Stock or property? Thoughts on my scenario below

Discussion in 'Investment Strategy' started by big max, 9th Jan, 2017.

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  1. big max

    big max Well-Known Member

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    House in Paddington Brisbane (bought for 400k now worth around 900k).

    Debt around 200k.

    Rents for around 550 pw (yes I know not great yield).

    My very rough calculation of net income is:

    500 x 40 weeks = 20k (I usually use 40 weeks to take into account repairs, periods vacant, Mgt and council fees etc).

    Interest on loan @ 4% = 8k

    Land tax (I'm estimating around 7k).

    Net income = 5k
    Assume 4%pa (on average over time) appreciation = 36k

    Total return 41K

    Or, I sell and have let's say 650k to invest in vanguard high yield blue chip etf yielding 4.5% = 29k plus assume stocks appreciate at 4% pa = 26k. Total return = 55k

    I'm finding it hard to justify holding the property other than maybe over the next few years we might see stronger annual growth (eg perhaps 6-8% in 2017 and 2018).

    Thoughts?
     
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  2. thatbum

    thatbum Well-Known Member

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    ...which sounds like a pretty good reason to me. Seems like even a tiny bit of extra % growth on a 900k property probably beats out the 14k/year extra on yield you get on the share strategy.
     
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  3. big max

    big max Well-Known Member

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    Yeah. Perhaps. Which is why I might grin and bear the land tax for a few more years. But after that gain, say we do get to a normalised rate of property appreciation of 4% (basically the rate of inflation) does it make sense to hold vs the high yield shares etf? I'm really getting sick of a hassle of tenants, various costs etc as opposed to a nice simple hassle free regular deposit of cash yield from an etf.
     
  4. traveller

    traveller Member

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    Don't know your experience with the share investment, however it can be volatile. You should be ready to give up 20-30% at any time. GFC was even worse! You should ask yourself how are you likely to behave(and react) if you lost 30% of 650k and the ETF values is now only 450K.

    If you can sleep with that then you should be good as they do bounce back esp. if you are not investing in the individual shares.

    Compare the volatility with the tenant hassles and you will have your answer!
     
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  5. willair

    willair Well-Known Member Premium Member

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    The only question to ask yourself is with a inner city blue chip like "Paddington" if this is it's value now ,what will the value in 5 years time that area as i know several that own within that small area for 30 years compounding on compounding year in year out and those area's don't stop..

    The exit costs to sell then reinvest in EFT'S Standalone single holdings and the way value can change that quickly from my experience they can go from champagne too S### that quickly then you ask yourself what's happened ..Try and hold the property 5 years time if you sell you will ask yourself Why..imho..
     
  6. Finrod

    Finrod Active Member

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    You're comparing a leveraged asset against an unleveraged one.

    On selling the house and clearing $650k - load it into shares; then take out a loan against the shares for another $250k - this brings your total asset base back up to $900k and you benefit from the growth of an asset base similar to what you currently have.
     
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  7. wylie

    wylie Moderator Staff Member

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    This is very similar to my quandary. We could sell in Camp Hill and I'd get about $370k in my hand. I could pay off debt with that. Or I could wait for our sons to repay loans to us ($233k) and draw $160k from super and buy my brother out (@ $370k + duty). Rent is only $520 (very flat market here) but that will rise when the rental market improves. We pay $6k just on this house alone per year land tax. So I'm getting $520 per week x 52 = $27,040 - $6k land tax = $21,030 - rates, utilities approx $4k = 17k of which I get half - $8,500. Not great.

    We really are relying on growth, and on the numbers, we are better to sell and pay down loan, but that doesn't factor in the future growth. This is never an easy thing to answer.

    We've always held on when we can, and we could hold this one too. We've regretted every sale, even when selling to fund PPOR renovation etc. Every house we've sold has risen in value, but the tradeoff has always been to reduce unmanageable debt or renovate our own house to improve our lifestyle. We've been happy with the trade-offs. But this time we "could" hold this house and cop the land tax for a few more years, or I could buy him out and hold out for capital gain.

    We are paying interest on $370k which is about $16k a year I could save if we sell and I pay down debt. So I'm losing about $16k interest and my share $3k land tax = $19k a year by holding.

    Buying him out means using money we could use to lift our houses in a year.

    There are too many "what if I do this?" scenarios for me to model them without going mad, but I'm working through each scenario.

    I really think we should copy the $3k each and hold on a few more years. If I pay transfer duty about $27k I'll need to hold long term just to make up that cost.

    Sorry, didn't mean to hog this thread, but putting down my similar problem and thought processes I run through to find an answer might help others as well as the OP.

