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.

The Great Index Unit Trust Hoax

Whenever I check into a hotel, I get really fascinated by just how crazy expensive some of the items in the minibar are.

One time when I was on vacation, I felt a little hungry so I lumbered over to the minibar and pulled out a pack of cashew nuts – just the regular kind you’d find at any convenience store. Just to be safe, I checked the prices before I tore the pack open, and involuntarily yelled: “NINE DOLLARS FOR A PACK OF TWELVE NUTS?! ARE YOU OUT OF YOUR FRICKIN’ MIND???”

It’s absolutely crazy how people are perfectly willing to pay several times the price for the EXACT SAME PRODUCT – a product that they could have gotten much cheaper elsewhere. We see this everywhere: a Nike sneaker vs a non-branded one, Tropicana orange juice vs a house brand, and beer that costs $12 in a restaurant and $2.50 in the supermarket.

A pack of nuts from the minibar might do a little damage to your wallet, but it’s nothing compared to the damage a unit trust (also known as a mutual fund for my American friends) could do to your long-term wealth.

Costs Matter

I’m not even going to discuss actively managed unit trusts with their high management costs. Nobody takes those seriously anymore – There’s more than enough research that shows that as a whole, actively managed unit trusts are a terrible choice compared to index funds.  Check out here and here.

Today, I’ll just uncover a pricing anomaly I like to call The Great Index Unit Trust Hoax, which involves 2 unit trusts being sold to Singaporean investors. Both charge exorbitant amounts to essentially help you invest in portfolios that you could have easily put together yourself… at a fraction of the cost.

To Infinity… and Beyond!

Exhibit A is the Infinity US 500 Stock Index Fund, which is supposed to help you track the return of the S&P 500. To accomplish this, it hits you with a whopping 0.98% expense ratio.  Now 0.98% may not sound like too much of a big deal, but try compounding that over 30 years and you’re talking about a difference of tens of thousands of dollars of extra cash that’s coming out of your pocket.

But hold on – there’s another, cheaper way for you to track the return of the S&P 500 on your own. You could buy an ETF from Vanguard, which gives you the EXACT SAME RETURN, while charging a mere 0.05% expense ratio. This makes the Infinity unit trust almost 20 TIMES MORE EXPENSIVE than the Vanguard ETF. Yeah, I know.

Home Sweet Home… For 4x The Price

Okay, I hear you say, so maybe that’s a problem unique to the USA.

Oh wait, it’s not.

Presenting Exhibit B, the patriotically-named unit trust MyHome Fund run by Singaporean asset management company Nikko AM. It invests in 1) an ETF tracking the Straits Times Index and 2) the ABF Singapore Bond Index Fund ETF. They’ll charge you a ridiculous expense ratio of 1.2% for all their hard work.

But wait! Did you know that you could totally log onto your online brokerage and invest in 2 ETFs which track the EXACT SAME THING for a fraction of the cost? Namely:

1. SPDR Straits Times Index ETF (SGX Ticker: ES3) – Expense ratio: 0.30%

2. ABF Singapore Bond Index Fund ETF (SGX Ticker: A35) – Management fee + trustee fee: 0.20% (I couldn’t find an exact figure for the total expense ratio on their website – those sneaky bastards – but it shouldn’t  be too far away from the sum of these 2 fees).

Total weighted expense ratio: 0.28%

Ta-daahh! You’ve constructed the exact same product, at a quarter of the cost. And that’s not taking into account sales charges, redemption charges, front-end charges, admin charges, and hire-an-attractive-banker-to-convince-you-to-part-with-your-money charges.

Do Yourself a Favor

My point here is to always, always, read the fine print. The finance industry loves to play down details like these because it means higher commissions for them – commissions that come right out of your pocket.

If you plan on investing passively, do yourself a favor and skip out on the unit trusts. You’re way better off buying the equivalent ETFs instead. Of course, there are a few disadvantages in buying ETFs (eg brokerage commissions, currency exposure, inability to invest in small amounts), but they can be easily circumvented (eg investing regularly using no-minimum commission brokers,  or in the case of the STI ETF, setting aside an amount every month until you can afford one lot). None of the disadvantages of ETFs justifies the tens of thousands of dollars you’re giving up in expenses if you invest in unit trusts.

