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Shares vs Residential IPs

Discussion in 'Investing Strategies' started by Young Gun, 10th Jun, 2008.

  1. Young Gun

    Young Gun Guest

    I'll give you my view from the outset, I really don't like Residential Property as an Investment class and where possible I will steer my clients well clear of it.

    So I thought I'd start a thread where people can put forward their views on why they feel strongly about one investment class over the other. in particular why Property over shares or vice versa.

    So I thought I go first and just list the advantages & disadvantages of both (to highlight why i believe a well diversified portfolio of shares & MFs is the better way to accumulate wealth).

    Well diversified portfolio of shares & MFs
    Advantages
    -highly liquid
    -low capitial required to start an investment
    -tax effective income through franked dividends
    -higher yielding than IPs
    -no ongoing out of pocket costs
    -huge amounts of diversification available at a low cost
    -low entry and exit costs
    -Most ASX listed companies are closely watched and research is freely (and not so freely )available.
    - greater flexiblity to structure a portfolio to meet you needs i.e. capital growth vs income etc.
    - the use of derivatives to hedge your bets or magnify your gains.
    Disadvantages
    - there are none lol..
    - Volatility
    - Market over reactions
    - Banks will only lend against shares and MFs on a margin.



    Residential Investment Property
    Advantages
    - Banks are very willing to lend against the equity in a property
    - you can see and touch your investment
    - you can control how much income you receive as rent (to an extent)
    - potential to increase capital gains through renovations to your property

    Disadvantages
    -too many to list, but here goes
    -Illiquid
    -large amounts of capitial required to start an investment
    -tax inefficient income through rent
    -low average yields
    -many ongoing out of pocket expenses
    -low diversification
    -High entry and exit costs
    -lack of research into "a" specific investment property
    -Rental Risk
    -"Unseen" Volatilty
    - Ongoing maintainence which creates a weekend job.
    - vacancy risk
    - etc etc
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    As I mentioned in another thread - I believe there is plenty of room for both types of asset in a well structured investment portfolio.

    Most us who have been around a while have seen all the arguments from both sides - you'll get plenty of "Property is the only asset class worth investing in" type arguments on sites like Somersoft (funnily enough - it is a property investment forum after all!).

    In my opinion, the arguments for and against are based mostly on personal biases and any numerical "proof" is typically warped using subjective assumptions.

    Everyone has their own comfort levels and understanding of various types of investment. I first and foremost believe that people should only invest in what they understand - and that they should especially understand the risks involved in the investment (something which is usually glossed over in most PDSs I've read).

    I know plenty of people who have become independently wealthy via shares, and likewise I know plenty of people who have become independently wealthy via real estate. It doesn't have to be one or the other.

    All markets move through cycles - you need to understand where the cycle is at to appreciate the way each asset class is likely to react to the underlying market conditions. These cycles are long term trends rather than short term indicators. At some times it may not be ideal to be allocating more capital to a particular asset class - but it doesn't mean that it won't become appropriate again in the future.

    I'm not going to get into an argument trying to refute or justify any specific strength/weakness of each investment strategy. At the end of the day - I feel you should invest in what you feel comfortable about based on a long term plan that suits your own personal goals and needs - and I think an advisor should be focussed on helping to facilitate that.
     
  3. islandgirl

    islandgirl Well-Known Member

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    I agree Sim. There are so many factors which affect an individuals investment choices. Its not just your risk profile, but time available to research the market and make trades, available cash and servicability. An advantage to one person such as the liquidity of the investment, might be a disadvantage to another person who just doesn't have time to watch the market and judge the best time to get in or out.

    The key to any investment strategy is knowing what you want to achieve, researching methods and choosing one that fits in with your needs - such as time frame, growth or cash, time availability, knowledge base. You just can't broadbrush these things.
     
  4. bella

    bella Well-Known Member

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    For property, 'disadvantages' such as high entry and exit costs, low liquidity and lack of research may be an advantage to a lot of "mums and dads", as it gives them an incentive to buy and hold. People who would freak out and sell if it were more cost effective and if they knew how much their house could sell for on a daily basis. If property did not have these qualities encouraging buy and hold I am sure a lot of property consumers (accidental investors, owner occupiers who just keep trading up, and have an investment property on the side because it is what they are confortable with) would not do very well. Also it gives them the big stick approach to saving money by paying down the mortgage or lose the home. So yes it really depends on the mindset of the investor. To do shares, even in a well diversified portfolio you need to have confidence in the long term, many people are just not capable of visualising past the next 5 years.
     
