Rental Property vs Stocks – The Differences

As of 2021, the most attractive investment out there is certainly stocks. Ever since the outbreak of Covid-19 in March 2020, stocks become the most preferred investment. You don’t need to leave home to invest. All you need it just an internet connection. Does it mean other investment is dead? Now, let’s look into the differences between rental property vs stocks.

If you ask me, I’m very tempting to say that stocks is really a good investment. Don’t get me wrong. I am still a property guy. It just that there are things in stocks that you can’t get in rental property.

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The Cash flow

Generally, at least RM100 in profit per rental property makes it worth doing. But of course, in business, more profit is generally better! Good rental properties give you cash flow. Say for example if you have five positive cash flow properties that each one gives you RM200, you will have RM1,000 extra every month. This is not something you can achieve with stocks. There is no stocks that will give you dividends every month with the exception to REIT counters (REITs derived from rental property anyway - read more about Real Estate Investment Trust. An alternative to owning a property.). At most, every quarterly you will get your dividends paid. In order to achieve monthly dividends, you will need to have multiple stocks that pay dividend constantly and consistently on any particular month. With rental property, you only need minimum one property that can generate positive cash flow for you. If you have multiple positive cash flow property, then you will feel the multiplier effects.

The Initial Capital

Rental property is certainly great. But finding the ones with positive cash flow is hard. Rental property requires substantial capital upfront. In some countries, you will need to have at least 30% of the purchase price as down payment. In Malaysia, first home buyers would need 10% down payments of the purchase price. If the property value at RM350,000, the capital upfront would be RM35,000. That’s a huge lot of money upfront. The beauty of stocks is that you don’t even need that much of money. You will need as little as RM500 to start your first investment. And of course, those good stocks wouldn’t come cheap. One of the way how people investing in property is to start off with stocks investment first. The earnings and profits from stocks can be used to invest in property.

Capital Growth

It’s important to note that stocks tend to increase in value more quickly than rental property. Stock prices increase because of economic growth and inflation. While rental property price increase because of scarcity. Scarcity relates directly to the land. When the population is growing and the high demand for land to build more residential housing, that’s what pushes the value of the property. If we look from a simplified version of this theory, it takes decades for the population to grow into millions. But it only take years for economic growth. Thus, the stocks will definitely increase faster than property.

Trading vs Investment

This is the part where not many people discussed about. The word trading is defined as buying and selling goods or services. You need to trade in order to make profit. Investment trading at least in my understanding is for short-term gain.

Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. - What Is Trade? (investopedia.com)

Short-term trading in stocks is called technical analysis. This is where investors don’t actually study the companies financial report. All they do is analysing the charts. Whereas for property, it is called flipping. The flipping strategy in property does not look into fundamental. Meaning to say that we do not look into potential rental income. Short-term trading be it property or stocks is rather high risk. Flipping property can involve the potential to lose money, large amounts of needed capital, very time-intensive, stress and anxiety, time and opportunity cost, physical and manual labour, and high tax bills etc. The main issue with trading is that the lack of time. We are all aware that giving time, most things will appreciate in value. With time, it allows our investment to recover. However in trading, it doesn’t allow much room for any error. Tips: Investment is never a short term game. Anything on short-term basis is not an investment but trading.

The Exit

This is one of the major differences between rental property vs stocks. Rental property - particularly in Malaysia takes time to exit. The fastest change of ownership that I have experienced before took two months to complete. This is far cry from other countries such as Hong Kong and Thailand where the properties can change ownership within days. Of course there are pros and cons to this. One of the pros is that the Malaysian Housing Department doesn’t allow speculation in property market. When it involve longer time to exit, makes it not attractive to speculators. On contrary, stocks are very liquid. It is very easy to exit the market. Stocks provide high liquidity to investors.

Conclusion

It is obvious that both investment have their own pros and cons. In order to get the best out from both sides is through diversification. Smart or experience investors will put their money into different investment vehicle. And this is diversifying well, that is diversification of asset classes, diversification of countries, diversification of currencies - this is because we know that we don’t know a lot! - Ray Dalio.

Ray Dalio is an American billionaire businessman, asset manager, philanthropist, and author who has served as co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, since 1985

You can watch Ray Dalio diversification comments on Managing Money in a Zero Interest Rate Environment - YouTube