Why Property is Better Than Shares

Well that’s only one of the leaked photo’s of you. I did warn you about storing stuff on Cloud. Here’s another photo from the collection. I do worry about you at times:

 

Great comments.

I must admit in all my time on Sommersoft I didn’t use the Chatroom all that much. Now and then I would join in but found it too time consuming. You did get to discuss stuff though that often wouldn’t appear on the public forum.

The last time I was in contact with Keith was about a year ago where there was brief mention of our share holdings. Very simple, a core of the three major LICs, small number of direct holdings, dividend focused. No surprises there. Keith is still 100% of the view that retiring young was the best thing he ever did being able to spend lots of time with his kids as they grow up etc. He could have aimed for very high passive income but time is a much more precious commodity to him.

Readers do need to be careful when reading those old threads though. LPTs (now AReits) were popular with Keith’s prior to the GFC but they crashed down near 90% during the GFC. Fortunately Keith exited most in time but from memory did grab some SLF when it was way down. That said, most of these went through the painful deleveraging process since the GFC so are not as risky now compared to back then. But I personally am still not a fan of listed property and infrastructure given they are more prone to holding high levels of debt and abusing it.

As for IPs there was an element of luck in our case as we sold a number of them including one in New Farm and another in Kew leading up to the GFC then sat on cash given the euphoria at the time in the sharemarket. So when the GFC hit we were very cashed up and able to take advantage of the massive bargains on offer. The other IPs still held were pretty much paid off so there was lots of juicy Equity there which we also utilised to leverage into beaten down Shares / LICs.

We also purchased the usual suspects during the lows of the GFC such as CBA, WES, MQG and a number of LICs ... . The only listed property I added to during that time was SLF. Started too early though at over 40% down. I don’t think any of us expected listed property to crash down to around 90%. Absolutely crazy and certainly an experience one doesn’t forget in a hurry. My own fault as I was always against owning listed property (as per Thornhill, @SatayKing) but greed got the better of me. My one mistake during the GFC.

The trouble with events like the GFC is they spoil you. Recency bias has you wanting another GFC and one has to be careful of waiting and waiting for another. However I have continued to accumulate shares since GFC mostly during the bear market a couple of years after the GFC hit and major corrections since. But my buying has been steadily decreasing over the last year or so till where it has pretty much stopped now.

Like Keith we’re retirees and current sharemarket conditions are certainly not offering much in the way of value. Hence I’ve happy to accumulate cash and stand aside. And I don’t care if I’m wrong and the sharemarket continues to go up up up. We’re in a very comfortable position so we won’t take on added risk until value returns and there’s a high margin of safety.

And as for holding on there’s no argument there in regard to shares. However in the case of IPs they were forced upon us due to unusual circumstances so we never intended to hold them forever. The last IP will be sold in coming months adding to the cash kitty ready for the next period of major sharemarket gloom. Hopefully that opportunity won’t be too far away but doesn’t matter as we’ll be ready like we always are. We rarely selll no matter how bad the market gets, just add more particularly in gloomy times.

 

No point of making this comparision...each has its own disadvantages and advantages...

 

Cheers @hieund85. If I understand correctly you’re using after tax money instead of before tax, hence the difference in outcome. Tax is highly variable from person to person though and a different tax structure would give a different result.

I haven’t checked your spreadsheets but I have no doubt they are sound. Sorry but I’m feeling a bit rusty/lazy numberwise right now having just spent 6 months in a hut in solitary meditation with no concern whatsoever about anything.

I’m not against using property to grow equity – I’ve done it too. My only aim in posting the comparison spreadsheet was to question the widely held belief that property is automatically better than shares due to its ability to be highly leveraged. I’ve been into LICs and property long enough to know that it isn’t necessarily the case. Good on you for relying on hard numbers rather than just perceptions.

Yes, these are only assumptions for planning purpose as real life is another beast. To be clear though, you’re comparing highly leveraged property with unleveraged shares.

Yep. Went away incommunicado for 6 months. Didn’t bother to check my LIC portfolio even once but dividends just kept coming in. In a month’s time when the accountant has done his job, another chunk will come in in the form of franking credits.

In contrast my wife who stayed home to keep an eye on the IPs had to deal with several tenant changes, one messy severance with insurance and tribunal claim and maintenance requests too many to count (gee, these hot water systems are dropping like flies ).

We’re been retired for many years now. My wife is overly attached to the IPs whereas I’m of the view they should be sold and the money put to better use. We’ve now come to a compromise: only 3 fully paid IPs will be kept to cover for our basic necessities in case of the sky falling and the rest sold off. I’d like so much for her to taste the feeling of being unburdened by all this stuff.

I agree with @Nodrog that time has come to hold off a bit. As @willair I’ll always be a conservative person investment wise.

 

At the moment you have to give it to shares. One year ago it was a different story. Donald Trump with his policies it seems has made shares a better proposition.

 

@truong welcome back mate. I was wondering when you’d return from the isolation ward. If I was going to have a go at same it would need to be a cave somewhere cold as I don’t like the home brew hot. Nirvana for me would be to get to that point of enlightenment where I become one with the brew.

Seriously though I do admire what you’re doing. Meditation has gotten me through a couple of difficult periods in my life. Never could get into the more convoluted methods though. Just simple stillness meditation as originally taught by Ainslie Meares. Body at ease, mind at ease, drift. No mantra, fixation on objects, breathing, visualisation, tapes etc.

Which is also why I like well known dividend paying LICs. Nothing to do but watch the dividends flow which is ideally how we should also live our lives. Bloody hard to do though at times.

