My experience with property
I've often said that real estate is the ONLY investment asset class that can turn you from rags to riches. In 2006, I could not even muster enough money for the 20% down payment of a very old apartment worth SGD388k. I only needed to muster SGD80k including stamp duties. I had 60k of CPF but needed 20k of cash. I had to borrow from my dad the money.
In 2009, the property en bloc or SGD1.18m. My profit was around 800k, all these for a 80k down payment. Since then, I've diversified into stocks, bonds, funds and another nine real estate investments.
Real estate without leverage is meaningless. Singapore's property achieved only 6% per year in the last 20 years, 1994 - 2014. Including rental yield of 3.5%, it's close to 9.5% per annum. It's not much different from investing into the MSCI World, which achieved around 8% per year ex div. With div, probably MSCI World achieved 11.5%.
Real Estate Is Not Hands Off. It's a Business
Real estate is illiquid. It takes around 3 weeks to sell a property in hot markets, and up to 6 months in a cold market. You need to have patience.
Real estate has high turnaround costs. There is a lot of hassle because if it's overseas, you have to contend with lots of admin, from the property manager who may try to rip you off with fake repairs, to troublesome tenants who don't pay.
Power of Safe Leverage
What makes real estate superior to stocks is the leveraging effect. My return from my second property which went en bloc was over 1000 % IRR. Even if Singapore's property rise by 9% per year including rental yield, if I leverage just 2x or 67% LTV, at 3% borrowing cost, I will achieve 21% IRR. If a fund manager can achieve 21% IRR, he would have beaten 90% of his industry mates!!
Why can't you leverage on stocks, but you can for real estate, bonds and good balanced funds?
The problem with leveraging on stocks is the volatility! For most bear markets, stocks correct by 50%! In a bull run, stocks can still fall by 20%. If you are leveraged 2x, most likely you'd have been margin called in 1998, 2001, 2003, 2008, maybe even 2011! The MSCI World ha a volatility of around 25% - 30%
But property has several advantages.
1) it has no mark-to-market. The bank doesn't usually margin call you unless you cannot pay your monthly mortgage. Stocks are marked to market every minute and day!
2) Property is far less volatile. I dare say the volatility is just half of stocks, around 10 - 15% Risk adjusted return, property has a return of around 1x. For stocks, it's 0.4 (10% / 25%).
3) Bonds, bond funds, balanced funds have similar volatility characteristics of property.
a) Investment grade bonds have a volatility of 5 - 10% but return of 4%. So risk adjusted return around 0.8x.
b) HY bond funds have around 6% of return, but volatility of 10 - 20%. So risk adjusted return is around 0.6x.
c) Good bond funds have a volatility of 10 - 20%. Returns of around 7%. So risk adjusted return is around 0.7x.
d) Balanced funds have a volatility of 12 - 24%. Returns of around 9%. Risk adjusted return is around 0.75x.
Real estate has the highest risk adjusted return and hence most suitable for leveraged returns!
Threats to Real Estate Riches
I noticed that governments in the UK, Malaysia, HK, China and Singapore are starting to clamp down on residential real estate investments. It is a political hot potato so I can understand the actions. Housing affects everyone and governments cannot allow house price to rise beyond the reach of masses, and then collapse, bankrupting banks.
I believe that increasingly, real estate investors will have to venture into industrial, commercial, offices to make their gold. There are many risks of commercial real estate investments which I won't address here. But at least the governments worldwide will leave market forces a free hand.
http://online.wsj.com/articles/how-investing-in-a-nyc-condo-stacks-up-against-other-investments-1406239486
I've often said that real estate is the ONLY investment asset class that can turn you from rags to riches. In 2006, I could not even muster enough money for the 20% down payment of a very old apartment worth SGD388k. I only needed to muster SGD80k including stamp duties. I had 60k of CPF but needed 20k of cash. I had to borrow from my dad the money.
In 2009, the property en bloc or SGD1.18m. My profit was around 800k, all these for a 80k down payment. Since then, I've diversified into stocks, bonds, funds and another nine real estate investments.
Real estate without leverage is meaningless. Singapore's property achieved only 6% per year in the last 20 years, 1994 - 2014. Including rental yield of 3.5%, it's close to 9.5% per annum. It's not much different from investing into the MSCI World, which achieved around 8% per year ex div. With div, probably MSCI World achieved 11.5%.
Real Estate Is Not Hands Off. It's a Business
Real estate is illiquid. It takes around 3 weeks to sell a property in hot markets, and up to 6 months in a cold market. You need to have patience.
Real estate has high turnaround costs. There is a lot of hassle because if it's overseas, you have to contend with lots of admin, from the property manager who may try to rip you off with fake repairs, to troublesome tenants who don't pay.
