In this week’s episode, Dave, Cate and Pete take you through:
- Share investment lessons from the property experts. The Property Planner, Buyer and Professor share their first-hand experiences and lessons learnt the hard way from their first foray into shares.
- What does an investor need to do to be purchase-ready?It’s a lot easier to get your foot onto the share market ladder, than the property ladder. With the ability to invest a few $100 in the share market and low transaction costs to purchase and sell, the trio share with you what you need to do to get purchase-ready.
- Leverage and borrowing funds to invest. One key difference between property and shares is bank policy in providing funding, which typically allows for lower loan to value ratios of 50-70% for margin loans. Whereas home buyers can seek loans of up to 95% to purchase a property. This is because of the perceived risk and volatility in the share market and relative stability of the property market. This also means that the value of the investment that you can purchase with your initial capital is greater, and this leveraging bolsters net capital growth, which translates to more opportunity to invest and leverage in the future.
- Share trading v share investing. The trio explain the differences between share trading and share investing, and if you’re not a share market expert, why share investing is likely the right strategy for you.
- How mortgage strategy applies to shares. The good news is that the same principle of mortgage strategy apply to share investing as property investing. The Property Planner, Buyer and Professor outline the key strategies to implement.
- Market volatility. While there is certainly more risk in the share market, there is also more gains to be had when leveraging is not considered. The value of shares can increase by 10 times their original amount and some companies just seem to take off. In contrast, outperformers in property see typically 10% or more capital growth in a year. However, it seems with shares that as quickly as they go up, they can come back down. We highlight the critical reasons why.
- How to strike a good balance between asset classes in your portfolio. The trio share their insights on how to structure and diversify your asset portfolio.
- And of course, our ‘gold nuggets’!
Weekly market insights– the Property Planner, Buyer and Professor’s insights
- Australian bonds in negative yield territory. For the first time ever, Australian bonds have been purchased at a negative rate last week, with an average yield of 0.01% and buyer’s who bid most aggressively receiving a yield of minus 0.01%.
- Landlords and tenants in limbo as VCAT unable to settle interstate disputes. The Court of Appeal has ruled that property disputes in Victoria involving landlords who are residents of other states are not within VCAT’s jurisdiction. This means that neither the tenant or the landlord can apply to have a tenancy dispute managed in VCAT. We expect this unsatisfactory state of affairs will be dealt with and rectified by the Government shortly.
- Savings spike the highest since the 70’s. One silver lining of the coronavirus pandemic is that many Australian’s are saving more money than ever. The last time we saw a spike in savings this high was in the early 70’s where fuel was being rationed. Increased savings will add fuel to the property fire for many borrowers whose borrowing capacity is contingent on their deposit size.
Leveraging property and shares – capital growth example
Example: $100,000 invested over 20 years @ 6% capital growth
- Purchase a property for $1,000,000
- Loan amount – $950,000
- Cash contribution – $100,000
- After 20 years compound growth @ 6% = $3,207,135
- Total growth of $2,207,135
- Rental yield @3% = $1,199,781 over 20 years
- Total return $2,207,135 growth + $1,199,781 yield = $3,406,916
- Loan repayments – $950,000 loan amount at 4% interest only = $38,000 x 20 years = $760,000
- Holding costs @1.5% of property value = $599,890
Net return property – $2,047,026
- Purchase shares for $330,000
- Loan amount – $230,000
- Cash contribution $100,000
- After 20 years compound growth @ 6% = $1,058,354
- Yield @4% = $527,903
- Total return $728,354 growth + $527,903 yield = $1,256,257
- Loan repayments – $230,000 loan amount at 4.24% interest only = $9,752 x 20 years = $195,040
- Holding costs – $4,000 ($200 loan fee x 20 years)
Net return shares – $1,057,217
- When did you first foray into shares?
- Accountant suggested to buy mining shares, now they are worth less than what we paid for them. Speculative shares can go up in price a lot, but until it starts to generate some income, it’s not very good.
- Bought Telstra shares, first tranche of privatisation for Telstra, record for the number per capita of Australians who bought shares. Jumped on board like every man and his dog, went up initially and now they’re been stagnant.
- What were your earliest learnings
- Good example of specialisation, when I was young, I was on a flight back to New Zealand someone smart guy, pro shares, got to go put $1,000 into a share called Pinnacle, within about two months they went into liquidation. I could have spent more on that and lost it all. Taking tip offs from people is like asking someone at a BBQ, which suburb performs well. I was naïve and blew $1,000.
- To be something verging on an expert, requires a significant amount of time investment.
- How easy is it? What does a share-purchaser need to do to be purchase-ready?
- Ask your financial advisor for advice on what shares you should be investing in.
- There’s a lot of info out there – balance sheets, commentary, profit and loss statements. The beauty about buying a particular share in a company, there’s lots of information. On property, there’s not that much.
- You can do it with a few $100 or few $1,000 – cost you $50 to buy or sell.
- When you’re buying and selling property, you’re talking 5% of purchase price to government and bank fees. When you’re selling, 2% going to the real estate agent.
- How much can a share purchaser borrow/leverage?
- Buy your house first, and then purchase shares second, because property allows you to leverage in a way that shares do not.
