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Self-use vs Investment Mortgages

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  1. #61

    Join Date
    Dec 2009
    Posts
    215
    Quote Originally Posted by Elegiaque:
    Thanks again for all the comments and advice. I'm reading through Elements of Investing.

    Before I finish the book, I have two nagging questions...

    First:
    If I take, say, $300,000 now and diversely invest it indices, assuming a generous 6% return, that will be roughly $1.7m in 30 years.

    Conversely, hypothetically, I could take that amount, put it as a down payment, buy a $3m flat, 2.5% interest for 30 years, w/monthly payment at $10,500 (which either I pay as "rent" or a tenant pays). In 30 years, this property will have at least doubled in value, I'm guessing, and be worth $6m (conservative guess).

    Granted, the comparison isn't completely fair because I will lose roughly $10k/annually for lost rent/maintenance, but it seems a far better deal at this stage than simply investing it in indices. I understand the HK property market is in a bit of a pickle at the moment, but my intuition is that for a long-term investment, 20+ years, it is fine. **Note, I think this 3M/$10,000 is a sweet spot in the HK market where the monthly mortgage payment and generated rent should be roughly equal.**

    Second:
    But, the approach to put my savings into indices (and a few small "pet" investments) is long-term. How can I keep this cash still available should an unforeseen opportunity to invest in property come up in the future? I don't want to be back to 0 with saving for possible down-payment money.

    That said, though, for a whole list of reasons, it seems that I cannot and should not invest in HK property in the next year. In fact, I can't foresee that I will ever have a geographical base in my future. The next place I may likely call home has a similar messed-up housing market to HK and will likely be inaccessible to me at my budget. While the US might be a good option, I am really unfamiliar with it at this point and think the overall costs and tax headaches are not worth it. I'm slowly coming to the conclusion that in my life property may just not be an option I can ever have.
    This difference in returns due to the practical norm of people investing with leverage for property but not for indices is exactly what I was referring to a couple posts up. Leverage simply amplifies any profits or losses. But it is definitely a consideration imo in deciding between asset classes like property, REITs and stocks in that a mortgage is easily the most accessible way that average investors have access to leverage of this kind of multiple (if that’s the level of risk they want)
    Last edited by foxwendal; 18-07-2020 at 04:14 PM.
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  2. #62

    Join Date
    May 2019
    Posts
    523
    Quote Originally Posted by Elegiaque:
    Thanks again for all the comments and advice. I'm reading through Elements of Investing.

    Before I finish the book, I have two nagging questions...

    First:
    If I take, say, $300,000 now and diversely invest it indices, assuming a generous 6% return, that will be roughly $1.7m in 30 years.

    Conversely, hypothetically, I could take that amount, put it as a down payment, buy a $3m flat, 2.5% interest for 30 years, w/monthly payment at $10,500 (which either I pay as "rent" or a tenant pays). In 30 years, this property will have at least doubled in value, I'm guessing, and be worth $6m (conservative guess).

    Granted, the comparison isn't completely fair because I will lose roughly $10k/annually for lost rent/maintenance, but it seems a far better deal at this stage than simply investing it in indices. I understand the HK property market is in a bit of a pickle at the moment, but my intuition is that for a long-term investment, 20+ years, it is fine. **Note, I think this 3M/$10,000 is a sweet spot in the HK market where the monthly mortgage payment and generated rent should be roughly equal.**

    Second:
    But, the approach to put my savings into indices (and a few small "pet" investments) is long-term. How can I keep this cash still available should an unforeseen opportunity to invest in property come up in the future? I don't want to be back to 0 with saving for possible down-payment money.

    That said, though, for a whole list of reasons, it seems that I cannot and should not invest in HK property in the next year. In fact, I can't foresee that I will ever have a geographical base in my future. The next place I may likely call home has a similar messed-up housing market to HK and will likely be inaccessible to me at my budget. While the US might be a good option, I am really unfamiliar with it at this point and think the overall costs and tax headaches are not worth it. I'm slowly coming to the conclusion that in my life property may just not be an option I can ever have.
    I wouldn't call 6% generous. Presuming you are pretty young with that horizon would you need to diversify beyond an SP500 tracker? You can check the cagr of any 30 year rolling period you wish here:

    CAGR of the Stock Market: Annualized Returns of the S&P 500

    If you had invested a lump sum in 1980 and divested it in 2010 after the GFC the cagr would have been 11.4%. 1970 to 2000 post dotcom crash similar. Assuming you reinvested that 10k "lost" from fees/maintenance each year you'd need around a 9.5% average return to hit that 6m figure.

    Personally, I think that 10k a year sounds on the low side. Also, a 3m flat in HK...is that a realistic investment for a 90% loan? I'm assuming something that cheap would be in an old building or a village house.
    Elegiaque likes this.

  3. #63

    Join Date
    Jun 2011
    Posts
    426

    I think its an important factor that one forgets that in 30 years a fairly new building will look pretty shabby. Plus maintenance on the flat over those 30 years will for sure cost some money.

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