Power of Safe Leverage
What makes real estate superior to stocks is the leveraging effect. My return from my second property which went en bloc was over 1000 % IRR. Even if Singapore's property rise by 9% per year including rental yield, if I leverage just 2x or 67% LTV, at 3% borrowing cost, I will achieve 21% IRR. If a fund manager can achieve 21% IRR, he would have beaten 90% of his industry mates!!
Why can't you leverage on stocks, but you can for real estate, bonds and good balanced funds?
The problem with leveraging on stocks is the volatility! For most bear markets, stocks correct by 50%! In a bull run, stocks can still fall by 20%. If you are leveraged 2x, most likely you'd have been margin called in 1998, 2001, 2003, 2008, maybe even 2011! The MSCI World ha a volatility of around 25% - 30%
But property has several advantages.
1) it has no mark-to-market. The bank doesn't usually margin call you unless you cannot pay your monthly mortgage. Stocks are marked to market every minute and day!
2) Property is far less volatile. I dare say the volatility is just half of stocks, around 10 - 15% Risk adjusted return, property has a return of around 1x. For stocks, it's 0.4 (10% / 25%).
3) Bonds, bond funds, balanced funds have similar volatility characteristics of property.
a) Investment grade bonds have a volatility of 5 - 10% but return of 4%. So risk adjusted return around 0.8x.
b) HY bond funds have around 6% of return, but volatility of 10 - 20%. So risk adjusted return is around 0.6x.
c) Good bond funds have a volatility of 10 - 20%. Returns of around 7%. So risk adjusted return is around 0.7x.
d) Balanced funds have a volatility of 12 - 24%. Returns of around 9%. Risk adjusted return is around 0.75x.
Real estate has the highest risk adjusted return and hence most suitable for leveraged returns!
Threats to Real Estate Riches
I noticed that governments in the UK, Malaysia, HK, China and Singapore are starting to clamp down on residential real estate investments. It is a political hot potato so I can understand the actions. Housing affects everyone and governments cannot allow house price to rise beyond the reach of masses, and then collapse, bankrupting banks.
I believe that increasingly, real estate investors will have to venture into industrial, commercial, offices to make their gold. There are many risks of commercial real estate investments which I won't address here. But at least the governments worldwide will leave market forces a free hand.
http://online.wsj.com/articles/how-investing-in-a-nyc-condo-stacks-up-against-other-investments-1406239486
How Investing in a NYC Condo Stacks Up Against Other Investments
A look at how the commodities markets for hogs, crude oil, coffee and gold have performed when compared to returns on an investment in a New York City condo
July 24, 2014 6:04 p.m. ET
When it comes to investing, some New York real estate is still producing solid returns—but hogs are just a hair behind.
Spread Sheet compared the 10-year performance of 100 of the best-known Manhattan condo buildings against the returns on some standard commodities—gold, crude oil, hogs and coffee. These are all traded on futures exchanges, in which people buy or sell the commodity for a specific price on a specific date in the future.
In terms of returns, gold topped the list with a compound annual growth rate of 12.91% over the past 10 years. West Texas Intermediate crude-oil futures came in second, rising 11.02% annually; coffee rose 9% over the 10-year period, and hog futures rose 5.34%.
By comparison, the S&P 500 stock-market index saw a 5.56% compound annual growth rate over the past 10 years.
Meanwhile, those who invested in Manhattan residential real estate 10 years ago have seen values rise 6.5% over that time period, which includes the real-estate market crash that began in 2008, according to according to Pete Culliney, director of research for listings website CityRealty. To track the returns, the company looked at condo-building sale prices starting in mid-2004 to determine each building's sale price a square foot of living space. The price was then averaged over 10 years to determine the compound annual growth rate.
Some of the properties that helped boost the returns include the sale of a $48 million duplex in 15 Central Park West, as well as a $15 million deal in the Time Warner Center. Other buildings on the list include One Madison and Residences at the Mandarin Oriental.
"The consistency of New York City real estate is something that is really hard to match," Mr. Culliney said.
Volatility can be a big concern with assets like oil and gold, which both saw larger returns, but pose considerably more risk due to political factors. Hogs have rivaled real estate in terms of dependability, but this year has been an exception, with futures jumping nearly 50% due to a deadly virus that has killed millions of piglets on U.S. hog farms.
Coffee can be a risky investment partly because of unpredictable price swings, said Sterling Smith, a futures specialist at Citigroup C -1.66% Citigroup Inc. in Chicago. "This stuff is nuts—it moves like nothing else," he said.
When and for how long one invests in these types of assets can make a world of difference, says JR Stegmueller, president at consulting firm Fusion Trading Zone in Frankfort, Ill. "In commodities, 30 days is a lifetime," let alone 10 years, he said.
Write to Stefanos Chen at stefanos.chen@wsj.com
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