May 10
2
Leveraging – Property versus Stocks?
Arts of Leveraging For most individual, we have at least one lifetime experience to get a loan from Banks to buy First property (on top of First car, of course). Very rare that one would get a loan to buy stocks. In this reporting season, most Malaysia's Banks reporting impressive loan growth, mainly attributed to growing consumers' loan. All Banks are aggressively promoting their attractive housing loan packages to customers, especially those with good credit rating. Why is that so? It has to do with risk management. The fact that banks want to loan you money to buy Property creates a situation which we will call LEVERAGE. Let's assume that you have $10,000 to put into some type of investment. If you choose to buy $10,000 worth of stocks, you will own exactly $10,000 worth of stocks. However, suppose you choose to invest that $10,000 into Investment Property using an 90% margin financing, you will own $100,000 worth of Property. If both of these investments were to appreciate by 10% (which is a realistic assumption), the gain would in such:
- actual gain on stocks investment would be $1,000 (10% on $10,000 stocks investment); compared to
- actual gain on property investment would be RM10,000 (10% on $100,000 property value)
With same up-front investment, one have achieved 10% returns on stock investment versus 100% returns on property investment. Above simple comparison revealed that property investment gives 10X better returns than stock investment. However, some may argue if taking into consideration of time factor, stocks may perform better than property investment. It is known facts that stocks' prices are volatile in nature, none can guaranteed a 10% returns on stocks. In contrast, prices for property in prime location has one one-way, is to go up! Wow! That's what we call leveraging!
