Why Shares are Better Than Property

There are a lot to like with the stock market just most people don't understand them well enough to take full advantage of it all they see is massive loss headlines or some business has gone belly up and resign to the fact stock market is too risky and too volatile.

There are more way to generate cash flow and income from stock market than just dividend.

 

Yes its interesting when you discuss this with the average punter, they will spout "property never goes down, and will double every 10 years!". As soon as you mention equities, the first response is "but I can lose all my money!"

I just dont understand this mentality, they just dont understand risk profile. Yes if you put 100% of your capital in a single company this is possible and likely. Allocate your capital across broad market Etfs/lics you won't.

Also trying to explain that by only investing in residential property they are actually taking a higher risk profile. The fact that they are tied to the performance of a single asset class which in turn is tied to the immediate economy of the area.

 

Just paid (or scheduled) 10 bills today... 9 were directly related to properties. 0 related to shares.

 

2 more new reasons that I have thought I would add:

- There are no longer deductions available for travel relating to residential property, and

- Depreciation on fixtures and fittings is also no longer available unless strict requirements are met such as the item being purchased by the taxpayer brand new or the property not having been lived in before.

Without these 2 deductions the tax advantages of property diminishes.

 

Massive increases by the insurance companies, strata levies, councils, rising maintenance costs, management fees, interest rates and etc, which are making shares seems more 'stress free'.

 

Sounds like you are a convert!

 

Diversification! But I think I am still passionate with properties.

 

Diversification: The only strategy that has truly worked for me over my years of treacherous investing. Well that and buying more shares at the very bottom of the GFC when I had nothing left to lose.

 

I would choose property always over shares due to my long term strategy for CG, never to sell, and using leverage hence I look only at total ROI (so CG and CF together)! What would you prefer say for the next 30 years 8% CG and 4% CF or 4% CG and 8% CF? It makes a huge difference to choose the first option!
But you are right the investment strategy is so relevant whether investing into shares or real-estate.
I am surprised how often the statistics are presented as percentages only, for example shares returning 12% on average over say 50 years and property say around 8-10%, hence if you look from this point of view without any leverage, short term, than yes property is not so attractive.
So you see I had this 'aha' moment few years ago where I understood that the key was leverage not the percentage growth in property. So I don't doubt shares can return higher percentage growth but property allows me to be exposed with little risk to the tunes of millions with no margin calls. Imagine having an 8 digit portfolio, could I sleep at night with that exposure to the ASX or other more volatile markets, could you? My answer is resounding, "NO!". Hence I can dabble to the tunes of thousands in shares (it varies too), until I buy another IP.
When you will understand that leverage, timeframe of at least 30 years for compounding, the stability of property over the volatility of shares, are the key ingredients, not gambling for the percentage growth, then shares become an income exercise while IPs become my wealth creation exercise.
Linear income from your job alone will not make you financially free but the recurring passive income from your substantial CG asset base with minimal risk will deliver to you financial freedom, at least IMHO!

 

Yes i agree that it is the leverage that makes property so good. But what happens when you tap out after say 3 properties and cannot borrow any more?

 

Providing you don't have a tenant that does a runner, there are major repairs needed, HWS goes, maintenance, all reducing the incomings, while the outgoings keep going out.

 

Net yields for properties very rarely get quoted by anyone.

 

I guess if yield is the only thing that mattered then you may be padding up creek.

I invested/leveraged into 6 boom property cycles since 2001, growth has been spectacular and enabled me to achieve financial freedom in a short time frame.

Which asset class is best will be totally dependent on timing the market in my opinion.

If you purchased shares in 2008 GFC you purchased at peak/correction and lost money, if you purchased property in Melbourne in 2008 you purchased in a boom cycle and probably made a killing if you leveraged. The ability to leverage is huge as mentioned before, but timing is everything regardless of what asset class.


