ETF Shares are better than property

Discussion in 'Shares & Funds' started by Jay Coffer, 26th Oct, 2021.

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Our property strategy vs ETF strat

  1. Property

    50.9%
  2. Shares

    49.1%
  1. Jay Coffer

    Jay Coffer Member

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    My partner and myself are about to pull the trigger on a property, circa 680k. There's a niggling feeling on this question before we go ahead and I would like some opinions on it.
    I've heard it time and time again: shares are a better investment vehicle than property.
    For a first home buyer like us, I'm not sure if this is true, due to the money we are "throwing away" on rent.
    Can someone please confirm our argue against my logic:
    Shares: 3.5-7% return (ETF's or LICs) with a dividend reinvestment strategy
    Property: 20k each year not going towards rent + whatever % annual growth the property market in a major city grants us (600sq house close to CBD)
    I plan to hit shares once we are paying for our own place of residence, rather than renting. Is this a good strategy, or is just going into shares completely still a better option, even though we are paying 20k / year in rent? We earn 130k combined pre tax (if this helps).
     
  2. Trainee

    Trainee Well-Known Member

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    You wont be buying 680k worth of shares if you dont buy the property, right? If you buy 60k worth of shares, 10% return will be 6k. On a 680k property, 5% return will be 32k. Compound this for 20, 30, 50 years.

    Do you understand where the difference is coming from? One word.
     
    Last edited: 26th Oct, 2021
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  4. Jay Coffer

    Jay Coffer Member

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    Leverage?
     
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  5. MB18

    MB18 Well-Known Member

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    Leverage for shares or property? Readily available for both. Resi property leverage is admittedly cheaper.

    @Jay Coffer get a hold of Peter Thornhills Motivated Money book and spend an afternoon reading that.
    If you're not familair with the name/book its an Australian publication (light reading) offering an Australian perspective with Australian data.

    PS: Rent's not dead money. You can either rent the house, or rent the money to buy it.
     
  6. Baker

    Baker Well-Known Member

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    You got it buddy.

    What other vehicle will allow you to borrow and purchase an asset worth 5 times the money you hold in your hand, with no margin call? (Well the NAB equity builder goes close and look how feverish everyone is to get a piece of that...)

    I HATE real estate and debt and banks.* There, I said it. But when the light bulb went on about the absolute return - as @Trainee said - you can get from the leverage available with real estate, well I had to park my issues and invest.


    * bank took away our family home when I was a child.
     
  7. Trainee

    Trainee Well-Known Member

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    Reverse the thinking. If you buy shares instead of the property, will that meet your goals? It might be fine if you already have a lot of money or are confident you can find the next afterpay or tesla.

    But most people start with relatively little. They need leverage. And resi property offers, imho, some of the cheapest, longest term, easiest leverage.
     
  8. Jay Coffer

    Jay Coffer Member

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    I've just finished reading motivated money, literally last night! Heard him on a FIRE podcast and had to read the book. He does kind of fail to mention in the book that paying for a PPOR over renting is a sensible investment option. 20k per year does kind of vanish when you rent, and is not a small amount of money? You can then use that equity to leverage again into shares...
     
  9. Zenith Chaos

    Zenith Chaos Well-Known Member

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    There is more sense to having at least a PPOR for the tax concessions on sale. The CGT on sale of an IP is never mentioned when someone talks about making big bucks on property.
     
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  10. SatayKing

    SatayKing Well-Known Member

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    Property. Hmm, where does it sit in my life? Deep thinks. Got it. Roof keeps the rain off my bed and the four walls stops the wind from whistling through. Apart from those cannot think of any other use for it.
     
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  11. Isla_Nublar

    Isla_Nublar Well-Known Member

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    But how much extra do you have to pay in insurance, water rates, strata fees, council rates, repairs and maintenance? All of those costs are currently covered by the rent, so take your $20k rent and minus those expenses and the true cost may be $10-$15k (depending on age and size of house etc). If you buy, you will need to cover all of thoses costs... not saying don't buy a house, just keep your eyes open to the true cost of all options
     
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  12. Isla_Nublar

    Isla_Nublar Well-Known Member

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    Do you "throw away" money on food - if so, maybe you should buy some cows for the backyard and plant some vegetables to eat?
    Do you "throw away" money on clothes - maybe you should buy some sheep for the wool to make your own?
    Do you "throw away" money on entertainment - maybe you should stop doing all fun activities that make life enjoyable?
    Everyone always complains about paying the landlords mortgage, but no one ever complains about paying the pizza shop owners mortgage, or the local ice cream shop owners mortgage, so why do we do it with renting?
     
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  13. Trainee

    Trainee Well-Known Member

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    In the short term, especially if you want to live in certain types of property, renting can make sense (usually means you invest elsewhere).

    But for most people, ppor is the largest and often only leveraged asset they have. Without it, their returns will probably be much lower.

    The only thing that matters is the outcome. If you can achieve your goals without a ppor, or without gearing, go for it. The problem is some people avoid gearing because they dont like borrowing, and don't achieve their goals as a result.
     
  14. skater

    skater Well-Known Member

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    This! I'll put it bluntly. If I did not buy property, there is no way I'd be where I am today.

    Let's face it, both property and shares increase in value. If you sell, you need to pay CGT. With a PPOR, you don't need to pay rent, with an IP you get a return via the rent your tenant pays, with shares you get dividends, right. So at this point, it looks like it's even.

