The Old 'Property vs Shares' Debate

G'day all

The Property vs Shares Debate is alive and well in several threads.

It makes reading the threads difficult, particularly when trying to find posts that respond to the original post.

I think this is a bit unfair on the original poster's query.

So I propose that we constrain our Property vs Shares discussion to one thread, and avoid the repetition elsewhere.

Concentrating all of one's investments in one asset type - eg 100% in IPs or 100% in Australian shares - may be a personal choice. Some people like the high LVR or simply the "I can touch it" of bricks and mortar, while others (eg those with binary addition problems) prefer a shares/managed funds approach, leaving the critical investment decisions to 'experts'.

Personally, I like a blend of both, with a growth rather than income focus.

So go for your lives. By the way, if we all get together for a BBQ one day, maybe we could set up a boxing ring...

 

I was talking to a work colleague the other day, and she is currently saving for a deposit to buy an IP (she lives at home and realises that that's a pretty good wicket).

I asked her what she thought about listed property trusts, and she said, "What are they?"

I explained this to her:

To buy a residential IP, you have to find "the right one" first (often a very subjective process, with inexperienced "investors" reluctant to buy anything they wouldn't live in). Then you need to pay massive stamp duty and other start-up costs. You receive rent, but there are many continuous outgoings and some risk to be managed.

To buy an LPT, you place a buy order, and pay about 0.11% brokerage. No stamp duty, and no monthly or annual outgoings. Basically your outgoings are limited to the initial outlay.

To sell a residential IP, you need to pretty it up, put in on market, and hope that someone buys at your desired price. You then have the bonus of having to pay an agent a whack of cash, and hoping that the whole thing settles without any hassles.

To sell an LPT investment, you place a sell order and the cash is in your bank account in 3 days.

I also explained to her that an LPT may hold commercial property that is spread across different states or countries, with different types of developments, altogether reducing geographic risk. (Go on, tell me you know which market is going to boom next).

Why take the risk on 100% of one property, when you can take the risk on 1% of 100 properties? (a simplified example, obviously).

Obviously, a residential IP can be highly geared, and a "margin call" is virtually out of the question, provided you meet the repayments. And this makes it attractive, of course. (In fact, the bank might require mortgage insurance, which is one of its ways of overcoming this sort of issue).

But a well managed LPT will have some level of gearing within the entity, and can be further geared using a margin loan. And LPTs tend to be less volatile than stocks, since they have a well published Net Tangible Assets, and the Assets are generally land and buildings, that are not going to go "bust".
_____________________

But the biggest benefit of all for an LPT for the young investor? You can start with a few thousand dollars, right now. You don't need to save a few hundred dollars a week for a deposit, while the market grows around you.

Example: I save $200 a week into a high interest savings account, for a deposit on a $300k IP. For 10% deposit, I need $30k, which will take me 150 weeks, or near enough 3 years. In the meantime I have received about $3k in interest and payed about $1k in tax on that interest.

Over the 3 years, let's say that the market has moved 10% per year, so the property now costs $399k, and in fact I need to save another $8k to get back to 10% deposit I need. And I will need to have a spare $10-15k on hand to cover stamp duty (although the first home buyer's grant should help, if it still exists in 3 years!). At this rate, I will never get the property.
_____________________

I hope this inspires a bit of discussion.
Cheers
- Rod

 

This is starting to look a bit like a blog. But I was a bit depressed last night after the poms beat us in the rugby.

But I did do some research on the Perth property market, which we all know has had a sweet run in the last few years. What if you didn't "catch the wave"?

Take a look at the two graphs. Surely we have to vary any spreadsheet models about property returns to include volatility. Simply assuming 12% return per annum is risky, if not dangerous to your financial health.

For example, if you bought in Perth in the second half of 1989 and sold in 2005, you would have seen 6.6% average compound return, over 16 years!

But if you bought in 1987, just two years earlier, and sold this year, you would have grossed 10.8% compound in 20 years.

Timing is everything.

 

Hi Rod

Just wanted to pop in to say hi and to avoid you feeling like you were talking to yourself

Seriously, though, there's no need for debate, as just like having both salt and pepper in one's pantry, variety is the spice of life- and that carries over to investing.

But I'm sure others will wade in and express their opinions on what they believe constitutes the superior investment. There are so many variables, however, for every investors circumstances are individual and their needs different.

For me, investing in both has always been the plan, though far more in property than is probably sensible

 

Hi Rod,

The points you raise are very good. There are lots of variables which IP investors don't count.. they just look at the GROSS return, not the NET return like lost opportunity while saving for deposit.. transaction costs, holding costs selling costs! Selling cost is usually 2-3% of the sale price, plus marketing etc.

One thing IP investors also ignore is the fact that over the last 5 years we have seen a BOOM in renovations.. so yes properties are selling for more, but these 'capital gains' also contain improvements.

As you rightfully showed, the long term capital growth of IP is something like 6.6%PA.. I always believed it was around 8%.. but from this you need to take out costs and maintaince.. You can't buy a property and do nothing to it for 30 years.. So lots of these results are skewed.

I'm not saying IP's are bad, but they should only form part of a investment portfolio.. Most people dedicate everything into IP as they can't afford to hold a balance of shares and IP.

You friend would be better off start a investment plan into a selection of funds, with regular contributing, and then in 5-10 years time sell down a portion of it and get a IP..

I have listed in other threads the costs and returns model, however this ended up in a heated discussion with IP investors getting worked up. So I'm not sure how much I can post here without causing people to get to excited!

