There are so many investment options available today. You may have seen ads on Facebook and Instagram claiming high financial returns in a short period of time. These are often accompanied by claims such as “it’s easy to do” and best of all, “low capital requirements”.
Before you click on those ads, we would advise you to save your money and time (and their advertising costs) because it really is just too good to be true. Instead of get-rich-quick schemes, consider smart and wise investments that you can start off with.
When it comes to investing, most people often consider real estate or a stake in the capital market. So in this article, we will highlight the differences between investing in real estate and an entry-level product in the capital market – Exchange Traded Funds (ETFs). (Not familiar with ETFs? Learn what they are and about other financial terms on this Finance Glossary.)
We’ll compare these two investment choices by looking at some key metrics.
1. Initial Capital
Firstly, the amount of initial capital required to invest in either of these options would be a key difference. A property purchase in Singapore, assuming you are below the age of 35 and not planning to get married anytime soon, limits you to either a private property or an overseas property.
Refer to the chart below for an overview of the cost of a downpayment on a residential property in the region. This chart is based on estimates and since taxes vary according to residential status, the lowest rates were used in these charts.
|Price per square metre outside city centre||S$13,820||MYR 6,066||IDR 16,608,695||HK 150,957|
|Purchase price based on 100 square metres||S$1,382,075|
|Min. downpayment||< 25%||< 10%||< 15%||< 10%|
|S$39,883||MYR 85,820||Transfer tax and others: 6.7%||HK 566,092 + 0.5% agent fee|
|Total upfront cost of purchase (downpayment + tax + others)||S$385,401|
US$ 290,914 (inclusive 0.5% agent fee)
In addition to capital requirements, the cost of mortgage loans and eligibility needs to be considered.
However, in the case of ETFs, there are many different initial capital requirements for various options. You can start by investing as little as US$30, see the chart below for more details.
|Minimum investment||< US$30||< US$30||< US$30||< US$30|
Real estate, given that it is tangible, immovable, and also not fractionable is usually considered highly illiquid. The sale of the property often comes with costs too. In most markets, sellers are required to pay a fee of 1%-3% of the selling price to real estate agents for their services. There are also cheaper alternatives available now in Singapore and Malaysia through flat-fee-based property agencies like Ohmyhome.
The time taken to sell a property may range from a week to a year in markets with an oversupply of options for buyers. So just be prepared to continue forking out the mortgage loans in the meantime. Estimate your potential monthly repayments using our mortgage calculator.
ETFs on the other hand are considered to be highly liquid. The time taken to sell your investment is usually 3 days. Also, there’s usually little to no charges incurred when you sell as most platforms usually charge a sales fee but not a selling fee.
3. Rate of return
The average rate of return for the Singapore resale property market from Jan 2009 to Dec 2018 (10 years) was 88.4%.
Meanwhile the average rate of return for the SPDR Straits Times Index ETF (for the sake of comparison) in the same timeframe was 107.16%.
Even with this comparison, we can’t conclude that the capital market would always beat the housing market, and the performance for subsets of properties may be higher or lower.
For a highly liquid investment like ETFs, prices are easily and frequently tracked. Nonetheless, it’s important to note that the beauty of this type of value investing (where stocks are bought when they seem to be trading for less than their intrinsic value), is that you needn’t track your investment’s performance every day, you should only have to check it around once a month and review the performance semi-annually.
Conversely, most people can’t track the value of their property as frequently or easily – any gains in value are usually seen over the long term.
A property is an investment you can actually live in, which usually adds an emotional value to it. While any product created in the capital market is intangible, which could make it seem more remote. However, tangibility doesn’t translate to higher rates of return. It can however give us a sense of security which results in a greater emotional attachment. So, depending on your investment priorities, you may want to consider excluding this factor to make less emotionally driven investments. However if you personally prefer something tangible and have the means to, you can still keep this consideration in mind.
So which one should you invest in?
Considering that capital is often the first barrier to entry, if you have the capital to purchase a property, and are spending a lot on rent, you might want to consider buying your first home.
If you don’t have the capital, and don’t own a home but wish to do so in the future, you can start investing in ETFs towards the downpayment of your future home. In fact, as long as you don’t have the capital to invest in property, ETFs are the way to go.
If you do have the capital and already have a home, consider the timeframe you wish to invest this sum for. If it’s less than 5 years, stick to ETFs. If it’s more than 5 years, both options would be suitable.
This article was originally published on Planner Bee, your handy financial planning app! Learn more about managing your money, investments and insurance on Planner Bee’s blog.