    The one very big advantage is leverage. You can leverage up to 95% of the price of a house, and if the market falls, it's extremely rare for a bank to call it in. In fact, I don't think I've ever personally heard of it happening, here in Australia. With shares, you can get a margin loan, now I don't do margin loans at all, so not sure what percentage, but if the shares drop in value, expect to have the loan called in.

    What has worked for me is to build a portfolio of houses, and now downsizing and deleveraging some into shares.
     
  15. Gav

    Gav Well-Known Member

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    I think you need a PPOR. If you dont have one, you are really short the housing market, and that has to be Australia's worst trade.

    If worst comes to worst, and you have no wealth when you retire, if you have a paid off place to live, and the pension you can muddle through. I am not saying it's the best investment, but as a vehicle for compounding and forced saving it's pretty hard to beat.

    Once you have your PPOR you can then think how you are going to go about building wealth, whether that be shares or property. Thats going to depend on your personality, what you enjoy, and what works for you.
    Have attached my old Shares vs property spreadsheet, you can play around with the inputs.
     

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  16. MB18

    MB18 Well-Known Member

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    Thats because he doesnt think it is sensible, I believe Scott Pape mentions the same (non financial considerations aside).

    It is true that 20k does kinda vanish when renting but so does paying the interest component of a mortgage, and the holding costs of a ppor (I've run the numbers as they relate to me and renting is certainly better - ohers may be different).
    You also have the opportunity cost of equity tied in a ppor vs an income producing asset (debt recycling can at least mitigate that to an extent of course).

    Remember this is a property forum so expect the bias to lie towards that end of the spectrum of course.
     
    Last edited: 27th Oct, 2021
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  17. MB18

    MB18 Well-Known Member

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    With an IP you get what the tennat pays less what the IP/tenant costs, hence widespread negative gearing.

    With shares you get dividends and franking credits.

    Agree about the 95% leverage on resi property vs max 75% on shares. But margin loans/calls are a thing of the past through the likes of NAB.

    It is true that either shares or property will do better than nothing, and the debate between the two is as old as ford vs holden, however in a country where the general mindset is one where resi property is the only way ahead it can benefit to question the status quo.
     
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  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Owning a main residence might cost you a bit more in terms of locking up a deposit and repayments and costs exceeding what you would be paying if renting the same property. But this is short term.

    Over time rents will go up while repayments on your property loan will be reducing your debt. You would have the ability to debt recycle, at owner occ rates, avoid land tax, have a CGT free asset, have increased serviceability.

    Worse case scenario if you only paid the minimum repayments on the loan for the main residence it would become cheaper than renting somewhere between 5 and 10 years down the track and you would end up with it fully paid off in 30 years. If you had only invested you would still be paying high rent at this point.

    It could come down to whether your 20% deposit, if invested instead would the income generated from that exceed the rent you would have been paying in year 30.
     
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  19. Brumbie

    Brumbie Well-Known Member

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    In my view, it is not a zero sum game. You should be invested in both. They are the two main asset classes that just about everyone is involved in. At the very least you should have a PPOR because of tax advantages. I would never use leverage for shares if it is subject to a margin call but think using home equity leverage for shares is fine. Having a balanced portfolio of income and growth assets should be your aim. I do both and built my wealth with property and leverage but as I get older I am switching more and more to equities because it is simpler. I do not want the agent calling me to replace a light whilst on a beach. Shares are easier. You can still have a property bias by investing in REITs. Again good returns and someone is managing your assets which are the best assets and your REIT hires the best people to do this. I will still keep the best of the best in my personal real estate though. Being able to borrow against property to take advantage of an opportunity is a game changer for building wealth.
     
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  20. DanW

    DanW Well-Known Member

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    Long-term shares return more than this, especially if you use long-term leverage with something like NAB Equity builder where there are no margin calls. While it's good to be conservative on expected returns - the same should apply to your expected benefits of owning a property.

    If you're paying $20k rent per year, that's not what you'll save when you buy a property. Currently your landlord pays alot of costs that you'll have to start paying. For the landlord these are tax deductible, but not for yourself if you live there.

    Add up the cost of these expenses and subtract them from your rent to find out the net saving of buying the property:
    -Stamp duty, pro rata over 10 years (average time properties are held)
    -Annual strata costs
    -Maintenance costs
    -Annual Rates & Water
    -Annual building insurance
    -Annual interest payments

    If you're feeling brave add the opportunity cost - the return you would have received on the deposit+stamp duty +principal payments if you had put that into the share market, or a rental property that has tax deductible expenses (or both).

    Not trying to discourage you, just making sure eyes are wide open. Rent money is not dead money, there's alot of money saved by being a renter. Also try to be dead sure that you won't have to sell the property, stamp duty is dead money more than rent is - when you sell a property you've lost that stamp duty forever. If you have to move, consider holding onto it.

    Buying your own home is better than making zero investments in life, but there's some next level options as well.

    Whether owning property and whether to live in it is better or not - The short answer is "It depends" or "It's complicated". It really is up to the individual, their location, opportunities, goals, and their alternatives.

    Buying a PPOR I've done twice, both times I've turned them into investment properties soon after.
    Today I don't want any more residential property, and prefer to make better use of the cash elsewhere for reasons unique just to me. Starting out though it can be very powerful to maximise leverage (but also risky). Ideally not having all your eggs in one basket is safer, especially in these days of sky high valuations for all investment assets especially houses.

    Similar to what @skater said - we would not be where we are today if we had not rented out our PPORs. Both situations are true and BOTH methods work. It's up to the individual and their future plans.
     
    Last edited: 27th Oct, 2021
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