There is a ton of information on property investing in Singapore. It is just wired in us to think of property as the way to wealth. This is reflected in the countless ads advocating property investing (you know which ones I’m talking about).
But there is far less written about bond investing, which is easier to manage and possibly more lucrative. Bond investing is not just in individual bonds, but can be in ETFs as well. But you can only leverage on individual bonds and some select income funds. It will depend on your bank or brokerage.
Here’s why a savvy investor should consider bond investing over property.
[Disclosure: I have sold most of my high-yield bonds, and have a remaining Temasek bond and income fund. Stocks are just much better opportunity at present. But I have written this article as bond investing is still relevant and has many advantages over property investing.]
Far Less Taxes
There are no taxes involved in bond investing. No GST, no capital gains, no income tax. 100% of the gains are yours, less the usual 0.3% brokerage sales charge.
The story is extremely different for property. It is taxed to the sky. You have to pay stamp duty, Additional Buyers Stamp Duty (ABSD), GST, the property agent, lawyers and bank fees.
That’s just the one-time costs. Annually, you got to pay your annual property tax. In addition, rental income is added to your overall income and taxed accordingly.
That is easily hundreds of thousands being consumed by taxes. You are in the hole the moment you sign, and have to wait years to break even, if it ever does. With bonds, you are in the black the same year you bought it.
Truly Passive Income
Being a landlord is not always easy. It is highly dependent on the tenant, and no matter how much screening is done, you may get one from hell. They can damage your property, be demanding, or late or even default on the rent. You also have to maintain the property, and it will always require constant repairs. To me, this isn’t really passive income. Landlords with multiple properties will tell you it becomes a full-time job.
For bond income, all that happens is that the sum is deposited into your account. That’s it. It literally just pops into your account 1 or 2 times a year. No chasing, no uncomfortable messages, and no paperwork to file. Just pure money that doesn’t take any work.
Higher Recurring Returns
The return for returning out property is typically about 2%-3%. And that is with leverage through a home loan. If you are lucky, you would get another 2%-3% in capital appreciation.
Let’s compare that to a typical high-yield bank bond. It comes from a prestigious international bank, offering you over 5% in yield, which translates to over 10% with leverage. Many of them are investment grade bonds, and has a 99% chance of not defaulting. Their respective governments have a heavy incentive to support their banks. If they fail, it is a threat to their national banking system and reputation. Quite often, governments are shareholders in the bank. The same goes for many other big companies and government-backed enterprises that issue bonds as well.
What are the chances that the government will save your property in particular? In fact, they tightly control prices, and are unafraid to clamp down on significant price increases. Property prices in Singapore appreciate within controlled limits. There are no such restrictions for bonds.
Less capital needed
Just $80,000 is needed to start with bond investing. This is based on a standard Loan-to-value (LTV) of 70% needed for bonds with notional value of $250,000. It can be slightly more or less, depending on the price the bond is trading at the moment.
In comparison, decent rental properties in Singapore are priced well in excess of $1 mil. For a property price of $1 mil, you need a down-payment of about $200,000 from a combination of cash and CPF. That doesn’t count transaction or renovation costs.
More Diversity and Less individual risks
Having that much in a single condo sounds pretty risky to me. You won’t know if URA decides to build a dormitory or columbarium right next to you. Another development can come up beside yours, blocking your view and competing for tenants, lowering rents permanently. And when these happen, there is very little you can do besides complain to the MP.
For the same down-payment, you can diversify into at least three completely separate bonds in different businesses. By mixing up high-risk and low-risk bonds, some risks can be mitigated. It is highly unlikely that all three would default. If you make a mistake, sell and re-buy, and just pay for the spread. This flexibility is simply impossible with property.
In addition, I find the bond market not too difficult to understand, and quite accurately priced. It’s hard to get cheated. Can’t say the same for property.
