Since I started working in the real estate development industry in 2013, I began to consider real estate as a far better asset class compared to publicly traded stock due to a few observations I made.

1. It’s not uncommon to make superior return on equity in excess of 300% over 3 years by using maximum leverage of up to 90% loan-to-value ratio (LTV). The LTV can even be increased to 110% by grossing up the property price, a widely known and accepted secret.

2. Bank financing is cheap (4.5% interest p.a.) and easy to get as banks readily accept real estate as collateral. Your creditworthiness can be artificially boosted via creative methods if you know the right people, not to mention you can get multiple housing loans approved at the same time by different banks before they update each other about your application.

3. Property prices generally go up over the long term and they do not swing up and down frequently because they are not traded in an exchange. That saves a lot of heartache.

4. The amount of research required for a property investment is extremely little compared to stock. It’s easy to understand the location of a property compared to assessing the earning power of a public listed company. You also don’t have to regularly monitor the performance of your property investment other than collecting rental and fixing broken pipes.

5. There is a widely accepted conformity that owning property is the safest and surest way to get rich while investing in stock market will get you burned eventually. There are just too many examples of stock market speculators jumping off the buildings. In other words, by investing in property you can a lot of psychological assurance because you are joining the herd.

6. As property price increases over time and the loan gets paid down, the equity value in the asset grows without much effort. You can harvest the fruits by refinancing the asset and roll the money into another property in a similar fashion and create your property empire.

The above is true to certain extent but I have also experienced some of its downside. The biggest disadvantage is the illiquidity of such investment. It took me 6 months to sell the service apartment I used to live in at a loss and another 5 months to receive the payment. The process was so painful that I wished I had just rented the apartment from the beginning. No matter how sound is an investment, a lot of things can go wrong if the selling process takes long and the complications will increase the risk in the process. Another problem with illiquidity is that it hampers your ability to take advantage of better investment opportunities. Take the same example above, if you have to wait 11 months to get the cash from the sale of your property, the present investment opportunity would have been long gone.

Most of the advantages of property investment listed above involves the aggressive use of debt and we all know the perils of debt when the tide is against us. The cost of debt at 4.5% per annum is manageable especially if the property is rented out with an equivalent yield, but most people conveniently ignore the capital repayment that often put a big strain on their cashflow. Throughout the past 5 years, it’s extremely rare to find a property that generate enough rental to cover the monthly repayment of loan with 90% LTV. Hence most people invest by only looking at the upside from capital appreciation but a lot of them are not able to hold it long enough to see that happen. This is actually quite similar to stock speculators that got wiped out via forced selling by their brokers who provide margin financing.

I have come across a few people who employed the following tactic in their property investment, which I would rather call speculation. They would buy a property with real value of say RM500k but at a gross price of RM600k and borrowed 90% against it. Immediately they received RM40k upfront cash back which was used to cover the transaction cost and service the loan repayment. Now imagine the same modus operandi was repeated across 10 different properties. When they saw that the lump sum cash back and rental was more than enough to cover the next 12 loan repayments, they start collecting luxury cars. Some even went to the extent of replicating this by using other people’s name as the borrowers. How did they manage to convince the borrowers? Go join some “coffee sessions” organised by some self-proclaimed property experts and you can find out easily.

The so called property experts conveniently forgot the fact that developers are busy ramping up the production of housing not because of demand but cheap credit given by the bank. When tenants fled for newer properties and buyers in secondary market dried up, they realised that their debt amount is way more than the underlying asset value because the theory on asset appreciation was simply not true. Therefore it’s not uncommon to see some residential buildings riddled with foreclosure notices. Unlike a troubled company which can be turned around by a high calibre management, a lousy building in a less desired location is extremely difficult to be turned around especially when there is an oversupply of similar products.

When assessing an investment, we ideally asses the asset’s intrinsic value against its current price. Very often the price of real estate is simply based on what the neighbour is selling for with no regards to what cash flow can be generated from the asset. This is prevalent among land owners who demand for astronomical price in line with their neighbour despite different land use allowed by the government. In Malaysia, there is always this dangerous belief that you can change the land use to whatever you want as long as you can afford the extra grease.

In Malaysia, the hefty real property gain tax (RPGT) of up to 30% makes a lot of investments not worthwhile. I’ve considered refurbishing run down houses and subsequently resell for profit but the RPGT will effectively wipe out all profit. Coupled with the long duration required for the selling process, I’ve decided that there are better opportunities elsewhere. Comparatively, there is zero capital gain tax imposed on the profits made on selling public listed stock and the selling process takes a few minutes provided it’s not some thinly traded counters.

Despite all the above, I’ve also seen really successful property investors who have built a solid property empire that produces amazing cashflow. This is often done with very careful deployment of debt in line with their holding power in order to avoid permanent loss of capital a.k.a foreclosure. This is also usually done over a long period due to the nature of property being illiquid and the time it takes to achieve meaningful capital appreciation. Therefore, it usually sends chill down my spine when I hear overnight success story of a young property guru in early 30s driving a Ferrari. I mean, you can be lucky enough to buy a severely undervalued asset from a desperate gambler, but what is the likelihood of finding another one?