Me & My Money Series (Sunday Times)

[KopiKat]

His ROC is likely to be way higher. the reason why property investors appear so wildly successful is mostly tied to both the climate, as well as the inherently leveraged nature of the investment. %tage absolute return may appear so so, but a 1% return on 1 million is still 100k. and if you consider that the 100k is made on a 200k downpayment, then the returns are substantial. (minus off interest, transaction costs etc of course)

stock investment isnt more or less difficult in terms of % returns. but in terms of absolute returns, it would be quite a diff story. your typical margin account doesnt give more than 1.4 times leverage or so. Property is 5x leverage.

Let's look at the figures again. Using your example, a $1Mil property using 80% financing ie. $200k Capital is sold for a $100k Gross Profit.

At 1st glance, the returns seems fantastic with a 50% ROC. But, let's not forget about Stamp Duties, which'll eat up a sizeable chunk of this profit. Way back, I paid 3% for Stamp Duties and ~0.4% for other Legal fees (but it may be lower now that they'd liberalise the Legal Profession's pricing structure) for my home.

So, in the worst case, for a 2-way (buy and sell) transaction, you'll incur 6.8% expenses.The $100k Gross Profit reduces to $32k ie. 50% profit drops to 16%. With the new anti-speculation measure in place, I guess we may have to hold for at least 3 years (?) or the usual bank clause for no penalty for early Capital Repayment. The profit reduces substantially to 5.13% p.a. If you hold for 5 years, this drop to 3.2% p.a. Not so attractive now, eh?

The returns can be improved if you are renting out the property, but the extra Nett Rental Yield is likely to be in the region of <5% after factoring in all the additional expenses (Maintenace, Renovations, Property Tax, Income Tax, Agent Fee, Legal Fees, ...). In the meantime, you may also experience negative cash-flow (the mortgage payment also includes Principal Repayment).

IMO, not worth the hassles when I can easily get 6-10% Dividend Yield from REITs (if I want exposure in Property Assets) and with active management, another 2-3% Capital Gains. Once a while, when Mr Market goes into manic depression, I can also get additonal ones at a good discount for additonal profits when market recovers.

Addendum : I went to check IRAS site. The anti-speculation measure is for 4 years (16% - <1yr, 12% - 1-2yr, 8% - 2-3yr, 4% - 3-4yr) . The Stamp Duty for a $1Mil property is $24,600 or around 2.5% (lower than the 3% of my above estimates).

http://www.iras.gov.sg/irasHome/page.aspx?id=1832