Equity vs Property Investment
Hi Readers!
If you’ve been following intently on my journey of investment via BTM, you would be able to glean on my stand when it comes to equities (aka investment in the stock market) vs property investment.
And… you are right! I favour equities a whole lot more than property investment. The 3 main reasons of which I would be sharing today.
(1) Capital Requirement
As with most (if not all) investments, capital is required to enter into investments. Capital means the cash needed to fork out to acquire these investment assets.
We can start our investment in equities with just RM100.
Properties require us to put down 10% – 15% of the property price (before deducting the rebates, etc, for new properties).
To illustrate:
- To invest in the Malaysian stock market, we have to acquire at least 1 lot of shares, which is equivalent to 100 shares of the company. If we are investing in a RM0.50 company, such as Datasonic Group Bhd (DSONIC), then 1 lot is equivalent to a capital requirement of RM50. (We could invest in 1 share or a fraction of it in the US market)
- In contrast, investing in the property market (with the assumption that we are investing in a RM100,000 property), the capital requirement is RM10,000 (before any deduction / discount / other fees).
Just looking at the difference between the capital requirements as above, we could acquire a total 200 lots of DSONIC shares to match the capital requirement of that property.
Of course, if we were to invest into a company that has a much larger share price such as Nestle with last traded price of RM136.50, then 1 lot will be equivalent to RM13,650. The same can be said for property investment, whereby a RM1mil property will require RM100k capital upfront.
BONUS point: It is much easier to diversify with equities investment compared to property investment due to the sheer difference in size of the capital requirement.
(2) Holding Period
Holding period determines how long we would have to hold on to the investment before we could get out.
It is quite fluid for equity investment as we could exit as fast as the next thing after the order is filled.
As for property investment, it will heavily depend on whether we are able to secure a buyer for the property. Even if we managed to secure a buyer for the property, it would take months before the property is officially transferred out of our hands to the buyer.
Then what if… we couldn’t find a buyer? All is good if the property is giving us good rental yield with positive cashflows. On the other side of things, it will be a bleeding effect to our wallets as we keep forking out to cover the monthly mortgage.
There is a conundrum when it comes to property investment exit: it’ll be easier to find a buyer for a property with good rental yields will be easier than one with terrible yields. Of course, one could always lowball and sell the property at a price much lower than the market price just to offload the asset.
(3) Losses
In terms of profits, both can fetch very high returns, if it turns out right. However, there is no investment out there with a guaranteed profit.
So let’s talk about worst case scenario here – incurring losses.
The most we could lose from an equity investment is the capital requirement that we put in and this can only happen if the company liquidates. The losses could quickly escalate to more than that if we’re talking about leveraged investment, but let’s leave that aside for now as it is not applicable for the day-to-day investors.
Our losses in a bad property investment do not stop at the initial capital requirement. It accumulates as we continue to top up for any net cash outflow (mortgage – rental). Theoretical speaking, it is quite difficult to lose 100% of the property value unless something crazy happened. However the losses can quickly stack up if the property market prices drop and there is no buyer in sight.
Closing Thoughts
I was just evaluating my investment options and this topic came to mind. As it stands, I could not foresee myself entering another property investment in the near future.
Which investment is better?
There are many who would agree with me in preferring equities over property investments. However, the opposite is also true. The key is understanding which one resonates more with us. One is not better than the other, but merely a difference in preference and style.
Which investment would you prefer?