It would be totally awesome if a reputable fund provider like Vanguard would set up an index fund in Singapore (are you reading this, John Bogle?), which would eliminate all the disadvantages in the para above, and yet charge a reasonable expense ratio that doesn’t require us to give up our first-born child.

In the meantime, stay smart and read the fine print. Save your money for those overpriced cashew nuts from the minibar. At least they’re tasty.

Car (That Costs A) Bomb

I’m just gonna say it publicly – I think our public transportation system is awesome.

Okay – I can almost hear the chorus of angry, dissatisfied Singaporean voices rising up to rebuke me: But they JUST raised the taxi fares! And the MRT is totally packed with foreigners/immigrants/maids/peasants/smelly people in general! And the Circle Line broke down AGAIN. THE CEO OF SMRT MUST RESIGN!!! Oh wait she already did. THE STAND-IN CEO MUST RESIGN!! Bring out the torches and pitchforks!! Die, you richest 1% of the population! – love, the 99%.

You know what? I’ve taken the New York Metro and the London Underground on a daily basis. Breakdowns, delays, line closures, stations smelling like urine, smelly weirdos walking up and down the cars asking for cash are everyday occurrences. And then there’s rush hour. I don’t really care how much the CEO of SMRT / SBS / whatever gets paid – to have 95% of the trains and buses running on schedule, clean, and with those awesome plastic seats you can fall asleep on without contracting some strange disease – is pretty damn awesome to me.

You know what’s even more awesome than those blinking lights on the MRT map that tell you which station you’re at? The fact that taking public transport is SO MUCH CHEAPER than owning a car. No, seriously. Someone once told me that even if you took cabs everywhere you went, it would still cost less than owning a car. I kinda sorta believed that, but I didn’t bother looking at the numbers because that was just way too much work. And then I came across a great article from Moneysmart.sg on the real costs of car ownership in Singapore, which shows that it costs a whopping $1,855 a month just to own a car here.

Seriously, that’s crazy. That’s even more than what I spend on everything else. You know what you could do with $1,855 a month? You could pay for university. You could eat at Ippudo (which is only like the awesomest ramen restaurant in Singapore) every single day. You could buy a Macbook Pro every month and still have change left over. You could invest it at 5% per annum (a pretty conservative estimate since the stock market has historically averaged around 8%) and end up with $281,254 after 10 years. You could…. okay you get the idea.

It baffles me why anyone who isn’t ridiculously wealthy and rolling in tha ca$h moneyyy would ever get a car in Singapore. It baffles me even more why anyone would take a friggin loan to buy a car in Singapore. Ladies and gentlemen, let it be clear that you should not be paying interest on a liability. What’s a liability? It’s something that sucks your money away, without the slightest chance of you getting it back (kind of like… children. Or your wife who spends all your money on gym memberships. Yeah, you can tell that I’m an awesome family man). Okay, if you earn a comfortable salary, and you bought your car without the help of a loan, and your monthly auto expenditure is 10% or less of your income, then you should totally get a car because you’ve earned it. But if you’re a young, just-started-working, clueless dude who just wants to get the chicks, then there are better ways to get laid (ever tried something called “talking to girls”? It’s been proven to work sometimes, and it definitely doesn’t cost $1.8 grand a month!).

“But Lionel… ” I hear you say, “It’s way more convenient. And I don’t have to wait for cabs in the rain.” Whine whine whine. I spend like $100 a month on public transport, which saves me $1,755 a month for just not owning a car. And I think I’ve only been stuck without a cab like one time for the whole of last year. Is $1,755 a month really worth that rare occasion when you couldn’t find a cab? Please – if you’re sensible, you’d save your money, plough it into investments, and earn a healthy return in the long run. Then you’d be able to afford as many cars as you want. That’s a much better choice than being in debt over a money-sucking liability.

Besides, not having a car is pretty awesome. I get to read during my morning commute. And meet random interesting people on the train. And not have to worry about parking. Or traffic jams. And predict with (almost) clockwork certainty what time I’m gonna get to my destination. And just lean back, put my iPod on, and enjoy the awesomeness that is the Singapore public transportation system.

I may not have a car, but I feel rich already 🙂