MTR

 

Same as if you had no funds to purchase shares anymore? Having bought around 23 IPs trust me you need to find solutions ahead! You need to become creative and responsible to try to solve the challenges (I don't like to call these problems - we all face similar issues).
Do you have an investment strategy plan? You buy or duplicate only when you can... Can you add value via renovation, increase rents, prepay loans over time into offset accounts, lower credit cards limits, lower living expenses, increase extra income, use equity from PPOR, sell some 'lemons' less performing IPs. I had to do some of those things....
I don't mean real-estate is easy, quite opposite, it has so much more work, I just refuse to get stuck on details I look at the big picture ahead, but I take 30 year plan perspective hence you need the time do it's thing. I don't know one person in Australia, that bought say a well located property 30 years ago that did not come ahead... (by well located I don't mean Alice Springs, or regional areas dependant upon one industry such as mining or tourism, etc..).
Property is not instantaneous riches rather a slow get rich approach that relies on compounding growth.

 

Yes had many similar cases like that, to me these are part of the journey the details, but I take general long term view as I treat my IPs as a business. So I have landlord insurance that may have helped, set aside a buffer for future renovations, act quickly on maintenance, etc... Like in any business we face challenges every day, whether cash flow issues, budgets, deadlines, payroll, staff, etc...
Say your asset base created 30% equity over 17 years, imagine another 13 years, I may have a cycle or two, or even say 5% CG, is it all worth to me? Thousand times yes as I could never earn that from linear income and better yet save it all put is aside. I realise this is all CG, unrealised gains but then you can leverage of this equity if your LVR is low enough.
This really depends on your investment strategy, hence the IPs you own, where you are in your investment journey, in accumulation phase (say the first 10 years), the next 10 years where you may renovate some, or the next 10 years, so 30 years after where your LVRs are so low now?

 

leverage is available for shares as well (margin loan)

'stop loss' order may help to control a sudden drop in share prices while we're sleeping.

 

Spot on, time in the market, and what happens to property held long term say 30 years, well located properties then? And what happens to share say over 30 years (some do well, some not so well some maybe no longer be around - unless your IP falls down it still provides a roof under someone's head)?
No one has a crystal ball, yet most people become financially free via that investment vehicle.

 

Hi Terry,
It's MIW here, long time have been out....

Yes I agree, I have used stop losses myself, but in crisis say next GFC, who is to say that they may stop trading the ASX like in China? We do not have total control, hence even though I dislike the work with IPs I really like that I am totally in control. I think this way, someone may need a roof over their head but a share (they can come and go, no longer pay dividends).
Also, who provides the leverage, banks/financiers and why it is lower % for margin loans? I presume it is more 'risky' (as classified by them not me as they lend out less - even when you buy say their bank shares they may lend you 60% yet the same bank may lend you 80-90% for IP!).
What I found out that the longer I held shares the more volatility diluted my asset base, yet with IPs the longer and less riskier they were the more they went up?
As I said, would you sleep well at night, say if you had $15 million invested in ASX (we will leave LVR out of this for now..), if so then the investment is for you. Not for me, I could not sleep well, having 8 digit asset base exposed to someone's else's control with high volatility, especially if you are later in your life, in your wealth accumulation journey.
Some people see the IPs as hard to sell, to me that's what makes it attractive as it implies it is more stable, imagine if we ALL could sell the IPs daily as stocks, we would have huge variations in prices. Also say 65% of ALL IPs in AUS are owner occupiers so even if ALL investors sold out today, the market would still exist, whereas many stocks may be not...
Anyway this is just my choice, I believe any investment serves its purpose as long as we understand and stick to what we want it to achieve....

 

I don't think we have total control with properties as well. When prices goes down it results in defaults (lower rents and higher unemployment leads to negative cash flow, --> defaults on repayments --> bank sells our properties and we lose all profit earned before. We may not have time to sell quickly as with shares and we can lose everything.

I'm not saying about other major events like nature disasters, war, hyperinflation, bank closure (the debt stays as it is, but money on offset account is considered as saving account and only partly protected), new laws for property market, etc.

With shares, we can buy an index based on many companies, so it is more stable, invest also into international shares. We can see the negative changes in the world and quickly change the leverage to 1:1, or convert it to gold, etc. We don't have that flexibility with properties. Property investment is like big ship (Titanic) - it's more stable and travellers don't even notice all those waves.... But when you see something is in front of the ship, you can't change the direction quickly compared to smaller boat.

 

Hi MWI

I was thinking along the lines of shares are able to be purchased in smaller parcels so someone who had maxed out in property, and was able to save, could slowly build up a portfolio of shares. This would gradually help servicing with the additional income and/or help with deposits for the next one by selling some shares