000 invested, that’s like thirty bucks).

5. Mortgages screw with your psyche

“Hey, let’s use other people’s money to get rich!”… is what most people would tell themselves before taking on a huge-ass mortgage.

Dude, a mortgage isn’t something to scoff at. It’s as full-fledged and serious a commitment as… marriage. Things change once you’ve got the ever-present threat of a monthly mortgage payment hanging over your head. You start to see things differently. Mortgages cause people to become way more risk-averse, and less likely to do things like finding a better job, starting their own business, and investing, even though those options may help them to become financially better off.

Think of it as a Big Buy – Not an investment

I’m not saying that real estate is a bad investment. You can make money from it if you already have 1) a house to live in, 2) lots of spare cash, and 3) a strong portfolio and are looking to diversify your investments.

But most young people don’t fall into this category. Instead, we should see our first property as a really, really, really large purchase rather than an investment. Think of it as a great way to build equity and start a family. But please don’t delude yourself into thinking that you’re going to get rich from it. If you’re just starting out, you’d be better off focusing on building a sensible portfolio of stocks and bonds.

Agree/disagree? Leave a comment or send me an email at cheerfulegg [at] gmail [dot] com. I’d love to hear from you, especially if you’re interested in publishing my birthday suited book cover.

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5 thoughts on “5 Surprising Truths About Investing in Real Estate

  1. You probably forgot about the leveraging effect for property. From the $250k house your descibed above, I might have only put in $75,000 with all associate cost but I had gained $150,000. Its actually a 100% gain on the investment. If you have invested into the STI in 2007, you will probably still be over 20% below water.
    Timing is important in shares just like for properties. Its also important to know how to look for undervalued properties just like those who invest in shares who try to look for undervalued shares.
    The difference between both is the number of mistakes you can make. For properties, you may only have 1 bullet and once you missed it, you may take years to recover….

  2. i dont completely agree with you

    with brick and mortar house
    you leverage
    you get rental income
    you have a choice and choose wisely (similar to stock)
    if nothing else, you can pass the house to your next generation

    as with all forms of investment
    there are their own inherit risk

    to say that investing real estate for the young is NOT RIGHT is completely false

    to be frank, I wish I had bought more properties when I was much younger
    currently i have 6 residential properties, 1 office and 5 warehouses which provide me with a monthly rental income of about $40-50K

    Frank Ooi

  3. Hey guys, thanks for the comments! Love it when my posts turn into conversations 🙂

    First up, let me clarify: Like what I blogged in the last section, it’s not that real estate is a bad investment per se. People CAN make money from it, as Frank undoubtedly did. I’m not saying that stocks are better than real estate or vice versa, but every savvy investor would have a portfolio that comprised of stocks, bonds, real estate and more. Diversification is key.

    All I’m saying is that for a young investor, real estate shouldn’t be their FIRST investment. Their first investment should be a stock portfolio, which is way more affordable and less risky. Let me explain.

    More affordable: When it comes to stocks, all you need is a few thousand dollars to get started. You don’t need to have a 20% downpayment that would amount to tens of thousands of dollars. You don’t need to wait to save up enough to afford the furniture, renovation, agent’s fees and stamp duties. Instead of painstakingly saving up for years and years and years just to afford these huge startup costs in real estate, they can get started IMMEDIATELY with a stock portfolio, and let compound interest work in their favor. When it comes to stocks, the earlier you start, the better.

    Less risky: If you lose your job, you’re not obliged to keep on feeding your stock portfolio, you can let it sit there and go on collecting dividends. However, with a mortgage, you have to keep on paying it even if you lose your job. That’s the dark side of leverage. You can use it to get 100% gains, as Adrian rightly pointed out, but let’s not forget you can also suffer 100% losses. When it comes to stocks, if you invest in the stock market as a whole, there’s almost zero chance that the whole stock market will crash to zero, meaning you can never lose 100% of your capital.

    To Adrian’s point of a 20% loss if you invested in 2007, If I’m holding for 20, 30, 40 years, the 20% drop from 2007 to 2012 will be insignificant. Look at any historical stock market chart (http://stockcharts.com/freecharts/historical/spx1960.html), 25 years ago there was the “Black Monday” Oct 1987 crash – it was such a huge event at the time, but it looks so insignificant now compared to the huge gains of the stock market since then.

    Real estate CAN be a good investment, just like stocks. It’s just that it’s a better idea to start off with stocks, and then invest in real estate once you’ve built up enough resources.

  4. So long as property musical chair doesn’t stop, this highly-leveraged property game is still ok.

    But imagine: Economy turns bad, people losing jobs, property market goes down, rental goes down, interest rate goes up and most investors could have over-borrowed.

    I do feel that the cyclical property market is currently in a peakish stage (when compared to the average salary) and it might be entering a tipping point if not manage this carefully by the authorities.

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