The Power of Leverage: Comparing Property Investment and Shares

One of the most significant advantages of property investment is the ability to leverage and borrow 80% to 95% of the value of the property to allow you to purchase an asset of greater value.

This is why leverage can play a pivotal role in property investment when compared to share investment.

Let’s explore how leverage in property compares to investing in shares and why it might be the right choice for some investors, particularly if you have time on your side until retirement.

Leveraging Property for Greater Returns

For example, if you have $200,000 in cash, you can purchase a $1 million investment property by securing an 80% loan-to-value ratio (LVR) loan. This means you borrow $800,000, resulting in a total asset value of $1 million.

Here’s how the numbers play out over time with an assumed 5% annual growth rate and a 3% rental yield:

At purchase: $1,000,000 – Rental return: $30,000

10 years: $1,628,895 – Rental return: $48,867

20 years: $2,653,298 – Rental return: $79,599

30 years: $4,321,942 – Rental return: $129,658

Over 30 years, you would earn approximately $2,092,824 in rental income.

The property itself would have appreciated by $3,321,942, giving you a total gain of $5,414,766.08.

After accounting for mortgage interest payments totaling $1,058,400.58, you still net $4,356,365.50, resulting in a gain of around $3.3 million.

Investing in Shares: A Different Approach

Now, let’s consider investing the same $200,000 in shares without any leverage, with the same 5% growth and 3% yield:

At purchase: $200,000 – Yield: $6,000

10 years: $325,779 – Yield: $9,773

20 years: $530,660 – Yield: $15,920

30 years: $864,388 – Yield: $25,932

Over 30 years, your total yield would be approximately $418,565, with the shares growing in value by $664,388.

This results in a total gain of $1,082,953.22.

The difference between property and shares over 30 years when starting with $200,000 in savings is over $4 million, illustrating how leverage can tip the scales in favor of property investment.

This example highlights why property can be particularly advantageous for younger investors with time on their side.

Leveraging Property to Invest in Shares

Another strategy involves leveraging property to invest in shares.

This approach allows you to access more funds but uses up the equity in your property, limiting your ability to re-leverage for further property investments.

Alternatively, you can leverage shares against a margin loan, but these typically have lower loan-to-value ratios (60-70%), higher interest rates, and the risk of margin calls if share values drop.

Each method has its risks and benefits, and understanding these is crucial before deciding.

Balancing Risk and Personal Preference

Despite the leverage advantage in property, investing in shares is still appealing for many for diversification reasons.

Property investment often involves more risk due to associated debt.

When choosing between property and shares it’s crucial to consider your –

Risk tolerance
Comfort with managing debt
Ability to withstand market fluctuations which happen more often in shares
Your timeline to retirement
Likelihood for your income to increase
Personal preference for property and shares
Diversification between property and shares inside and outside of superannuation

Unlike shares, property investment allows you to amplify your returns by borrowing money, which can significantly impact your overall financial gains.

This is especially useful in growing wealth during your early to middle working age years.

For more information on creating a balanced and robust investment portfolio, read our blog

Mastering Investment Strategies for a Secure Future – Building Your Financial Fortress