Why Shares are Better Than Property

It's easy to borrow against property and buy shares with the loan. Why not keep both for a while and turbo charge your capital growth?

 

Enron...

Not a speculative share but it did happen. Ok not literally overnight, but pretty close to it.

Unlikely to happen? Yes. Impossible? No.

Blacky

 

Was it a good business though? All the magazines said so, so it must have been?? People actually had ~2 years of warning before it folded. A massive spike in stock price in Jan 2000 should have been the warning trigger.. then the directors sold-off over a $1b in stock.. that was warning 2!

Enron changed it's business model from energy supplier to energy trader.. it became an overnight superstar... that should have been warning enough. It was also run by an ex-McKinsey guy. Marius Kloppers was also ex-McKinsey, he trashed BHP and left the aftermath for Andrew Mackenzie to mop up...

 

Not a useful post. You can't cherry pick times and a boom you see in hindsight to make a point.

For example. If I purchased a total USA market etf in 2009 or say 2013, that would have gone up 30 or 35% on the calendar year respectively. If you timed it even better in the year you could near double your money.

So the equivalent share market analyogy could be.

Purchase 370k shares Jan 1, 2013. (70 cash 300 loan). Sell Jan next year to reduce cap gains. Increase is 35%. So you turn 70k into 125k and can negative gear the margin loan. Close to 2 for every 1 dollar in in one year. Much quicker than in 6 years for 4/1 in the property analogy.

Even if I invested at that point in 2013 and didn't sell. Average returns over the 14,15,16 period have been near 11%. So 35% year 1, plus 11 year for 3 years compounded means. 370k becomes near 750k in 4 years. This obviously is one of the greatest efforts in market timing ever implemented. Turning 70k into 750k using leverage and after taking away the 300k loan having 70k becoming 350 a much quicker time. This scenario was achieved by some people. But to use it as an example assumes that we can just do it again. That is unrealistic.

You might say - well what about the financial crash? Good point. But there is buyers in regional areas and Perth all over Australia that have lost a lot in houses.

All markets have booms and busts. Thinking you can pick it, is just arrogance.

Let's give the honest answer to shares vs houses.

Margin loans on shares are much more risky than that on homes.

If you have money to invest and you don't want to use leverage, shares are by far the better choice.

If you want to use leverage, real estate is a far better choice.

As they say. Once you have a million it's easy to get another million, it's the first one that's hard. Since most of us don't have have a million, we need leverage to get it.

That's why property works for so many.

 

I guess the only question is did you invest 370k on jan 1st 2013 with those numbers,you only have to look back too when in oct 7 th 2007 the DOW was on close was 14164,from there till March 2009 and the decline to 6547,the same may well happen again,so as they say the first million is the hard part ,keeping the one million and making it into 2 million is the hard part..

quote..
Purchase 370k shares Jan 1, 2013. (70 cash 300 loan). Sell Jan next year to reduce cap gains. Increase is 35%. So you turn 70k into 125k and can negative gear the margin loan. Close to 2 for every 1 dollar in in one year. Much quicker than in 6 years for 4/1 in the property analogy.

 

Yeh that's my point. You agree with me. You can't pick a scenario that is market timing. Using examples of buying a house in Sydney 5-10 years ago is a fantastic way to support how good property is. If you had purchased houses in regional WA around the same time you would be less happy.

Also if I had put a million dollars into an etf in 07 using your dates, it would still be worth 2million today.

See attachment.

 

Sorry. I was replying to what MTR said in that you could have doubled your money by buying property in Sydney or Melbourne, my point was that you put in say 20% but actually get 4x your money back. Ie. Just the power of leverage. Not debating time periods at all.

 

It may not be that easy to do if you have hit the servicing wall.

 

True. This is why it is good to be working with a good broker earlier on. Work out your borrowing capacity and what you want to do with it. Make your decisions before you hit the wall. Of course this works when all things are equal. Events like APRA changes to lending or Basel III can throw a spanner in the works. That said, it's not like these things happen overnight. Basel III has been on the cards for over a year? I don't know how much warning we got about the APRA changes. The key is to be aware of what is coming up and take action before it happens. I did this before the APRA changes. I took out a max loan against an unencumbered property. Post-APRA I then used the funds from the loan to invest.

 

My thoughts exactly. I'm still weighing up a "shares play" vs borrowing again to buy another IP.

If I buy another IP, I'm probably going to hit the servicing wall, which means lowish yields (compared to dividends) and a rather large chain of debt around my neck..

or I stick with current property, and use equity to buy into stocks and recycle my current debt more quickly.. ?? Maybe. I haven't convinced myself, let alone my wife, either way yet.

 

With a market cap of over $9 billion at its peak I don't know if BNB was considered a specy.
Plenty of examples of ASX 300 companies where the share price was destroyed. The mining services sector, take your pick.
BLY is currently 12cps it was once 2000 cps.

The LPT sector has also been volatile, companies like GPT have wiped out shareholder's wealth with continual capital raising and then share consolidation.

Then you have companies where regulatory changes ruin businesses like CAB.

LICs are a safer place to be IMO.

 

One approach is to gear up on property to as much as possible and then debt recycle the main residence debt into shares.

Periodically check servicing and get that extra property when you can - or squeeze out more LOC and buy more shares until you can borrow enough for the property

 

That's the sad reality i guess,i have those dates on my white board in front of me just to remind me of what's it's like to go down over 55%,plus have several others from that period up too yesterday it is also a good way to eliminate all emotions options and prejudices ...

 

I think leverage for shares is too volatile. If you wa t shares. Save and buy.

Margin calls exist in the share market more than the property world.

 

For some unexplainable reason, banks prefer rent to dividends for servicing.

Impact of share (ETF) dividends on serviceability

Looking at a $1,000,000 property portfolio returning 5%, rent received (all going well) is $50,000 per annum. Banks will use 80% of this for servicing? That $40,000, which provides a level of serviceability. In reality, between 30% and 40% of the $50k could be expended with PM fees, land tax, council rates, water and sewer charges, building insurance, landlords insurance, repairs and maintenance etc.

$1,000,000 of a high yielding ETF could return 7% (including franking credits), which is $70,000. But some banks won't use that as income for serviceability? or they calculate the yield at a lower rate, such as 2%? I am unsure as I have not tried this.

In any case, it seem it is easier to use the rent to increase serviceability than dividends from an ETF.

 

What is the loan is secured by residential property? No margin calls.

 

Yeh you could use your offset and put it into the market.

In the end though for shares - I feel like Warren Buffett
"Leverage is the only way a smart guy can go broke."

 

Yeah I guess a lot comes down to what you define as a good business. Anything related to the mining industry is a speccy for me. LPTs are also a no-go. I'd rather invest in property directly.

BBL (I take it you meant Babcock and Brown?) were leveraged to the hilt so when things went side-ways, they were flipped upside-down and got a right spanking. Highly-leveraged companies are also speccies for me. (easy to pick by looking at the balance sheet)

CAB not sure, never really considered them.

Of course I say this with hindsight, though I never bought any of those shares above, for the reasons mentioned..

I agree LIC's are a much safer place to be, and much easier for punters like us to spread our securities allocation... I like the look of LICs

 

The common denominator on margins calls are as most will lever into the 80% range,so if it went below that range then what ever account you have linked too the holding then you may have a problem,or they will sell you out depending on the fine print in the contract and you when combine this when bearish investors want rallies ,but they also need and as some people don't think about is you also need bull traders to make the rallies
simple enough..