  5. austing

    austing Well-Known Member

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    Hi Gang,

    What I do know is that existing property holdings has provided us with a great, lower risk source of funds for borrowing to purchase shares. And the bank regularly rings to offer us even more:eek:

    I will also admit that I no longer buy property (and intend to reduce holdings over time) mainly because shares are so much less hassle. I'm basically lazy!

    Cheers - Gordon
     
  6. islandgirl

    islandgirl Well-Known Member

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    And this is why most investors don't like financial planners because of this one sided view. Its like trying to make one shoe fit all. By eliminating a complete asset class you are not providing your clients with a full range of options that best suit their entire profile including lifestyle, risk, time managment, knowledge base etc.
     
  7. Tropo

    Tropo Well-Known Member

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    Well said !!!!! :)
     
  8. AsxBroker

    AsxBroker Well-Known Member

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    Hi IslandGirl,

    I agree with Sim, holding a mix of any growth asset should appreciate in value over the long term.

    Whether this is property or shares, as long as you make a profit!

    YoungGun has said he doesn't like residential property, this doesn't include industrial, retail or office property.

    Please don't paint all planners with the same brush. Its like trying to make one shoe fit all.

    If residential property is a complete asset class so is industrial property, retail property and office property.

    Cheers,

    Dan
     
  9. Nigel Ward

    Nigel Ward Team InvestEd

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  10. million9

    million9 Member

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    a case for property

    As in all investing there is a need for specialized knowledge

    i have found that developing property

    building house & land packages has been a great way to wealth

    you can hold them or sell them for quick returns

    to evaluate a project the equation is used


    land cost + building cost + purchase costs + holding costs - end resale value / over time

    a current project i am involved in a pair of duplexes

    350 k land 300k construction

    840k sales value

    net net net return is 104k

    the project is fully managed by the property developers club it is completly passive

    i have one 10% share @ 28k investment returning 38 k over 6-9 months

    thats better than 25% pa

    25% per year compound is my aim year in year out


    just as there are fund managers there are great property managers as well

    by the use of small syndications property developing is fairly liquid and has consistent high returns
     
  11. crc_error

    crc_error The Rule of 72

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    There are 2 advantages that property has over shares, and that is how high one can leverage, and deprecation. ie tax man funds part of your investment.

    Property is a good spring board to build wealth, one can enter it with 100% borrowing, then you will get 5-7% capital growth on say $300k. You can redraw this equity after a few years and invest it into shares/funds giving you access to cheap money. Its also a good foundation to start your wealth building.

    Each asset has its benefits, and I believe investing in both is the way to go.

    Property is generally better when getting started, but then its better to use managed funds/shares following. As your ability to benefit from deprecation and high LVR diminishes.

    I'm personally now holding 1 IP, and will re-draw equity from it each year and pump it into the stock market. it costs me $300 per month to hold after tax and I hold a asset worth $400k. I don't plan on getting another one, cause bringing down my taxable income below $30k is not worth it as tax savings here are now only 15%.
     
  12. crc_error

    crc_error The Rule of 72

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    good article..

    one point which wasn't made was how many properties at 80% or higher gearing can one person afford? This places a limit on how many one can buy. Once you work out this limit on your income, it then will be more effective to invest into funds.

    At 80% LVR my property is costing me about $10k PA to hold before tax refunds.. getting a 2nd IP will really eat into my cash flow and wont be as tax effective as currently I'm sitting at $30k taxable income after deductions. hence wont enjoy the 30% tax refund from the ATO which I'm getting on my first IP.
     
  13. crc_error

    crc_error The Rule of 72

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    one more point wasn't raised is the dramatic effect on your property outcome is the effect of higher interest rates, 1% change will significantly reduce your end return. The lower geared or even ungeared share portfolio isn't affect to the same extent by raised interest rates.

    so my point is modeling is next to useless as you can't predict the future, so best to invest in BOTH assets and enjoy the benefits of what each one can offer.
     
  14. Chris C

    Chris C Well-Known Member

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    How do you get involved with these property developer clubs/syndicates?