 

Thoroughly enjoying this post @Nodrog! Thank you

 

You’ve got a knack for illustrations @Nodrog!

Not looking for Nirvana or whatever but just enjoying... Somebody taught me that to look for something is to lose it, therefore there can’t be success in meditation considering that what you look for is never going to be achieved!

I may well go for another stint now that I’ve got a taste for it! Aaah… LIC is bliss.

 

Of course.

LIC = Lost In Consciousness

Well at least in my case after an extended home brew meditation. Any longer then it becomes UNconsciousness.

One of my favourite Mindfulness exercises:

 

There is a point I think. But to be fair to both 'sides' I have written two threads
Why shares are better than property, and
Why property is better than shares.

Many invest in both property and shares however.

 

Cheers....

How Good is Dom Pérignon Champagne? - Social Vignerons

 

Hi Jack,
I have read your story and definitely motivating and inspiring! Massive thanks to you and all the others that provide the evidence to show this is possible.

I have a quick query in regards to the possibility of using your property equity to purchase fully franked dividends.

If, for example, you have $2.5M in property equity, does this mean that you can utilize the entire $2.5M to purchase fully franked dividends, or are you only entitled to utilize a certain % of this equity (e.g. 80%)?

Using the assumption that the entire amount of equity can be used, does this mean that, assuming a share price of $81 (current CBA share price) and an average dividend yield of 6% that we could purchase the following:
$2.5M / $81 per share = 308,642 shares
Fully franked dividend = $2.30 per share (CBA - 9/8/17)
Before tax-income = $709,877
Assuming a personal income tax rate of 50% and hence 20% after the imputation system
Total tax = $141,975 (0.2 * $709,877)
After tax income = $567,902

Is this how it works? I think I have something wrong because when something seems too good to be true, it normally is.....

 

@truong - wondering.. roughly how old are you? I would have thought you were roughly my age, but now I'm thinking you're older?

 

I have made a mistake on the above post. I think I understand how it works, but would be great to get some clarification:
If I have $2.5M in equity, I guess that question that I have to be asking is what the maximum LVR is that the bank will allow me to borrow against that for the purposes of investing in to shares. For example, if it is an 80% LVR, this means that I can borrow $12.5M from the bank using the $2.5M in equity. So, using the figures from above, would it be as follows:

$12.5M / $81 per share = 154,321 shares
Fully franked dividend = $2.30 per share (CBA - 9/8/17)
Before tax-income = $354,940 (approx.)
Assuming a personal income tax rate of 50% and hence 20% after the imputation system
Total tax = $71,000 (0.2 * $354,940)
After tax income = $283,940
Assuming a bank interest rate of 4% on the loan of $10M ($12.5M - $2.5M) = $400,000
Net Loss = $116,060

I think this is how it should play out in reality because in the first example, I didn't factor into account the interest repayments on the loan I would have to take out from the bank to leverage my equity.
If so, I think I have made fair assumptions in the above example, and in the current lending environment, seems like I would be at a net loss by using my property equity to buy fully franked dividends....

Paul

 

What about the second dividend?

 

Which is why the original post said $1.2 M "unencumbered" portfolio, redrawing equity to purchase share portfolio is no longer unencumbered?

 

You can't borrow the full amount of equity because lenders will only lend up to 80% of the property value (or maybe 90% in some cases).

But you will still have to qualify for the loan and show servicing - proposed dividend income unlikely to be taken into account.

If you had $2.5mil in equity you would be able to borrow less than $2mil (assuming you can service). If you then want to margin loan probably 70% in most cases.

Don't forget to factor in the interest payments.

 

@Paul D
I think Jack is suggesting the 1.2m is invested in shares such as dividend focused LICs which usually yield around 4% or 5.7% including franking.

This would provide $48,000 in dividends plus $20,571 of franking credits.

Gross income $68,571. Minus tax at whatever rate is applicable.

And the 2.5m of debt free property at a yield of 4%. Net yield after expenses 2.6%.

Rent would equal $100,000.
Minus expenses of roughly 35%.
Leaves $65,000 of income. Minus tax at whatever rate is applicable

This might even be generous currently for many cap city prop investors. I know most of our properties don’t yield this much after expenses if I’m honest.

So I believe he’s saying you only need half as much net worth to retire on with shares due to the much higher yields and no expenses. And I totally agree with him

We retired last year because we realised after ploughing our savings into property over the years we can actually achieve a much better income stream from investing in shares for dividends. Swallowing our pride and changing course is a hard choice to make but it was the right one for us. Especially since it allowed us to retire much sooner than expected.

Funnily enough, I crunched the numbers and worked out that because of our strong savings rate over the years we could have retired at exactly the same time if we had just accumulated shares from the start. So we realised that all the leverage, paperwork, emails, stamp duty, tenant hassles was for little or no extra benefit!

This is also due to the short timeframe though - our journey was just less than 10 years so some properties haven’t been held very long at all.

If I started again I wouldn’t go into property. Just some very solid saving and watching that dividend income stream build would have been a much more enjoyable journey and (in our scenario at least) had the same result

Sorry for hijacking this thread! Just thought with the info on income streams and transitioning to early retirement, it may be of interest.

 

Great one Snowball. Please tell us more!

 

Great post, thanks @Snowball .
I'm interested that the leverage in property didn't speed your progress. Are you feeling that the CGT at the other end eroded some of these benefits? Agree about that net yields of IPs can be very different to gross yields; can help if in higher income bracket (tax process) , but must consider as part of long term investment strategy.