IP3 vs Shares?

Discussion in 'Share Investing Strategies, Theories & Education' started by Realist35, 30th Apr, 2017.

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  1. Realist35

    Realist35 Well-Known Member

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    Evening all:),

    We are thinking of investing 100k in IP3 Vs investing in shares. If we go for IP3, it would have to be a high yielding property due to our serviceability limitations. If we buy shares, it would probably be an index find or an ETF.

    Our portfolio is worth 1.1M with the LVR of 88%. It's negatively geared and yearly holding costs are approximately 5k. I suppose if we buy 100k worth of shares with 5% dividends, we can use the dividends to pay the holding costs of our property portfolio or we could just reinvest the dividends.

    What would be a smart thing to do in our circumstances?

    Thanks:)!
     
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  2. Realist35

    Realist35 Well-Known Member

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    Any thoughts:)?
     
  3. The Y-man

    The Y-man Moderator Staff Member

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    I'd got REIT as indicated to you before by PM.

    The Y-man
     
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  4. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    I think you may be on the right track. Look to offset any non deductible debt as well.
     
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  5. Realist35

    Realist35 Well-Known Member

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    Hold on, I'll need to Google again what REIT stands for lol
     
  6. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Real Estate Institute of Tassie ;)
     
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  7. The Y-man

    The Y-man Moderator Staff Member

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    Real Estate Investment trust - where basically a manager pools investors money together to buy commercial properties, and split out the rent net of fees and costs back to the investors in proportion to their stake.


    Happy to PM you some links.

    The Y-man
     
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  8. Realist35

    Realist35 Well-Known Member

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    Ok so buying shares would be on the right track:)?

    No non-deductible debt here, no PPOR:).
     
  9. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    If the reason you're buying the shares for the 5% yield, then there's really not much different to putting the $100k into an offset account. Rates on your properties are likely to be almost 5% (if they're not there already, they will be in the near future). Ignoring the tax, there's no gain and likely to get worse as interest rates increase.

    No problem with investing in shares, but do it with a goal of getting more than a 5% yield.
     
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  10. Realist35

    Realist35 Well-Known Member

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    Thanks:). But that's property again (although commercial). Wouldn't it be better to buy shares for the sake of diversification?
     
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  11. JK200SX

    JK200SX Well-Known Member

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    The rates vs the yield are probably the same now, but by buying into shares (LIC's/ETF's), wouldn't you also have potentially another appreciating asset?
     
  12. The Y-man

    The Y-man Moderator Staff Member

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    Possibly - but most people already have shares in their super, and no commercial.

    The Y-man
     
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  13. Realist35

    Realist35 Well-Known Member

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    Yes, that's exactly the reason I'm looking into it.

    However what I don't like about shares is their high volatility. For example if I bought ASX200 in 2007, I would still not have recovered the losses 10 years later. In my eyes that makes them look like a more risky alternative to property. Or am I missing something?

    I've been trying to find a study showing a performance of shares vs property over the last 20 years in Australia?

    I did find a study (see the link below), but it compares unleveraged shares vs unleveraged property and leverage shares vs leveraged property.
    ASX - Request Rejected

    It would be nice to see how unleveraged shares with dividend reinvestment compared to leveraged property, as that's typically how it's done.

    Maybe @The Falcon or @Terry_w would have some data?
     
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  14. mcarthur

    mcarthur Well-Known Member

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    Good point. With interest rates nearing/above 5% for home loans, if you have a PPOR/non-deductible debt then presumably share return (CG + dividends) needs to be above 5% to compete with keeping the money in an offset. While still working, then tax on the dividends is also going to bite - 6%+ return is needed.

    On the other hand, if you're doing this with an IP and not PPOR, then at least the loan is deductible, but your costs are high - I use 25% of income, which would mean a gross yield of 5% is about 4% before tax (or around 4.45% after tax negatively geared) which is less than PPOR offsetting.

    @Peter_Tersteeg, what pure dividend yield do you feel is needed for the shares? (I'll assume for these purposes that CG for the shares and property are the same)

    Of course the best benefit is when having a PPOR and IP, and using funds borrowing against equity in either one (preferably PPOR I would think?) to purchase dividend yielding shares at PPOR or IP interest rates, and debt reduce the PPOR over time.
     
  15. The Y-man

    The Y-man Moderator Staff Member

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    @mcarthur

    Remember many divs carry franking credits.

    The Y-man
     
  16. Marg4000

    Marg4000 Well-Known Member

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    I could quote buying properties in mining towns just before the bust as a more risky alternative to shares.

    We can all cherry pick dates to support any argument.
    Marg
     
  17. b0b555

    b0b555 Well-Known Member

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    You are only looking at the price index. If you include dividends (i.e. look at the accumulation index) shares are well above their 2007 peak.
     
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  18. oracle

    oracle Well-Known Member

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    If you bought in Perth in 2007-2008 nearly 10 years later there are some properties that have still not recovered to their previous boom prices. That is more risky alternative to diversified portfolio of shares (like index fund / LIC) when you consider you would have used leverage to buy property. Or am I missing something?

    Cheers,
    Oracle.
     
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  19. Realist35

    Realist35 Well-Known Member

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    Do you have data that would include dividend reinvestment by any chance?
     
  20. thatbum

    thatbum Well-Known Member

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    I agree. And cherry pick good and bad examples of property or share investments too.

    Seems like a fairly pointless general comparison apart from one main difference I can think of - the amount that the investment can be leveraged.