As a millennial living with almost every one that I know trying to keep up with the Joneses, it’s not surprising to see some of my friends spending a hell lot to get their first home. The concept is drilled into their heads that property is 99.9999% of the time the best investment that they can make in their entire lives. In fact, the price that they are willing to pay is sometimes something that my alter ego of Miss Niao will never approve of.
With the hefty loan that they have to take, after wiping off all their OA monies for the down-payment and still having to service part of their monthly installment with cash because their OA contribution isn’t high enough, where does this leave you?
For a freshly bought BTO, you have an “asset” on your balance sheet that is in need of renovation, maintenance fees and all that yada yada that is totally not going to generate any income for you in the next 5 years of MOP.
Plus, you’re also possibly losing out on all the accrued interest in your CPF!
While having a home is important, it is essential to consider a property that is within your means. BF and I have been discussing about this for some time now and we both (or at least me, and I have brainwashed him) agree that a home is meant to be there, for us to build a family. We should not see it as an investment, and we should not have any intention to sell it, unless of course, things change advantageously. Hoping that the valuation of a house would appreciate in time to me is pure speculation, and I would not want to use a roof over my head to be a liability because of greed.
Richmond also feels the same way, and insists that if possible, real estate should only be bought when opportunities present themselves. I introduced him to the alternative of REITS, where you get to own real estate in a different way, but enjoying passive income at the same time with quarterly distributions without having to do as much work as a typical landlord. It also extends his investment boundaries out to other real estate options like commercial/retail/industrial/etc as compared to residential ones.
Now then, if having property is awesome and the best investment that you can have, then why aren’t the richest people in the world known for being rich because of real estate? Surely they must have multiple houses. But their main investment isn’t in real estate, but instead, in a business/enterprise, or more often than not, a combination of both.
Here’s a comparison of how stocks did in comparison to REITS from 1988 to 2016:
So it looks like the stock market is only slightly beating REITs with not even one percentage point! On an even brighter outlook, if we purely calculate how well REITs of the residential properties did, it would beat the S&P 500 a little bit more with annualized returns of 11.53% and 10.85% respectively from the period of 1994 to 2016.
What this concludes is that REITs (NOT personal property) could possibly be a viable option for investors who want to get decent returns over the long run which are similar to the stock market, and with the addition of frequent payouts from the distributions as passive income.
Of course, this also does not necessarily mean that you should jump onto the bandwagon and buy property immediately. REITs compared to owning your own property is very different, and all those not-so-obvious fees that I’ve mentioned before would not be reflected here in the returns, and can average from 1% to 4% of your yearly home value. And, like before, don’t forget about the opportunity costs like CPF interest.
Timing is also a very important factor. Just like the stock market, prices of property fall and rise with some relation to the general economy. NAREIT, notably, represents the entire world’s REITs performance, so to compare just how Singapore did may turn out to be a different story altogether, but that’s an analysis for another day. The S&P 500 also consists of a number of REITs, and still undoubtedly offers a wider diversity of industries/sectors.
But are you reading Miss Niao because you want to be the defensive investor? Check out my post on buying your first stock. With the creation of this blog, it is obvious that I am trying to beat the market, and it would take me some time to prove that I can do it. (If you’re doing the same, stay tuned for more articles, and bring some fresh perspectives into the comments if you have any). This is the reason why I will not heavily concentrate my capital on REITs, because I am aiming for something else.
In contrary, within both BF’s and my personal portfolio, we hold quite a huge chunk of REITs, but most of the capital used are from BF as they align more towards his investment objectives.
But to buy my own property? In our funny, sunny island, don’t you know that you have to get married first? :p
Thanks for reading!
Miss Niao xoxo