Ravi Chandran
Real estate should be part of your retirement portfolio because it offers the best combination of low risk and high returns
Property should be part of your retirement portfolio. Here’s why…
Historically, residential real estate has been Singapore’s best investment opportunity for individual investors, for two reasons:
First, residential real estate offers the best combination of low risk and high returns.
- Savings bonds and Treasury bills offer low risk, but also low returns. Stocks and mutual funds offer potentially higher returns, but as we’ve all learned recently, they can drop to zero overnight. Real estate is called real estate because you own actual property, not a paper investment whose value fluctuates by the hour. The value of your real estate (properly covered by insurance, of course) will never drop to zero.
- Averaged over the past 100 years, long-term real estate returns (rental income plus appreciation) have kept pace with long-term stock market returns (dividends plus appreciation). But remember, you don’t make money in the stock market based on averages, you make money based on how your specific stock performs. You could do much better, or much worse, than the historic averages. With real estate, the returns are more stable and therefore more predictable. You get that perfect balance between low-risk and solid long-term returns.
- Unlike the stock market, real estate investors do well in good times and bad. When times are bad, investment properties can be purchased at lower prices (often in foreclosure), and demand for rental space increases. During good times, the value of your properties increases and rent prices go up.
Second, and perhaps more importantly, residential real estate uses other people’s money.
- The banks won’t lend you money to buy stocks and bonds, but they will lend you up to 75% of the price of an investment property. To purchase $1,000,000 worth of stocks, you’ll need $1,000,000, but to buy a $1,000,000 investment property, you may need as little as $250,000 (including funds in your CPF).
- But here’s the exciting part: The mortgage note you pay to the bank each month is paid by your tenants! Part of that note comes to you each month as income, while part of it goes to increase your equity in the property! What’s not to like?
Why will banks lend money for one type of investment and not for another? Because banks don’t take risks, and they know that residential real estate is a safe investment offering dependable returns. And with interest rates at their lowest in 50 years, now is the time to buy!
Of course, your retirement portfolio should include a variety of investment types, and talk to a professional to ask whether residential real estate should be part of your long-term financial plan.
The Government’s Private Residential Property Price Index shows that prices of private properties had almost doubled in the last 20 years.
The Government data suggests that although a private property may dip sharply over certain years, observed over a longer 20-year-period, it always appreciates. So the lesson really is if you are a short term investor in Singapore’s residential properties, don’t overestimate the returns on this investment.
In fact, no investment property can guarantee a perpetual positive return. And there is always the probability that your rental returns cannot cover all expenses related to your investment – expenses like loan repayment, management fee, property tax and maintenance and repair cost.
While that single real estate asset might help protect you against inflation, a well-balanced stock and bond portfolio seems to be a better investment. But a lot of people’s portfolios are mostly made up of their home value. You wouldn’t put 80 percent of your portfolio in a bond simply to protect against inflation (unless maybe you were nearing retirement) so why would your home make up that same amount? That’s the argument against buying a home as an investment.
