There are so many ways to invest our hard-earned money; which direction is the best one? Investing in property and equity investment are two key routes that wealth builders can take. But what exactly do they mean, what do they involve, and what are the benefits? We asked Max Keeling, Head of Expat Advisory at Providend, to break it down for us and give some good financial advice, so we can work out where best to invest.
What are the differences between equity and property investment?
In this conversation, when we refer to property investment we’re talking about investing and owning individual residential properties. You can invest by buying and collecting properties individually. Alternatively, you can gain exposure to properties through managed investments such as a real estate investment trust (REITs) or a property fund.
Equity investment, for most wealth builders, is when we invest in a portfolio of companies through an equity unit trust or exchange-traded funds (ETFs). Money is invested in exchange for minority ownership rights in companies. In this way, the investment management is delegated to a fund manager or a mechanical index so as to achieve some sort of diversification.
What drives the decision making between property or equity investment?
Economic contribution is one of the four pillars of Providend’s investment philosophy. We want to assess whether an investment has sound fundamental drivers of return. The economic drivers of property and equity are different.
Property provides returns predominantly in two ways. When an investor rents out their investment residential property to a tenant, the tenant pays the investor recurring rent in exchange for this utility provided. Secondly, as the country’s economic growth and inflation increases, the potential for future rental increases. The value of the residential property has the potential to go up as well.
When an investor purchases an equity, he or she purchase a minority stake in the company. Being an equity holder has its risk. The business may become insolvent and fail, and the investor may lose a chunk of his or her money.
However, there is also a possibility that a listed business – Amazon and Apple, for example – could grow to become a company worth trillions of dollar. As Amazon or Apple’s income grows, the company becomes more valuable. Listed companies may choose to distribute part of their earnings as dividends to you.
The driver of return is different for both. One is mainly from providing utility in the form of shelter, the other is from providing capital for entrepreneurship.
There are many other intrinsic differences, including liquidity of both investment types, and the ability to leverage the amount of money you invest. Then there’s the management effort you need to invest in property, against the more passive management effort for equity.
There’s also the nature of your cash-flow contribution. That is, how much will you need to borrow when investing in property? The cash outflow can be quite a commitment for property, in contrast to the cash contribution into an equity unit trust or ETF, which is optional. To build your wealth, you should contribute cash flow from your income into your unit trust or ETF on a recurring basis.
What capital is required? It may be quite challenging to purchase an individual residential property in areas that are popular with expatriates. An investor would need to save a sizeable amount to pay for the down payment of an individual property. In contrast, an investor can start investing in an equity fund with as little as $500 or $1000.
While there are many contrasts, there are also similarities between residential property investment property and an equity portfolio. This includes capital gains, cash income (both advantages), and the fact there is no cash income guaranteed.
Let’s say I’m keen on investing in property. What good financial advice do you have?
In general, people shouldn’t buy properties on the basis that they hope the value of property goes up. A key piece of good financial advice I give is that if you want to make money from property then you need to put the effort in to find the right ones to buy.
I would advise gaining a detailed knowledge of particular locations, down to the street level, including past and future economic growth and property supply.
You should enjoy prospecting properties and be willing to put in the hard work to find undervalued properties. It’s not uncommon to review 100 properties, put offers on 10, and get acceptance on two – this is an intensive process and some people really enjoy it.
Enjoy the operational side of property – detailing with tenants, rental agencies, decorators, plumbers, tax accountants. If you hate the ‘hassle factor’ then avoid owning many rental properties, and other people might thrive in this area.
If your property strategy is, for example, to buy through an agency after attending a webinar on buying property in Malaysia, which you never visit, then your chances of a successful outcome are probably low. We often come across expats that have purchased properties across Asia through such third-party agencies; they can end up making very little cash-flow and struggle to sell.
So, like most investments, the more time and effort you put, in the better your chances of success.
How healthy is the property investment market at the moment?
In regards to residential property investment, the demand for properties in various countries has picked up post-COVID-19. One main reason for the demand may be due to how work-from-home and home-based learning have made many realise they need bigger space.
The shift in geo-political tension between the US and China has made countries such as Singapore attractive to foreigners looking for a tax-friendly jurisdiction to preserve their wealth, away from risks in their home country.
Singapore premium properties, relative to other comparable markets, are reasonably priced. Elsewhere, however, property prices have risen to pre-2008 financial crisis levels. This includes Canada, the US, Australia and the UK.
Is there anything specific that expats need to know about property investment?
Yes! Property ownership laws and taxation laws can change; investment property in many countries is subject to the whims of the local government.
So, while some investments may look attractive on paper, there might be intricate local rules that make future selling challenging. For example, in 2013, the Malaysian government raised the minimum price of property that can be purchased by foreigners to 1 million ringgit from 500,000 ringgit; then there are the changes to capital gains tax introduced in Australia to cool the property market.
Also important is how overseas properties are subject to the laws of jurisdiction the property is located in. Many expats have investment properties in different countries. Section 5 of the Wills Act states that immovable properties, such as land, condominiums and houses, are subject to the laws of the jurisdiction where the immovable property is located.
This means that even if you create a will in Singapore, the house you own in Germany that was listed in the will would still be subject to, and therefore dealt with according to, German law. Your beneficiary (the person who inherits your property) may also have to pay the appropriate taxes for the property, as specified by German inheritance tax rules.
It may be worthwhile to create a will for properties in each country. However, if the majority of your assets are in Singapore and you only have a few simple assets overseas, such as a single apartment in Malaysia, it could be more convenient to create just one will in Singapore and subsequently rely on the resealing of probate overseas.
Singapore Legal Advice is a great source for more information on this; or, of course, come and speak to me about your property investment or equity investment queries!
Providend is Singapore’s first fee-only wealth advisory firm. For more good financial advice, speak to Max or one of his colleagues about financial planning and investment; call the Providend office, or go to the website for more information, including what you might need help with and useful publications available to help you define your needs.
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