Why Shares are Better Than Property

If you invest money from an offset account it is the same as using cash. There is no tax advantage.

I can borrow against an existing property and use the loan to invest in managed funds. Then the interest on the loan will be tax deductible. For example, I have $300k equity in an investment property. I can take out a loan for $150k and buy managed funds (subject to servicing of course).

Also, I am not talking about direct shares. I would not know which shares to buy. I am talking about funds such as ASX:VAS, ASX:VHY or ASX:VGS:

Is this the only dividend stock you need to buy?
3 shares with higher dividend yields than Commonwealth Bank of Australia
Vanguard MSCI Index International Shares ETF

 

@Jess Peletier @Peter_Tersteeg
What percentage of share dividends do banks consider, 80% less/more?

 

I'm not sure what this means. Are you talking about a residential loan here?

For example, last year I had a loan for $300k that was secured by an IP. I could have bought $300k of BHP. If BHP halved in price, my loan doesn't get touched because the security is a residential property. This is not the same as a margin loan.

 

How confident are you to put $280k today in Sydney or pick another city and come out with $1.1 million (4 times) after 5 years?

Lots of time people think making money in real estate is easy just because they happen to time the boom to perfection. But was it their skills or luck only time will tell over the next 5-10 years.

Let's just say there was no skill required to make money in Sydney real estate over the last 5 years anyone claiming otherwise probably hasn't been in this field long enough IMHO.

Cheers
Oracle

 

Yeh I think we just disagree on risk tolerance in the share market. I have most of my money in vanguard and follow that investment philosophy too closely to take a loan to invest in shares.

 

I am not criticising your approach.

Personally, I would be fine to borrow money to buy vanguard.

 

Yeh. We are down to personal preference.

In theory vanguard will out perform the loan easily. But in the end you need to decide how much debt you can have and sleep at night. For me and the way my job and life is, share related debt is one bridge too far.

But it's a personal taste thing.

 

Fair enough. Having debt backed by a property doesn't keep me awake at night.

My SANF is way higher than the amount I am allowed to borrow

 

Sorry about that,i was geared in at about 40-45% during the start of the GFC but there was no property mixed with the equities trading loans everything was backed on future unknown value ,all the
money was made reinvesting to back everything up ..Then you combine the power of ten asx listed top 50 drop over 50%,you get a simple phone call about this is the cost per day,i had to take 2 titles out of the bank and borrow against those unencumbered titles or i would be sitting on a roof somewhere still working because a lot of people i know from that period that sold low never recovered..

 

Ah ok, that makes sense. Thanks for taking the time to explain. Did you ever get your money back? It must have been a worry at the time!

 

As you experienced, 40-45% is absolutely margin call territory in 50% drawdown situation, and I guess you felt pretty safe at that level initially as well, as it doesn't seem high.

30% is about the highest "safe" static margin level.....on average. But you need to be prepared for more than "on average" and be able to withstand the blackest days so you aren't shaken out like those people you mention.

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Having mucked around with margin, personally its not something I'd use for long term investing. It stops you buying when opportunities present, as you are too busy managing exposure....like everyone else! Liquidity is absolutely key here so you can take advantage of the opportunities caused by every leveraged / panicking punter running out the door and trying to save their bacon. Cash or line of credit will be the making of an investor in this situation. Learn from the greats here, have piles of cash and deploy it when nobody else will.

There is too much focus on leverage here, without thinking about how it affects behaviour as an investor. As an aside, balance sheet leverage is free for the investor.....works both ways something that is overlooked in these "leverage" type discussions.....you've also got options and warrants if you want to lever up, don't need margin! yeeehhhaaaawwwwww

 

Normally a deeming rate of about 2.5%. Or in tax returns over 2 years, shaded to 80%

 

Line of credit is leverage. It's all well and good to say 'have piles of cash' but cash does not magically appear. The only way for me to get a pile of cash is leverage!

