Stocks or Property Investment? We Usually Already Have Our Own Answer

Stocks or Property Investment? We Usually Already Have Our Own Answer

Whenever any of my friends ask me this question above, they usually have their own answer. More often than not, they like to tempt me to say property investment is better. Haha. Sorry yeah, if the answer is that simple then property market would have appreciated to a level no one could buy while the stock market would have collapsed too.

Think about it. Someone who loves investing in stocks will tell you all the amazing stories about their investments. They could share their friend’s success too. They may even share a sob story about a property investment that went wrong. Or their friend’s property investment gone wrong. Basic idea these days is that algorithm will strengthen what we believe a lot more! Whichever you believe is true will now be served to you by the social media yeah. So, stop reading one side because you are indeed delusional.

Meanwhile, someone who loves property investment will tell you all the advantages of owning properties. They may explain how the return on investment (ROI) can be attractive because the property price increases based on the full property value, even though the investor only paid a fraction of the price as a downpayment.

If you do not understand this yet, perhaps you have not explored property investment enough.

It’s okay. I am comfortable with both sides because I have been investing in both for a very long time.

So, instead of arguing about which investment is better, let’s look at some interesting comparisons.

#1: The stock market is way better in terms of returns, right?

Based on the historical comparison, stocks performed much better. US$100 invested in the stock market grew to approximately US$22,400, while the real estate investment grew to around US$1,500. (Source: Source: Investopedia — Which Has Performed Better Historically: Stock Market or Real Estate?)

Wow! That is quite a difference.

Imagine investing at 18 and seeing the value of your investment grow over the next five decades. By the time you reach 70, the investment could be worth many times what you originally invested.

Of course, these are historical figures, not guaranteed future returns. The actual outcome depends on the period measured, the index used, inflation, costs and whether dividends or rental income are reinvested.

Still, the broader lesson is worth considering. Buy shares in the right businesses, hold them for the long term and allow those businesses to grow. When a company increases its profits sustainably, its share price may rise too.

Yet, many investors buy and sell frequently, sometimes buying at the wrong time and selling at the wrong time. When their results disappoint, they conclude that the stock market does not work.

Perhaps the problem is not the entire stock market. Perhaps it is their investment decisions.

#2: Property investment returns are so low. Better buy stocks lah!

Hold on a minute.

US$100 growing to US$1,500 over 50 years represents a 15-fold increase in value, or a cumulative gain of 1,400%, before considering costs and inflation.

That is equivalent to a simple 28 percent return every year.

Is that really so bad?

More importantly, the stock market comparison typically uses an index, not a single individual stock. An index spreads exposure across many companies, depending on how it is constructed.

If you invested in an individual company, your returns could have been much better. They could also have been disastrous.

Remember Enron? Once considered a major US energy company, it collapsed in 2001 after accounting fraud was exposed. Investors who concentrated their money in its shares suffered devastating losses.

So, comparing a property investment with one successful stock is not necessarily fair. Neither is comparing property with a stock market index without understanding what each figure measures.

#3: But property investors do not pay the full price upfront!

Here is where property investment gets interesting.

Suppose a property costs US$1,000. If the bank finances 90% of the purchase price, the buyer needs a US$100 downpayment.

Now imagine the property price increases to US$1,500. The property has gained US$500 in value, equivalent to 50% of the original purchase price.

Compared with the original US$100 downpayment, that US$500 increase represents a 500% gain on the initial cash invested.

Sounds fantastic, right?

But there is a catch.

The buyer still has a housing loan to repay. There are also interest costs, maintenance, taxes, insurance, transaction fees and potentially periods without tenants. If the property price falls, leverage magnifies the loss on the investor’s equity too.

Therefore, we cannot simply compare property price appreciation with stock market returns and declare property the winner. We must compare returns on a consistent basis, including financing, rental income, expenses and the amount of money actually invested.

Nevertheless, leverage is one reason property investors may achieve attractive returns on their initial capital when the investment performs well.

#4: Stocks versus property — what are the differences?

Property investment	Stock investment
A physical asset that can provide a place to live or rent out	Ownership in a business or even the hotel you love! (if they are listed)
Often involves a large downpayment and borrowing	Can start with a relatively small amount
Usually price changes may appear less obvious (except during a speculative market)	Prices are visible and can fluctuate daily
Involves maintenance, repairs and tenant management	Usually requires less direct management
Can generate rental income and capital appreciation	Can generate dividends and capital appreciation
Often takes longer to buy and sell (could be many months)	Generally easier to trade, depending on the stock

The tax treatment also differs according to the country, type of investment and investor. We should not assume that rental income, dividends and capital gains are taxed identically everywhere.

So, which one is better?

I think the better question is this: which investment suits you?

Stocks may suit people who prefer liquidity, diversification and the ability to invest smaller amounts regularly. Property may suit those who understand a particular location, can manage the financial commitments and want an asset that can generate rental income.

Both have risks. Both require knowledge. And neither guarantees that you will become wealthy.

Personally, I do not think we need to choose one side and dismiss the other. We should understand both, assess our financial circumstances and make decisions based on our goals.

After all, the objective is not to win an argument about which investment is superior.

The objective is to build wealth sustainably and prepare for the future.

Happy investing!

Stay updated at all time for free. Sign up for daily investment news updates (FREE since Nov 2013 and FOREVER).

Please LIKE kopiandproperty.com FB page to get daily updates about the property market beyond kopiandproperty.com articles.