LIC vs IP

The question of LIC vs IP was started in the 'Sydney Thornhill Event - 17th June' thread.

I have done a bit of analysis to see if there is any merit in PT's claims.


I have attached the working file. I would appreciate if someone can go through the workings to see if I have made any mistakes.

I have also added this file the Dropbox Excel Collection

You can play with the assumptions (yellow) to see the effect.
I think my property assumptions are very conservative. Then adjusted the LIC assumptions to get the graph meet.

 

Thanks for the attached excel @devank

Wonder why did you put the assumption for LIC capital growth is 8%? Any reference to support this would be useful.

If I assume same capital growth for IP and LIC to be the same 10%, hence capital growth for LIC is 6%. The result is IP significantly outperform LIC.

 

I have no reasons apart from trying to meet the IP chart.
Or we can interpret this in a different way. To outperform IP, we need to invest in a LIC which is going to grow more than 8% and gives more than 4% yield. Finding the reasonable growth rate itself is a bit of challenge as it depends on which time frame you are looking at.

 

In your example property is giving a total return of 10% and LICs 12%.

I can't open the file in my phone, something seems amiss if a higher return gives the same result. Is the property leveraged or something?

 

Any leverage included in analysis?

 

Thanks @devank.
Also for IP, is it realistic to calculate the cost ex interest for be around 38% off the potential total rent? i.e. 20 weeks of no rent.
This seems to be quite high. I expect it to be around 20-25%

 

Yes. IP at 80% LVR. LIC without any leverage. That's what I would do in real life.

 

That includes vacancy, PM fees (general, finding new tenants etc), rates and other maintenance fees.
My IPs come at about 18 weeks. I gave another two to count for any sudden major expense.
Feel free to change any yellow cells. It won't break.

 

I think given the leverage difference thats amazing.

Not really possible to put in a spreadsheet but the mental difference as well. Eg tenant issues, pm issues, banking changes etc that seem to haunt everyone at one time or another.

 

All good. Just want to validate your assumptions with mine as I'm pretty new in both asset classes.

 

What PM issues? My PMs are awesome

LIC seems to be achieving similar results without IP's leverage. However, I don't know if it is easy to find a stock which can grow at 8% and also yields 4%. There is also SANF thing.

 

IPs at 80% LVR whereas no margin lending on LIC.

Data sheet's col B has all other assumptions listed. You may want to check that as well.


Most of my assumptions are based on kind of what makes sense.
5% growth means doubles every 15 years.
All my IPs are 5%+ yield.
LVR 80% is very common.
Generally, it costs 5% of the price. In fact, a bit less.
I thought agent fees are about 3%.
Most my IRs are 3.8-4.5% but 5% seems likely future reality.
My expenses are about 18 weeks. Added two more for hot water systems.
Most my depreciations are between 7-10K. I have better yield if the depreciation is lower. So 8K seemed fair.
On average, the depreciation seems to be reduced by about 4%.

Above are really harsh assumptions on IP side. To me, IP wins. But, if you have enough IPs then no harm in trying a bit of share either.

 

Thanks for crunching the numbers.

I went with the same growth (5%) and yield (4.5%) numbers just to keep things fair between asset classes:




Property wins due to leverage. Without leverage LIC wins.

But what if the asset is held on and never sold? After 30yrs accumulated cashflow is $420,678 for LIC vs only $134,420 for property.

For what it's worth as many already know net yield on property is terrible. Cranking the yield on property up to 6.5% only creates an additional 115k in accumulated cashflow after 30yrs.

To me LICs are still worth serious consideration for when one needs to draw on the asset base for income in retirement. In fact, i think it's preferable to the strategy of converting residential to commercial property for income.

 

That is amazing that property geared at 80% is pretty much the same as ungeared LICs.

BTW CGT rate of 37% - doesn't take into account the 50% CGT discount. I don't understand the spreadsheet but why is CGT taken into account?

 

Personally, my end game is to sell all IPs and convert them to easy to manage shares. Wouldn't the income be more than $420,678 by converting those IPs into shares in 30 years time?

Yes. Make sense.

 

Please note, my assumptions are soft on LIC but hard on IPs.
I'm not sure if we can find a stock which can grow 8% year on year and also yield 4% fully franked. This would be my next check.

The label 'CG Tax Rate' should be just 'Tax Rate'. Col H (CG Tax) calculates the CGT which is


(Selling Price - Total Cost) x 50% x Tax Rate of 37%

 

Yep. Though I think there's a middle ground where there is no need to sell all IPs. Since they're more leveraged, theoretically they should provide greater asset growth even in retirement. Depends on how much the target income is.

 

Is it reasonable for LIC to get a Capital Gain of 8% p.a. What has been their historic averages?

 

I dont understand the spreadsheet either

Performance can change dramatically dependent on commencement date/year of investing

 

"adjusted the LIC assumptions to get the graph meet."