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 Lowdown on Low Rates

An amendment to my previous post (thanks Sharon!) – just found out that DBS/POSB slashed their interest rates to a pathetic 0.05% for their regular savings accounts, and 0.2%-0.25% p.a for a MySavings account. To give you an idea about how painful that is, consider that $1,000 saved at a 0.05% interest rate, compounded monthly for 10 years, would give you a grand total of …. $1,005. Owtch.

It’s actually hardly surprising that banks are cutting their rates to pretty much zero in light of the current economic environment. And while I could bore you with my thoughtful analysis of why interest rates are near zero, (peppering my speech with words like “current economic environment”), I’ll just give you the lowdown on what you should, and should not do.

What you SHOULD do:

1. Stick to your guns. You’re not going to get rich just by saving, but good saving habits are the first step to getting your ass out of the poor house. Just like how the first step to losing weight is to STOP EATING THOSE DAMN TASTY MCDONALD’S BURGERS, the first step to getting rich is to stop spending your money on useless crap. Your account, while not earning very much in interest, serves as a protective commitment device to prevent you from making stupid spending mistakes. There’s a certain psychological advantage in keeping your saved money separate from the account meant for your daily expenses: you’re less likely to spend it.

2.  Use your account as a short-term savings account, saving for large expenditures that are less than a year away. This is actually what I primarily use my POSB MySavings account for – so I always have a stash that I can spend on vacations, parties, gifts, weddings (not mine), and random weekend trips, absolutely guilt-free.  Get your system to keep shoveling $100 into your savings account every month, and at the end of the year you’re likely to have enough moolah to spend lavishly on Christmas, or reward yourself with a trip.

3. If you’re a savvier saver, you could possibly look into some insurance-linked savings plans, CDs, bonds, etc. But I’ll blog more about those another day. But if you’re going down this route, be damn sure that you don’t need the money within the next 5 – 20 years. (what about your house? or wedding? or investments?)

(Side note: I have a separate long-term savings account, earning a higher rate of interest where I park most of my money that’s not meant to be splurged within the year. But I’ll talk more about why the hell I bother to maintain three bank accounts in another post)

What you SHOULDN’T do:

1. Don’t be tempted to switch to another bank offering an interest rate that’s 0.02% higher than the one you’ve got. Honestly, it’s not worth the trouble. Your subway ride to the other bank is probably going to cost you more than the additional interest you’re going to earn. Interest rates are constantly adjusted by banks. They’re low now because all the other banks’ rates are low. When the Federal Reserve in America decides to raise their interest rates, the rest of the world will follow suit and your bank will be forced to raise its rates in order to keep its customers. So hang in there.

2. Don’t be tempted to dump all your savings into some foreign currency term deposit. I’m seeing lots of ads these days touting everyone to convert their Singapore dollars into Australian dollars, offering interest rates of 5% and above. Sure, you could possibly make some money if you’re willing to take some risk, but don’t be fooled into thinking it’s risk-free just because it’s a term deposit. If the Australian dollar falls against the Singapore dollar, you could actually lose more than what you earned in interest. I learned this the hard way back in college when I transferred most of my savings to my US bank account, only to see the Greenback fall spectacularly by like 30% or something. (Luckily, I was too drunk to notice).

In short, it sucks for savers that interest rates have fallen, but don’t let that steer you away from your plan. Saving is just one part of the equation – it prevents you from spending on dumb things, and it’s a necessary prerequisite for all that other good stuff that WILL make you rich. Keep it steady!