- You can borrow 50 to70% on a margin loan – the loan is secured against the shares.
- With property you can borrow 80-95% – more secure and more stable – it takes more time and effort to sell property, shares you can get in and out of any time. Banks will lend you more v shares.
- Interest rates are about 1-2% higher, so you’re paying more. The sting in the tail is that you can get margin calls – you can be asked within 24 hours to put more cash into the loan, because the loan to value ratio has reduced because the shares have reduced. With property, you do one valuation when you get the loan and then that stays there, the banks are not re-evaluating the prices.
- Income derived from shares
- Capital growth, the regular income is dividends. Coems from the profit that the company makes – eg: if they made $1B worth of profit, they can share that amongst the investors and choose what they keep to expand the business. Something like a REIT, which is listed on the stock market, they must distribute ALL of the income.
- For those focused on income, not interested in capital growth, more on income, a REIT could be an option.
- There are 100’s of companies listed on the Australian stock exchange that you could invest in.
- You could get dividends 6 monthly or quarterly.
- Something else – we’re the only country in the world that offers franked dividends. When the company pays 30% tax rate, you the shareholder doesn’t need to pay tax on the dividend income you receive.
- Australia the lucky country – 100% offset, negative gearing and fully franked dividends, CGT PPR and exempt from the pension.
- What is the difference between share trading and share investing
- Investing – buy and hold, there for the capital growth and regular income, long-term investment.
- Trading – people who make money from shares, ordinary shares, options, US stock markets. Most people don’t do it successfully, emotions get involved and then they make bad decisions. You need a lot of knowledge, technical analysis or fundamental analysis.
- How does tax effectiveness apply to shares?
- Leveraging, how to optimise your tax deductions, it’s the same rules that apply to property. Interest is deductible, if dividends are less than your loan repayments, you’re negatively geared (this is not a good thing)
- If you have non-deductible debt, you should try to borrow the full purchase price plus costs for the investment, and put all of your money to reduce the non-deductible debt.
- The mortgage strategies are the same as they are for property.
- Degree of control and how property varies from shares
- If property has been vacant, I can drop the rent. If I’m looking to get extra rent, I can spend some money and do up the place to increase the income.
- If the value of shares is coming down or the company decides not to distribute, there’s nothing that can be done.
- If something goes wrong at a company level, it might impact dividends, but it won’t impact cash flow. If something goes on with my investment property (it needs a gutter fixing), that will impact my personal cash flow.
- One of the big upsides is the returns can be much larger – ‘10 baggers’, the value of the shares has increased by 10 x the amount. Some companies just take off, the outperformance is significantly greater than the outperformers in property where you may get 10% growth in a year.
- More risks with shares, but more opportunity.
- You also don’t need to invest as much as you would with property
- Practice diversification – how you spread and allocate investments and do this with smaller numbers.
- The fact that your property is probably going to be worth the same the next morning, whereas shares can change over-night. If you’re going to invest in shares, you need to take the ups and the downs.
- The ups and downs in property are not that extreme as shares.
- But we don’t value property as regularly as the share market – on ‘market’ the property may be valued once every few years and only one person can purchase that asset, with shares you have multiple people.
- What legal issues must you be mindful of with frequency of returns
- Shares is less regular – twice or four times a year
- There are virtually no legal issues when it comes to share market, if they’re not distributing, you can’t do anything about it.
- Residential and commercial properties do come with legal issues.
- You do need a stronger constitution when you’re investing in shares, because the prices do go up and down so much, and you cannot get over-emotional about money.
- What is a good balance between asset classes?
- Depends on your goals and risk tolerance. If you’re risk averse, then you should probably have more in property than shares.
- Property is easier to asses – the land that the dwelling sits on doesn’t change, it’s the same piece of land for 100 years and it will be the same piece over the next 100 years. The dwelling is difficult to change, unless you knock down and rebuild. The drivers of the returns of property – where is the land located and how many people want to live there, proximity to CBD, ocean, schools, amenities, quality of the street. These things don’t change much, if at all.
- Shares are companies, made of humans, they change, they go, market changes, regulation changes, technology changes.
- A company outperforms on the share market on average 7 to 12 years. But top performing houses would
- Every property is unique, but a share is worth the same as another share from the same company.
- How can a property investor assure themselves of liquidity?
- Shares wins hands down when it comes to liquidity – you can sell them in a matter of minutes on the share market.
- Property takes weeks to get ready for sale, weeks on the market and could take months to settle.
- Clever use of offset accounts.
David Johnston- The Property Planner’s Golden nugget: with share investing, to learn you should read books and educate yourself. ‘Intelligent Investor’ by Ben Graham, ‘One up on Wall Street’ by Peter Lynch, ‘Bulls, bears and a croupier’ by Matthew Kidman, ‘Property v shares’ by Peter Koulizos. Take the time and invest in your knowledge, scale yourself up gradually and try to make unemotional decisions, or just put it in an index fund as Warren Buffet suggests.
Peter Koulizos – The Property Professor’s Golden nugget: you should have both property and shares, what proportion you have them in depends on you. Your comfort level, how risk averse you are. Shares have many advantages – liquidity, if all you have is property and you need some cash, that’s going to be hard. You need some of both.