19 August 2013

Why there are more millionaires made their fortune through real estate investment compared to shares investment?

A studies showed that there were increasing millionaires in Asia, and most of them made their fortune through real estate investment instead of shares investment. As I am now diversify my investment into these two area, below are the reasons why I think real estate is favored by millionaires here:

  1. Stable Valuation - as in my earlier post, one of my friends enjoy the capital appreciation of her property in Serangoon. Under Rule 72, with about 7% compound annual return rate, a 100K investment could increase to 800K (about 800% return) in about 30 years. And most of the time, the real estate value normally valued at incremental stage except during crisis period such as SARS, 97 Financial Crisis etc. Therefore most of the investors prefer this asset class.   
  2. Easier to Get Margin Financing at higher LTV Ratio - In Singapore, you may get as high as 80% loan. With stable valuation, this is why I think why banks are willing to give you so high margin financing compared to Shares margin financing. 
  3. Stable Cash Flow - with stable rental income that the landlord may adjust according to inflation environment, I believe this is why most of the landlords tent to hold their real estate investment for long term period, say more than 10 years, which I think it is very hard for shares investor to do so. 
  4. Long Term Investment Period - With longer term investment period, I believe this is the main difference behavior between a real estate investor and shares investor. Normally real estate investors can sleep soundly as long as their rental income can cover their capital repayment and interest loan payment (please note in Singapore, the bank has the rights to ask you to top up if the property valuation drops below the mortgage loan), but for majority of the shares investor, they might not sleep well if the stock price in a big swing and may cause "emotional" action to cost you a lot of opportunity cost of not holding a good investment long enough to enjoy the capital appreciation. 

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