24/12/2023
Penning down thoughts:
Property investment versus USA S&P index fund investment.
Assumptions:
a) USA S&P index fund will continue to compound at a 10% PA
b) singapore property over mid to long term will continue to go up in prices
c) take away dividends and rent variables from the equation
d) remove transactional expenses from the equation
e) one is purely buying to chase after returns rather than for intangible reasons like legacy, tax benefits etc.
1) property: fully pay to buy at 2m and sell at 3m ten years later.
2) property: take 500k loan, and sell at 3m ten years later.
3) invest in USA S&P index fund and assume that it will continue to compound at a 10% PA
Results of percentage returns after ten years:
1) 4.1% CAGR
2) 1m profit on 500k monies invested: 11.5% CAGR
3) 10% CAGR
Takeaways:
i) if buying an investment property, there are concentration risk (bulk of monies all invested into one asset) and lack of flexibility of liquidation of assets in short notice. Hence, a risk premium needs to be applied as compared to putting monies into hands off risk free assets (govt bonds 3-4%, hence a 2-3% risk premium on top of 3-4% CAGR is needed at least) or (projected 8% CAGR for usa index fund plus another 2-3% risk premium at least for the more aggressive investor)
ii) taking a loan for property investment will give more bang for the buck. Assuming conditions for taking loan is favourable. Otherwise, one may be better off just passively investing into dividend stocks or a basket of blue chip reits (6% or so dividend yield PA).
iii) property investment has a place for everyone’s investment portfolio but there are indeed many routes to Rome and some routes are easier and shorter.
