The power of leverage – property v shares

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.

Interest rates are also higher for share or margin loans. And the sting in the tail, is if your share values drop, the bank can hit you up to provide extra cash to pay down the loan in very short notice. 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 property with, from your initial capital or saving is much greater. This extra ability to leverage against property bolsters financial returns significantly over the long run for property compared to shares, when you start with same amount of cash. The caveat being if you select your assets wisely! See how this plays out in the example below.

Property Planner Tip

For more education on how to structure your investment portfolio, listen to episode #64 “Property v Shares – How to strike the right balance in your investment portfolio, which investment strategy is superior, how to get started and should it actually be property AND shares?”

Example: $100,000 invested over 20 years @ 6% capital growth

Residential property

1. Purchase a property for $1,000,000
   1. Loan amount – $950,000
   2. Cash contribution – $100,000
2. After 20 years compound growth @ 6% = $3,207,135
   1. Total growth of $2,207,135
3. Rental yield @3% = $1,199,781 over 20 years
4. Total return $2,207,135 growth + $1,199,781 yield = $3,406,916

Minus

1. Loan repayments – $950,000 loan amount at 4% interest only = $38,000 x 20 years = $760,000
2. Holding costs @1.5% of property value = $599,890

Net return property – $2,047,026

Shares

1. Purchase shares for $330,000
   • Loan amount – $230,000
   • Cash contribution $100,000
2. After 20 years compound growth @ 6% = $1,058,354
   • Total growth of $728,354
3. Yield @4% = $527,903

4. Total return $728,354 growth + $527,903 yield = $1,256,257

Minus

1. Loan repayments – $230,000 loan amount at 4.24% interest only = $9,752 x 20 years = $195,040
2. Holding costs – $4,000 ($200 loan fee x 20 years)

Net return shares – $1,057,217

Difference: $989,809