Someone I respected for his expertise in the stock market spoke about property investment to a few young professionals. Frankly, I hope this article can set some records straight because the assertion of property investment being low risk = low returns is incorrect. There are a lot of reasons why the stock market or many other types of investments are better than buying a property. However, to think of property investment as secondary choice to all these other investments because “low risk = low returns” is unfair yeah. Please allow me to explain as simple as I could since the answer which this respected friend gave was also extremely simplified too.
Property investment is not “low risk = low returns” yeah. Assuming we rent the place we stay in versus paying a mortgage for it, the rental amount after many number of years will be pretty substantial. RM1,000 x 12 x 5 years = RM60,000. I am not sure how many of us love giving RM60,000 as a gift away to some stranger who happens to own the home we rented. Current market is very good for rental because prices have not moved much. Thus, owners have no choice but to rent out their units even when it’s below their monthly mortgages. Plus, we must rent as low as we could instead of renting high and enjoying it now because we will not be able to buy in future. Here’s an article explaining why. Coming back to “low risk = low returns” comment.
Let’s understand that Malaysia remains a young country (media age 29) This meant that demand for properties are going to continue. Assuming the growth in property prices is just following the typical inflation rate of 3%, a property will still double in price when we retire. (Yes, financial crisis etc are call calculated inside the average of 3 percent per annum). By the way, actual property price increase for periods of 1990 – 2016 was 6.5%. So, assuming we paid 10% for downpayment of a RM500,000 home, that’s RM50,000. When we retire, the home becomes RM1 million. Using a super simple calculation of RM500,000 (gain in property price) divided by RM50,000 (downpayment) divided by 30 (years). That’s a simple return of 30% per annum.
Low risk = low returns? When it’s said to represent property investment, think again yeah. Note: Property Investment is NOT for everyone because it is so slow….. Stock market is by far faster yeah. By the way, there’s no need to debate which investment is the best. The best investment is simply the one that we are most interested in. Whatever that may be, put our full attention into it, do due diligence and I think the return on investment at the end of the day / year / years will be above average versus those who did nothing. Happy investing and following.
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written on 19 Jan 2019
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0 Responses
erm, i think do we need to calculate loan interest as well?
Yea, definitely. However, the ROI will still be very high even if we halve the number. The reason is because the price moves up based on house price but our investment is just the down-payment. Let us not forget that because we stay there, we save on rental too. That is also a plus. Else it is still rental X number of years… Cheers ek