I do take your point about opportunities though. I like to buy when others are fearful. For me it would be about setting up a loan, secured by property, to draw down on when the stock market goes south. I am not at that stage just yet but then now doesn't seem to be a particularly good time to buy for those looking for value.

 

Cash appears by saving more than you earn, in a way I guess it is magic

Viz. LOC, well yes clearly right? Not getting my point though.

 

Yes i did but it took time--The main holding was CBA and still is, they went from just over 60 buck range into mid to low 20 range ,i bought back in around the 28 dollar mark then it went lower and lower then you think again what is the maximum loss
you are prepared to sustain mid 20 dollars it starting trending up again all the way too just below the 95 dollar mark then back too below 70 bucks then today $85.390 after a while it becomes just a number on a page..imho..

 

If I saved every cent I earned for the next 10 years I would have enough to retire.

If I borrow and invest the money over 10 years, I will have far more. It makes no sense to not leverage.

No, I am not getting your point. According to you it is ok to set up a LOC to invest when it when nobody else will. But there is too much focus on leverage here, without thinking about how it affects behaviour as an investor. This makes no sense to me so I have completely missed your point.

This is the reason I like leverage:

if I save $100,000, invest it and get a 5% annual return, I have made $5,000.

If I borrow $1,000,000, invest it and get a 5% annual return, I have made $50,000, minus $40,000 interest and I have made $10,000, double what I would have made without leverage.

Now compound the returns over 10 years.

The saved $100,000 is worth $162,889.50 at the end of 10 years.

The borrowed $1,000,000 is worth $1,628,895.

The difference is $466,005.13.

Why would I not do this?

 

That's why from there it's either extracting equity or selling and investing further. Otherwise that's just dead money not working hard for you as ROE is just too low.

 

Well said mate! Leverage can obviously work both ways. However, if you've been lucky enough and invested in a booming market that first mil becomes much closer.

 

Is it really lucky to invest in a booming market though? When I bought my first IP in 2007, I wanted to buy in Perth but prices were extremely high, so high I could not see any value in buying in Perth. Then I looked at Melbourne and prices were ridiculously low. Perth was peaking and Melbourne was the pits. I don't think it was any luck at all that I picked Melbourne, which performed a lot better than Perth over the next 10 years. Is that just random chance? I don't think so. People have the ability to evaluate if a market is undervalued or overvalued.

 

Now if only we could convince the banks that old dividend paying LICs are better for servicing than property rent

 

True. What I'm saying is that there is always a bit of luck involved (as well as ones DD). E.g. as was mentioned earlier Sydney property did nothing for about 10 years.

 

I think it is lucky how much Sydney went up, not the decision that people bought there. In real terms, much of Perth has not moved since the last peak in 2007. Smart investors avoided Perth during this time and invested in Melbourne or Sydney instead. Melbourne or Sydney have been rising since 2013 and Perth was flat or falling at the same time. I don't think it takes a lot of luck to buy in a rising market instead of a falling market. The decision of which market to buy in isn't luck. But there is an element of luck how much the property goes up I guess.

 

Here is a way just thought of.

Have a discretionary trust own the shares. Distribute to a company and have the company pay you a directors fee.

Needs further thought

 

Either this or hold the shares within a company in general - this does work for servicing, it just needs to be meet the traditional self employed requirements.

 

Would this depend on the level of dividends received by the company and distributed as Director's fees? Are Director's Fees subject to PAYG withholding? So you would need to withhold tax at the Director's marginal tax rate? Compulsory superannuation would need to be factored in. Would it also depend on the Director's current earnings.

For example, if I was earning $100,000 a year and my company wanted to pay me $50,000 per annum in Director's fees, I effectively lose $18,500 of that $50,000 to tax?

Except the dividends to the company are fully franked but I don't know how to account for that.

 

It will probably not be the best way to do it from a tax perspective but could help servicing.