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Investing in Property Doesn't Add Up!?!

Discussion in 'General Property Chat' started by mrdobalina, 11th Apr, 2016.

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  1. mrdobalina

    mrdobalina Well-Known Member

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    Why investing in property doesn't add up | theage.com.au
    Michael Pascoe's most recent commentary in Fairfax.

    "Housing returns have beaten the stock market very handsomely over the boom years while equities have done nothing – but equities doing nothing now are winning hands down thanks to the much richer franked dividend yields, no stamp duty and negligible transaction costs."

    Thoughts?
     
  2. mrdobalina

    mrdobalina Well-Known Member

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    For those with sizeable property portfolios, is it worth it to divest the property portfolio and invest in shares?

    Case study:
    a) Someone has $6m IP portfolio at 50% LVR ($3m debt and $3m equity). At 4% net rental return will give a net income of $120k p.a.; or
    b) Sell down IP portfolio and invest in shares. Selling entire IP portfolio will incur ~$750k cgt, assuming 50% cgt discount and at top tax rate. This leaves $2.25m to invest in shares with no leverage, which at 8% return gives $180k p.a.
     
  3. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Anyone that can unequivocally say that investing in property doesn't add up is nothing more than a sensationalist at best.

    There are thousands of markets, many strategies and opportunities and for some people investing in real estate will 'add up' more for them then say shares or business. Also the opposite may be true, that for others property may not 'add up' for them while other investments may make more sense for them.

    But to say investing in property doesn't add up period, is laughable imo.
     
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  4. joel

    joel Well-Known Member

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    8% is a bit optimistic. Not many companies consistently pay 8% in dividends. You havent included any capital growth for your property portfolio. Growth in a leveraged asset makes a huge difference.
     
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  5. mrdobalina

    mrdobalina Well-Known Member

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    [QUOTE="Leo2413, post: 195373, member: 85"
    There are thousands of markets, many strategies and opportunities and for some people investing in real estate will 'add up' more for them then say shares or business.
    [/QUOTE]
    Agree. There are dud companies floated on the stock exchange and dud industries; just as there are dud properties and dud markets.
     
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  6. larrylarry

    larrylarry Well-Known Member

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    Leverage is what I like about property investment.
     
  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Quite reasonable comments. If you're looking at entry and exit costs alongside tax treatment, holding costs and a simple return based on yield, I agree. Property is an inferior asset class. In fact it's lousy.

    What's not really considered in this is the incusion of risk and leverage, nor capital and yield growth over the last few decades. On this basis, property wins hands down.

    Hard to see if property will continue to be superior over the next decade. I suspect some locations will be, but other locations won't.
     
    Last edited: 11th Apr, 2016
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  8. HUGH72

    HUGH72 Well-Known Member

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    Its a silly example quoted, buy and sell within 3 years in a flat market of course transaction costs will swamp any return.
    Its easy to pick stupid examples, I could have bought BHP shares at $48 ps and sold recently for $16 with a miserable DPS return over the last 8 years.
     
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  9. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I'm with you. Not only leverage but I love the fact that its very much like a poker game. Those who take the time to develop their skill/craft/poker face will be rewarded the Pot.
     
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  10. sanj

    sanj Well-Known Member

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    True and growth is a big factor early on in your journey but towards the end of it income is vastly more important, you can't eat or pay your bills with paper gains, you can with money hitting your bank account every week.

    personally I think resi property undoubtedly has its place for many people and can have great results. I'm yet to be convinced that it's the best outcome for someone looking to live off the income created though.3/4% net yields are pitiful imo and doubling them means the ability to retire on half the capital
     
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  11. sanj

    sanj Well-Known Member

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    The problem there is you've described potentially a huge % of the housing market and used 1 singular share to compare it with. there are times where resi property is great and times its a complete waste of time and capital. I'd argue that's been the case for many in perth this decade and potentially the same for many buying in say sydney atm.

    if you take a fluid/open approach to investing then there's no need for it to be an either or approach, eg you could invest in shares or any other asset class during the few years you feel the resi market isn't likely to do much and then put the money into resi at the right time.

    there's a bit too much praying at the church of resi property at times imo.
     
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  12. mrdobalina

    mrdobalina Well-Known Member

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    Entry and exit costs for property would eat away a chunk of your gains though.
     
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  13. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    There's pro's and con's to both. The housing market is unlikley to halve, where the share market does so quite regularly. Individual houses are very unlikely to drop to zero value, where shares can. You can add value to create wealth.

    But, shares are liquid, have minimal transaction costs, can have massive capital growth, can have similar leverage to property via CFD's, and can have very good yields.

    Why not both?
     
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  14. Northy85

    Northy85 Well-Known Member

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    This is exactly why some people complain about not making money in property as you really need to jump in hard and go for it. The people who buy an OTP unit on the gold coast and call themselves property investors will not make the kind of money that will set them up. They'd be better off putting the money they had for the deposit into a diversified share portfolio and reinvest the dividends.
     
  15. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I agree with you.

    Without trying to sound arrogant or condescending, I honestly believe that most people (and most people is NOT Property Chat folks by a long shot) who 'invest' in ips in Australia are just hobbyists and not hardcore investors who want to build wealth.

    Just my opinion.
     
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  16. sanj

    sanj Well-Known Member

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    Agreed, which is why I don't invest in property unless there's a value add plan there. the idea that if market conditions change I have to sit there twiddling my thumbs for possibly years watching my capital being wasted is unpalatable to me. I do admit to aiming for higher highs and accepting the occasional lower lows that come with them and accept it isnt for everyone.
     
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  17. See Change

    See Change Timing Lord Premium Member

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    I could introduce you to some people who's retirement plans were fXXXXed by the GFC ....:rolleyes:

    Cliff
     
    Last edited: 11th Apr, 2016
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  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Average shares grow faster in value than property on average. But it is too dangerous to leverage highly with shares. An index fund like Vanguard products will give safer long term growth compared to individual shares and the dividen yield is pretty good compared to property.

    If you buy a property it will initially be highly leveraged. But over time the LVR will decrease and it loses its attractiveness.
    e.g. $100,000 property with $100,000 loan is highly leveraged. 100% LVR. But in 20 years
    $1,000,000 with only $100,000 loan deductible against this property. You might be getting 4% income if lucky and then have all the associated costs such as land tax etc.

    Some would sell and buy shares, but then you are hit up with CGT.

    An alternative may be to just leverage up to 80% (if you can) and buy index funds. Instead of incurring CGT you incur interest, but this may enable more shares to be purchased as you are not losing money in taxes. You can also keep the property for more growth.
     
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  19. mrdobalina

    mrdobalina Well-Known Member

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    Can you elaborate further Cliff?
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Cliff meant GFC possibly?