Tom

 

Howdy crc, not quite what I said, the 30 year return in median prices is 9.2% pa. The 6.6% was just an example of poor timing.

But to make a fair comparison with shares etc, we need gross return including rent and minus outgoings; I reckon 4% rental yield and 1.5% costs is close to the mark (that's how my IP has been historically), so total return is more like 9.2% + 4% - 1.5% = 11.7% pa.

Coincidentally 11.7% is the same figure that the Russell report found was the 20-year nationwide return (before tax, but after costs).

But the point of my post was to highlight the danger in assuming consistent returns, or that a 5-7 year timeframe necessarily carries you through a cyclic low.

 

No worries Jacque, I'm used to talking to myself, my wife is not too interested in investing!

 

I'm a firm believer in a mix too. I have a PPOR with a bit of debt still owing, an IP in Perth that we bought about four years ago (and we thought we might be buying at the peak back then!!), and a good dose of direct shares. I went quite heavily into shares a couple of years ago, because at the time my asset allocation was 99% residential property : 1% shares. Now it's more like 60:40, and I feel really comfortable with that.

 

Rod
Thank you for opening this discussion. Your right, its seems to be a continuous debate which keeps popping up.

I believe you should never stop learning. To be one eyed about any approach limits you to finding potential investments in other areas you have not tried before. Whilst I understand that a key to wealth is finding a system that works for you and applying it over and over, it you don't grow and adapt you can also fail.

Whether you start in IP's or shares the basics are the same. Crunch the numbers and do your due dilligence to enable you to see if that investment fits into your required outcomes, investment risk style. As our requirements adapt and change so should our investments. To only invest in one type of investment limits your ability to adapt and change.

 

Absolutely, I've read some posts where people have said they have 3 IPs and they want to diversify and buy another one...

I just shake my head...

Investing in property from perth to sydney is not diversifying. Some unfortunate people found this out with Westpoint.

Diversifying is changing your asset allocation in local property, international shares, australian shares, global property and fixed interest.

Always crunch the numbers is the most important bit.

And always ask a registered financial planner, accountant or tax adviser.

At least if it hits the fan you can sue them!

That's also why I dislike smaller licensees, the bigger licensees have deeper pockets.

 

I am pretty sure that most statement of advice documents prepared by financial planners would have clauses limiting their liability. Plus if it hits the fan, how are you going to pay for the legal costs of suing somebody?

The only investment advice i would seek from an accountant or tax adviser is the tax implications of an investment. Not what makes a good investment, unless they themselves invest in a myrid of things and are succesful in those investments.

 

Yes, but the law ensures that advisers cannot limit reckless behavior, eg, recommending that an 80 who doesn't work and who only likes term deposits putting them in a geared share fund. ASIC have had a field day with advisers who recommended WestPoint...

This ensures confidence in the financial system. The government really really dislikes anyone undermining the Australian financial system and will sink their teeth into anybody that messes around with investors confidence of it.

Most lawyers add the costs to the damages, so it'll be x amount you've lost plus y legal costs equals z total amount being sought.

Good choice

Cheers,

Dan

 

I thought that was only with small law firms. You don't have to pay a retainer or any upfront costs? What happens if you lose? Is it still common these days to have to pay the other party's legal costs

 

I have no idea, I try and stay away from lawyers/solictors...

I do believe the party who loses the case has to pay the other party's legal costs.

Though like I said, I try and stay away from lawyers/solictors...

Cheers,

Dan

 

I understand your not an expert in this area, i guess the point i was trying to prove is that you can't just throw out statements that say, "you can sue them" because it is not that easy or cheap to do that, well not without potential consequences anyway.

Investor beware, should always be the number one defense. I don't want this thread to be sidetracked, so back to the issue at hand.

cheers

 

For those who think property is a great 'risk free' investment.. watch this Four Corners - Mortgage Meltdown click on PLAY on the left hand side..

 

its amazing how when their is a thread about anything else people are willing to bring examples, life experiance etc in to prove their point.

However their its own thread started to stop side tracking of other threads and it hasnt really been much meaning full at all said.

When talking about spilts, are people talking about entire amount invested? I like to think about entire equity you invested (this will take away the lobsideness of gearing).Its been talked about 12k down can control a 200k asset, so ROE can be huge.

If you put that same 12k down on shares you can control max 35k (unless you use CFDs).

So say if you have 24k to spend, your asset allocation (of investments) may be 85% property 15% shares, but you have a 50/50 spilt of your equity invested in each

 

Hi Dave
Sorry I think I've missed your point.
I'm not trying to say anything meaningful - take from it what you will.
I was simply inviting people to have a punch-up in this thread, and let the focus be maintained in other threads, where the initial post had nothing to do with "property vs shares".

When I say 60:40 property:shares, I mean gross investment; ie I 'control' (rather than 'own') say $1200k property, $800k shares. As to the gearing I have in these investments individually (or alternatively, what % equity), it doesn't really matter, as long as I can maintain cashflow and avoid margin calls, since I'm a firm believer in growth assets (rather than having cash sitting in the bank).

 

sorry the point came across wrong then... it was meant with the same intentions as yours. With the heated debates lately i thought this thread would of gone gang busters however this has not materilised....

yes i totally agree, i think its wasteful for people to have those (however im high risk tolerance), i even think money sitting in an offset (above emergancy) is a little bit of a waste and more can be done on it....