    And we are retired, so borrowing more is tricky.
     
  8. Finrod

    Finrod Active Member

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    If you are in the harvesting/retired phase of your investor journey, does growth really matter?

    Maximising cashflow in a sustainable manner is probably more important right now than speculating on further capital growth.

    Be sure to ensure the cash flow vehicle is somehow indexed grow in line to inflation though.
     
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  9. MTR

    MTR Well-Known Member

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    I probably would not sell only because you mentioned there may be further growth?
    However, if you had an opportunity to take the funds and make more money immediately/grow wealth via developing etc. then I would take the money

    What's your experience with regards to the share market?
    I know I can more money from property than the share market.

    MTR:)
     
  10. wylie

    wylie Moderator Staff Member

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    For me, I think it does matter because we are 57 and 56. We have to (hopefully) live on what we have for another 30 years. If we had no option but sell, that would be easy. It is the fact we have the option that is doing my head in, weighing up each option (without a crystal ball).
     
  11. big max

    big max Well-Known Member

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    Thanks MTR. I have a really good track record with shares. Long term investor and long history of overall gains. I apply the same approach as I do with property. I'm a value investor who looks for underpriced assets.
     
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  12. MTR

    MTR Well-Known Member

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    great.
    Then it comes down to what suits your particular strategy, sounds like a win/win to me.

    MTR:)
     
  13. big max

    big max Well-Known Member

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    Yes good point. Although something often forgotten on the property being leveraged argument vs shares is that the companies you have shares in are usually themselves leveraged (which to some extent also explains why the value of shares over time should outperform property). So by putting 650 into shares I'm already getting leverage from that 650.

    The other issue of course is finding a banker that will offer as good a rate on share leverage vs property. Do you know any that offer similar rates?
     
  14. big max

    big max Well-Known Member

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    Thanks. Yes absolutely ok with volitity in shares.
     
  15. Perthguy

    Perthguy Well-Known Member

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    You don't have to get a margin loan. If you have equity in an IP, or even better, an unencumbered IP, you can take out a standard loan and use the funds for whatever you want.

    I have done this in the past. Applied for a loan "for investment purposes" then used it to buy an IP. I could have just as easily bought listed securities with the funds.

    So in your case,

    House in Paddington Brisbane (bought for 400k now worth around 900k).

    Debt around 200k.

    Equity around 700k.

    At an 80% LVR lend, you could borrow around 560k and use those funds to buy vanguard. If your interest rate was 4% and your yield is 4.5%, the return is not spectacular.

    However, the interest is tax deductible and you get to keep the capital growth on the property and capital growth on the vanguard.

    If you use the income from the house and vanguard to reduce you loans, the yields will improve over time.

    You would have to run the numbers but this could be a good option, subject to borrowing capacity of course.
     
  16. JDP1

    JDP1 Well-Known Member

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    whats the ticker code for the etf? is it intl? or a proportion intl?
    I do not think there will be much global growth, even for blue chips in the next 2 years. I also hold a similar one and have rode the wave - but have had it for about 5 years. Im not expecting a significant amount more in the next 2-3 years.. because a fair number of blue chip shares have had their run already, as have indicies like the nasdaq, dow, sp500 and ftse.
    I would probably hold to your property. Paddington will smash it in the coming years.
    Btw- arent you supposed to go all in on the gc? :)
     
  17. big max

    big max Well-Known Member

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    Thanks and noted. Yes this is the best way to get cheap finance to buy stock I agree. I have done that in other countries very successfully. The problem I have with oz is the holding cost for property. Give the amount I have the land tax is killing me!
     
  18. big max

    big max Well-Known Member

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    Thanks. I would be looking to move from some oz property into the vanguard high yield blue chip etf (based only on oz stocks).

    I'm never all in on anything as I spread risk (and opportunity) but yes I am exposed as much as I am comfortable with to the Gold Coast. Very much invested with "chips on the table" on the Gold Coast and very bullish both next few years and longer term (ie next decade).

    Common wisdom among all seems Paddington will do well next few years. Nice to hear.
     
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  19. Perthguy

    Perthguy Well-Known Member

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    Yeah... but capital growth! :D

    Let's just say you hold the rental property for 2017 and 2018.
    What is your projected total return if you borrow around 560k and use those funds to buy vanguard?

    You would maintain the option of selling in Spring 2018, paying off both loans and using any surplus funds to buy more vanguard. Then you could always borrow more using vanguard as security.

    How much capital growth are you really sacrificing if you sell now vs Spring 2018? More than the land tax?
     
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  20. Bran

    Bran Well-Known Member

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    Have the best of both worlds. Redraw some equity and invest
     
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