Should I Invest in Real Estate or ETFs?

There are so many investment options available today. You may have seen ads on Facebook and Instagram claiming high financial returns in a short period of time. It often comes with other messages like “it’s easy to do” and best of all, “low capital requirements”.

Before you click on those ads, I would advise you to save your money and time (and their advertising costs) because it really is just too good to be true. Instead of get-rich-quick schemes, consider smart and wise investments that you can start off with.

When it comes to investing, most people often consider real estate or a stake in the capital market. So in this article, we will highlight the differences between an average piece of real estate and what I consider as an entry-level product in the capital market – Exchange Traded Funds (ETFs). If you don’t know what ETFs are, you can read this article.

We’ll compare these two choices of investment by looking at some key metrics.

 

1. Initial Capital 

Firstly, the amount of initial capital required to invest in either of these options would be a key difference. A property purchase in Singapore, assuming you are below the age of 35 and are not planning to get married anytime soon, limits you to either a private property or an overseas property.

Refer to the chart below for an overview of the cost for a downpayment of a residential property in the region. This chart is based on estimates and since taxes vary according to residential status, the lowest rates were used in these charts.

Data Singapore Malaysia Indonesia Hong kong
*Price
per square metre
outside city centre
SGD 13,820 MYR 6,066 IDR 16,608,695 HKD150,957
Purchase price
based on
100 square metre
SGD 1,382,075
USD 1,008,813
MYR 606,684
USD 145,139
IDR 1,660,869,565
USD 117,586.18
HKD 15,095,770
USD 1,939,429
Min. down payment < 25% < 10% < 15% < 10%
Purchase tax
(stamp duty)
SGD 39,883 MYR 85,820 Transfer tax and others 6.7% HKD 566,092 + 0.5% agent fee
Total upfront cost of purchase
(down payment + tax + others)
SGD 385,401
USD 275,286
MYR 100,790
USD 21,112
IDR 360,408,695
USD 24,818
HKD 2,264,365
USD 290,914 (inclusive 0.5% agent fee)

Source: https://www.numbeo.com

 

In addition to capital requirements, cost of mortgage loans and eligibility need to be considered. However in the case of ETFs there are many different initial capital requirements for various options. You can start by investing as little as 30 USD, see the  chart below for more details.

Data Singapore Malaysia Indonesia Hong kong
Sales charge 0.08%-5% 0.08%-5% 0.08%-5% 0.08%-5%
Minimum investment < USD 30 < USD 30 < USD 30 < USD 30

 

2. Liquidity 

Real estate, given that it is tangible, immovable, also not fractionable, is usually considered as highly illiquid. The sale of the property often comes with costs too. In most markets, sellers are required to pay a fee of 1%-3% of the selling price to real estate agents for their services. There are also cheaper alternatives available now in singapore and malaysia through flat-fee based providers like Ohmyhome.

The time taken to sell a property may range from 1 week to 1 year (based on personal experience) in markets with an oversupply of options for buyers. So just be prepared to continue with the mortgage loans in the meantime. You can calculate your potential mortgage loans here.

ETFs on the other hand are considered to be highly liquid. The time taken to sell your investment is usually 3 days. Also, there’s usually little to no charges incurred when you sell as most platforms usually charge a sales fee but not a sell fee.

 

3. Rate of return 

The average rate of return for the Singapore resale property market from Jan 2009 to Dec 2018 (10 years) was 88.4%.

While the average rate of return for the SPDR Straits Times Index ETF (for the sake of comparison) in the same time frame was 107.16%.

Even with this comparison, we can’t conclude that the capital market would always beat the housing market, and the performance for subsets of properties may be higher or lower.

For a highly liquid investment like ETFs, prices are easily and frequently tracked. Conversely, most people don’t track the value of their property as frequently or easily. It’s important to note that the beauty in value investing is that you don’t need to track it everyday, you should only have to check it once a month and review the performance semi-annually.

 

4. Tangibility 

A property is an investment that you can feel and live in, and this usually adds an emotional value to it. While any product created in the capital market is intangible and more… boring. However, tangibility doesn’t relate to any form of higher rate of return. It does however give us a sense of security which results in a greater emotional attachment. So, depending on your investment priorities, you may want to consider excluding this factor if you want to make less emotionally driven investments. However if you personally prefer something tangible and have the means to, you can still keep this consideration in mind.

 
 

 

So what should you invest in? 

Considering that capital is often the first barrier to entry, if you have the capital to purchase a property, and are spending a lot on rent, you might want to consider buying your first home.

If you don’t have the capital, and don’t own a home but wish to do so in the future, you can start investing in ETFs towards the down payment of your future home. In fact, as long as you don’t have the capital to invest in property, ETFs are the way to go.

If you do have the capital and already have a home, consider the time you wish to invest this sum for, if it’s less than 5 years, stick to ETFs, if it’s more than 5 years then both options would be suitable.

Itching to plan for your investments now? You can calculate your investment returns here.

I hope this has helped you in deciding where your investment efforts can be spent. Feel free to ask us any finance related questions and you might just see an article on it! Write in to us at ask@plannerbee.co

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