Is property really worth it as an investment?

Everybody knows, or rather believes that buying a property and collecting rent is the best form of passive income. It is extremely clear cut and simple to understand, your rental income per month less taxes is money to take home. But,

OPPORTUNITY COSTS!!!

Most people evaluate property simply based on the yields, $2k/mth, $4k/mth, etc. This has been severely capitalized on by property agents. I strongly believe that property in Singapore is definitely one of the lousier investments right now, notwithstanding the extremely misleading selling tactics that they employ. Let's take an example I saw recently from a Facebook ad.

Pictured: Ad.

Before we even get to considering the worth, just let me tear down these values a little because this is absolutely impractical. I love this because they listed the monthly installment and rental (more on that later) so I won't be needing to prove the basis of the numbers should I come up with them myself.

So our situation is:

1) Condo price: $643K

2) Monthly installment (claimed): $1760

3) Monthly rental (claimed): $1800

1) Condo price, assuming you are not staying there (because if you do then you can't rent it out obviously), means you already have a property in your name. This would result in a 12% ABSD so cost of this condo is = $720k, adding some legal charges, some slight furniture, agency fees, etc. Let's say you will be dropping $730k minimum.

2) To come up with the claimed installment of $1760 with the average bank's mortgage interest of 2.1%, I believe that the loan amount is 80% x 643k = $514,400 and stretching that over 35 years. (Or around there) This naturally assumes that you will be dropping the 20% in cash (144k) as down-payment as per regulations. Again, this down-payment amount is completely omitted in order to beautify the image.

3) Because rental income is deductible against installments, let's consider this amount equals installments since there isn't a huge difference. You thus do NOT derive any additional income throughout the 35 years of installment payments as they net off against each other.

Sounds good isn't it? 20% down-payment, rental income paying for the home itself and 35 years later boom you have a new home. Wrong. This is where opportunity costs comes into play.

What is really happening?

For simplicity, we will just assume the following:

1) Rental income nets off against installments until the end of the loan where you get a fully paid-up property in 35 years' time.

2) There is NO inflation. (Trust me this doesn't matter)

Essentially, a down-payment of $144k will turn into $643k in 35 years. (it's not $720 because you are getting the property value without ABSD).

A 5% yield over 35 years would provide a cumulative growth of 5.516x (1.05^35). This would mean that $144k, if invested into a portfolio yielding 5% year on year, would become $794k after 35 years, easily beating the property's yield. Additionally, this already takes into account that you are renting it 100% of the time throughout the 35 years, which is rather far-fetched.

"But obviously in 35 years, the property will not be worth the same value as it is today?!!?" One might add. Yes it will not, if you are unlucky it might be even lesser due to the 99 year lease. Assuming you are, and that the property is freehold, it will, in all fairness, be just expected to grow with inflation.

Taking inflation to be 2%, in 35 years the property worth will double - $1.286m. Sickkkk? With only an initial investment of $144k?!

Well if anything, stocks will tend to be in line with inflation much more than property, so lets bump our return to 7% after taking inflation into account.

1.07^35 = 10.6765x.

This would means that the same $144k, in a portfolio yielding 7%, would be $1.537m at the end of the same 35 years. (See why I said it doesn't matter?)

In terms of capital gains, a property is expected to just have as much volatility for upside as stocks. Yes some properties could double in value in just a year - so can stocks. It's not a fair argument. If a property is guaranteed to increase twice its value in a year, then everyone will be bidding the price to the point that capital returns are meager. To be realistic we have to take luck out of the equation.

To make things worse:

1) Selling a property can result in a whole array of costs and paperwork time again. Not to mention the continuous efforts to find and resolve issues surrounding the rents. The only thing you are getting out of this is bragging rights that you have a second property, there's nothing fiscally superior.

2) You also cannot partially liquidate. If you only need 100k for an emergency, the only way out is to sell your house. In stocks, you can liquidate as much as you need (not that I recommend it), anytime.

3) You are beholden to pay a monthly installment as well, which is a huge liability if there is no rental income. On the other hand dividends are forever assuming you are invested in a well diversified portfolio.

4) Even if the condo is freehold, it is already worse off, imagine it being on a 99-year lease.

5) Assuming you can pay fully up front, the average market yield for condos right now is approx $2k/mth for a $1m condo. This translates to $24k pa and a 2.4% yield which is really terrible. You might as well buy government bonds.

HDBs are slightly better in the sense that a ~400k 5-room flat can get about 2k/month, which is a 6% yield. However you can only have one. You can't buy more to rent out, and if you rent out yours, you have to pay rental elsewhere which defeats the purpose.

The takeaway

Property as an investment just ain't cutting it for me right now. Neither should it for you.

PS: Yes it is not difficult and rather extremely likely to turn 100k into 1 million. Just give it 35 years.