Why Property is Better Than Shares

Why Property is Better Than Shares can be summed up in one word "leverage".

It is true that you can leverage with shares too, but using shares as security can be very risky because of margin calls. So if you were to leverage shares you would probably only want to go to 30% LVR. Most people would not leverage shares.

Property is different because people can leverage up to 90 or even 95% with relative easy and safety.

But the problem with property is the low yields and the high costs such as maintenance, repairs, rates and land tax etc. I have seen many people actually sell properties to buy shares because they are sick of all the problems that go with owning property. They are also attracted to the higher income of shares and the franking credits.


So assuming property and shares were to grow equally would it be better to
a) buy shares without leverage or
b) property with leverage and then sell the property, pay the tax and then buy shares?

Below is a simple example - income isn't taken into account and neither is stamp duty etc

Example

Imagine X has $100,000 and has 2 choices


a) Invest in shares with capital growth of 10% pa with no leverage or


b) Invest in property with capital growth of 10% pa with 80% leverage





Which would be better?


The $100,000 could buy


a) $100,000 worth of shares, or


b) $500,000 worth of property





End of year 1


the shares would be worth $110,000


the property would be worth $550,000


End of year 2


the shares would be worth $121,000


the property would be worth $605,000




End of year 3


the shares would be worth $133,100


the property would be worth $665,500




End of year 4


the shares would be worth $146,410


the property would be worth $732,050




End of year 5


the shares would be worth $161,051


the property would be worth $805,255

Now lets say the person with the property sold it. They would have a capital gain of $305,255. Applying the 50% discount this would be $152,627. A maximum of $74,787 would be payable in tax so this would leave $230,468 in ‘profit’


The property person would also have the $100,000 initially used as deposit. So they would have a total of $330,468 which could then be invested in shares.


Had X invested in shares they would have around 50% of what they would have had with property. $161,051 compared to $330,468

 

Instead of selling how about borrowing against the equity to purchase blue chip shares/LICs/ETFs for income?

At mortgage interest rates you're laughing

 

But you are often getting leverage when buying shares because companies borrow money to expand. Also leverage is a double edged sword. It increases returns but also magnifies losses if the market goes down. That's what caused the biggest financial crisis in 80 years, namely the GFC.

Other advantages with shares include they are divisible (you can't sell half a house). They are easy to buy and sell with low transaction costs..

 

To add to scienceman's reply, the market does not even necessarily need go down, property capital gain below your mortgage rate will have a depressive effect on gains.

For example, if you had a IO mortgage at 5%, and capital growth at 2%:

Year 0
100,000 Equity
400,000 Debt
500,000 House value

Year 1
Interest paid (-20K)
110,000 Equity (+10K)
400,000 Debt
510,000 House value

This obviously ignores rental yield after all costs, but then again shares pay dividends which can be reinvested and compound.

Its a trade-off like any investment decision.

 

What if x now took out an 80% loan against the property minus the existing loan then used the funds to buy shares?

Keep both the property and shares for another 5 years interest only. Both the property and the shares would benefit from capital growth. During this time use any surplus funds to buy shares. At the end of 5 years, pay down debt and use any surplus to invest in shares.

If x has any borrowing capacity left, they could repeat this strategy to boost their share holdings significantly.

 

@Perthguy - Just ask Nathan Tinkler’s administrator in bankruptcy about it.

50% discount on purchase made 9 years ago.

 

Or you can join Interactive Brokers (only with Trust account) and can get Margin rates of 3.2%

 

I still invest in shares but makes up only a small amount of my total investing and willing to learn more in this area but I think it's fair to say that money will be lost in the learning process.

 

I don't think it has to be one or the other.

Property IMO is superior generating CG with leverage compared to squirrelling away $2-3000 per month into shares only. Shares generate far superior income streams as your yield isn't reduced by maintenance, rates, land tax and insurance.

There is a strong case to be made to deleverage at some point and move more funds to LICs, this will enable a much earlier retirement IMO. Or try to have exposure to both asset classes from the start.

Anyone's opinion will be influenced by their personal experiences, both positive and negative.

 

Some other reasons why property is better than shares:

* Property is usually less volatile as an asset class.
* Property provides some of the basic human needs. Shelter and in some cases food.

 

I could argue

* The reason property is less volatile is because you don't get a quote on it everyday. If you don't believe me go to an auction for property and you could get 25-50 quotes on it within 10 min. There is a lot of price movement. Now imagine if an auction on property was held everyday property price would be equally volatile like shares.


* Shares provides an equally important human need. Underlying each share is a business which provides employment to majority of the population. Most of the time it is also providing an essential service (bank, supermarket,insurance etc) or product (food, car, clothing etc) to meet the needs of the society.

The good thing about shares is businesses are run to churn out profits for its owners.

Once you understand shares they have a lot of good things going for them. Whether you make more money from shares or property depends on the invidual and their skills.

Cheers
Oracle.

 

I tracked Heidelberg Heights development sites while I owned there for 9 years. I found the prices very volatile.

 

Less volatile because the time from an individual share actually being turned over might be anywhere from minutes to years. Property is usually measured in years to decades?

Essential services are a function of business but the two highest essential services are still food and shelter. Employment (in various forms) is probably third, the rest trail off after that.

I'm not really suggesting one asset class is better than the other, but just that there's a lot more to value in property than just leverage. IMO the best sort of investment is in your own business, but it's also one of the riskiest.

 

- You can't renovate a share to increase its value but you can renovate a property to increase its value
- You can't build another share out the back of an existing share but you have build an additional dwelling (or 2 or 3) behind an existing dwelling, providing you bought a site with development potential or benefited from a rezoning.

I think the point is that people find it hard to retire on property as a sole investment. Why not leverage up, make smart property buying decisions, add value through capital growth (buying at the start of a boom), renovations or building additional dwellings (or, for the win do all three at the same time). Then use the equity created to transition into well performing ETFs and/or LICs (for those not experienced enough to directly invest in shares).

 

Your tenants eat the walls after smashing them up ?

 

More than one of my tenants has grown veggies. I believe they qualify as food?

 

I do not consider vegies mixed with gyprock as food, but it is probably better than what you get in Nth Korea ...

Also I do not consider pot to be a vegetable, although the users often turn into vegies.

 

I am not talking pots. I am talking whole garden beds and proper edible vegetables, not "vegetables"

I would suggest that they didn't mix the vegetables with drywall, considering both properties were brick and tile with no drywall in the structure. Just sayin'

 

Yeah, bit rough on the old choppers that brick'n tile, unless your off your chops

Anyway, back to the topic....have we worked out which one is better, I need to find if I have the right strategy.

 

1. Leverage up to buy property, particularly in a rising market
2. Add value through renovations, building or both
3. Pay down debt while the market rises and wait for a good time to buy into the stock market
4. Borrow against equity and invest the funds in listed securities
5. Reinvest the dividends in more listed securities
6. Over time, strategically sell down properties to buy more listed securities

Holding property and listed securities at the same time will turbo charge capital growth. I am planning to do this for as long as possible before selling down the property to buy listed securities.