Nevertheless, there are so many misunderstood concepts about real estate and stock market.
At a PURE investment aspect, real estate always underperforms compared to the stock market. Even if you choose the most valuable piece of property in the most booming area of the country, the stock market will make you richer compared to a house or condo.
Let me illustrate this by this example.
In 1992, Mr. and Ms Santos have 2 millions to spend in a condo unit in Manila. At that time, Makati was not yet fully developed but showed potential. I'm sure we all agree that Makati area is the best real estate investment area in the Philippines for the past 3 decades.
Nowaday, Mr. and Ms Santos 100 sqm condo unit in the center of Makati Business district (2 minutes walking to Ayala Ave.) is worth 8 millions. Wow, Mr and Ms Santos have made a good investment that made a 6 millions appreciation.
Let's take an other couple: Mr and Ms Sy. They have no interest of showing off with a brand new condo. They also have 2 millions to invest and they chose the stock market.
In 1992, the Philippine Stock Exchange Index (PSEi index that represents the biggest stocks in the country) was roughly at 1600. With 2 millions pesos, the Sy family bought the equivalent of 1250 shares.
As of today, the PSEi is at 7,881. Mr. and Ms. Sy still have their 1250 shares x 7,881= 9,851,000.
They made a profit of almost 8 Millions. Compared to the the Santos, they made more or less 2 millions more.
Many of you will say that my reasoning is not right. And even though you can't beat the logic of mathematics I just used, I need to add some remarks:
1. The Santos have to spend a lot in taxes for that condo. Not only the taxes but also the dues. Real Estate taxes are big and should be taken into account. Same goes for the dues. So, the cost of the condo is much more than 2 millions. The Sy have less taxes to pay. There's taxes and fees to be paid only when buying and selling the stocks. Advantage still goes with the stocks because the Sy didn't have to pay for real estate taxes every year.
2. If the condo was bought with a loan, the price the Santos paid is much more than 2 millions. It should be close to 3 millions if they chose to pay it over a long period. Advantage is still for the stocks
3. A property needs a lot of repairs. Kitchen sink, water leaks, heater not working, air con not working, re-painting, re-tiling, etc... Stocks need no maintenance. So, the price to acquire and to maintain the property is more than 2 millions. Advantage is still for stocks.
4. Now, if the Santos decided to rent out their condo, they would have made more money. Here's the key in winning with real estate: renting it out. By renting it out, their condo will still be worth 8 millions but they would have generated an income out of it. This gives real estate and advantage over the stock market.
5. Knowing that stock market outperforms real estate, I still bought a house. Why? Because nothing beats the feeling of owning your own house or condo. Period. Advantage for real estate.
Here's a small summary table:
To conclude, stock market returns are higher than real estate investment. Nevertheless, real estate beats stocks if owning your own house is important to you or if you rent out your property.
If you have any question, you can send me an email at pinoyfinancialcoach@gmail.com
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