For property, it can weeks or months to liquidate it. You have to choose an agent, set up for viewings, and wait to get a decent offer. That easily takes months. Even when you get an agreement, there are many more weeks to actually get the papers signed and the money into your bank account.
To sell a bond, you call or SMS your relationship manager. They tell you the spread and the bids, and you can choose to take it or wait. There will nearly always be a bid, meaning it can be executed immediately. Once the order is done, your RM notifies you and the money is deposited into your account within a few days.
But let’s be fair and talk about the drawbacks on bonds vs property.
Property is more stable. While rare, bonds do experience sudden declines, which can trigger a margin call. That happened in a fairly shocking manner in early 2020.
Bonds can even default and go to zero. When this happens, its fairly serious. You stand to lose 300% of your capital, if you had borrowed the maximum LTV of 70%. Meaning that on top of the $70,000 capital you had put in, you stand to be liable for another $180,000.
However, the rates for defaulting are extremely low, as long as you choose investment-grade bonds.
“S&P Global reported that the highest one-year default rate for AAA, AA, A, and BBB-rated bonds (investment-grade bonds) were 0%, 0.38%, 0.39%, and 1.02%, respectively. It can be contrasted with the maximum one-year default rate for BB, B, and CCC/C-rated bonds (non-investment-grade bonds) of 4.22%, 13.84%“
A margin call is still possible for properties, when its valuation falls far below the loan amount. However, this scenario is extremely unlikely and its fair to say that property prices won’t suddenly decline 10% in a day or week.
Property should appreciate. Bonds are simply debt, and not equity. Even if the issuer grows to mammoth portions, the amount of debt they issued remains the same. A bondholder doesn’t take part in the company’s growth. A bond is issued at $100, and is redeemed at $100. The exception are perpetuals, which don’t have an end date and the issuer doesn’t need to redeem them. It’s still possible for bonds to appreciate, though its more of a bonus, and must be sold before its redeemed.
My understanding is that on average property appreciates around 2%-3% per year. But that’s the average, and individual profits will depend on a lot of factors. Plenty of people lose money on property despite holding for years. The location, purchase, price, and even neighbours matter. Not to mention government regulations. But most of these factors are out of your control. You just need to roll the dice.
You can touch your property. I used to have 5 income-generating bonds that put together, can easily purchase a nice condo. But its invisible. You can’t look at me and say wow that guy has 5 bonds, he’s super rich. With a condo, it is an obvious show of wealth that everyone can see. People can guess how much it costs, and it generates envy. You can jump into your condo pool and play tennis. And that undeniably feels good.
But the expenses like the loan and maintenance costs of the condo are invisible. People can’t see the money flowing out from behind the scenes through taxes and fees. Much of what people see is an illusion.
If you want to achieve true wealth, stop paying for things you don’t need with money you don’t have, to please people you don’t like. Go for freedom, rather than status.
How do I buy bonds?
You don’t need to be a privileged banking client to buy bonds, though it helps. The cost is lower. You can buy through FMS as well as different stock brokerages.
I would caution that bonds can have high spreads. They are traded over the counter, which means the prices are not transparent and what you see may not be what you get. In bad times, liquidity can disappear and it becomes hard to sell bonds at a reasonable price. It is not like the stock market, where prices are easily visible and trade-able.
However, I wouldn’t consider this a heavy disadvantage when compared to property investing. Properties still have much lower liquidity and potential spreads than bonds. Buyers for bonds are worldwide, but property has a much smaller local pool. Always choose bonds that are large and liquid.
The advantages bond investing has over property investing are:
- Lower taxes and fees
- Higher recurring returns
- Lower minimal capital required
- Higher liquidity
There are more barriers with bond investing, likely because there is so little information out there. There aren’t hordes of property agents advising you and feeding one-sided dreams.
But I assure you bond investing it can be rewarding. Talk to your RM about it, and you can drop me a line too. As always, I can only give friendly advice, and you have to do your due diligence and make an independent decision.