New to stocks and wanting to build up capital to invest in property

[Wysiwyg]

One developer makes >20% on properties in our street.

Buy property $300k
Subdivide $35k
Demolish $10k
Build $175k
Build $175k

Total Outlay $695k

Sell $420k
Sell $420k

Profit before abnormals $145k

About 20%

But then, I may have missed a few sundry costs (stamp duties, commissions)

175 k worth of dwelling? Certainly highlights the fact that in some places of Australia building costs are significantly less. Around here, as a comparison, the billboards have land starting at 220k for 600sq.m.. My enquiry 2 years ago to build a 3 bed brick house started at 250k. So 470k minimum to buy in a newly developed suburb. Blatant price gougeing.

 

[burglar]

175 k worth of dwelling? Certainly highlights the fact that in some places of Australia building costs are significantly less. Around here, as a comparison, the billboards have land starting at 220k for 600sq.m.. My enquiry 2 years ago to build a 3 bed brick house started at 250k. So 470k minimum to buy in a newly developed suburb. Blatant price gougeing.

They are little boxes built of ticky tacky!
On a narrow block, 25 foot wide x 120 foot deep.
They are built from boundary to boundary. Next door the same.

Brick colour = Liquorice
Young people would choose this colour to annoy their parents!

 

[minwa]

Equity curve - the equity curve for a share portfolio over the longer term is very volatile in comparison to residential and commercial property. Note that I did not say Listed Property Trust or structured product. The moment you list a product (even if that product is property), you correlate the product to the share market. This defeats my purpose of owning an asset that is negatively correlated to the share market.

I agree with your post except about properties being negatively correlated to shares. They are lowly correlated but positively, if any..not negative.

 

[Sir Osisofliver]

Depends on your age and income requirement, having a stable income stream like rent is understandable.
And i'm sure it make all of us sleep better knowing if the market were to fall, at least the tenants will pay us $500 a week or so and that's enough to do the shopping.

But... that's not really investing as i understand it. It's financial planning, financial security.. not investing as a pursuit of the highest possible return with the lowest possible risk.

So what fuels your investing activities luutzu? It wouldn't happen to be...your level of disposable income would it? Either the amount you can save after expenses, or the amount you can borrow based upon your serviceability. You seem to be saying that establishing another source of income that is not derived from your employment is only important to people with grey hair. Sure that income provides a degree of financial security because once it's set up you don't have to work for it; but that very same income stream allows you to compound gains through the use of additional leverage up to the limits of your risk profile.

Risk is not beta, it's not the average market price fluctuation of your stock versus the fluctuation of a representative group of that stock etc. If you buy a stock today, and next week that stock dropped 30% while the market dropped 2% or even gained 5%.. .why would buying it at 30% discount riskier? Put another way... if you're buying 1 can of Coke for $1 then the owner said the second can is for 50 cents.. .would you look at his shop and seeing that no other stocks are being discounted and conclude the second Coke is riskier?

risk "The chance that an investment's actual return will be different than expected."

Risk is about expectation...that is why it is personal, because we each have differences in what we consider to be an acceptable risk/acceptable return. In your above example you indicate that a 30% drop (a 5x/15x greater volatility than the market) is expected in your investment. Regardless of whether the stock now has a more attractive risk reward profile...the risk (not what you expected) has happened.

If you know what the value of your assets, or know the value of someone else's assets on sales... and have the courage, and capital, to take advantage of those opportunities... That's not being myopic or short sighted, it's the definition of intelligence and far-sighted ness.

The hard part, of course, is to know, with reasonable certainty, of what you're looking at. This is where Graham's margin of safety, where Fisher's scuttlebutt analysis, where Buffett's emphasis on buying established businesses whose future are pretty much as it has been up to today (only bigger due to its own growth from its strong position and able management) etc... come into play. well the other parts all came from them anyway 'cause i got nothing original or new...

---

Stocks are share of businesses. Not all stocks are equal or represent the same thing called stock.
So you could diversify within this one asset class... The businesses on the stock market does represent the entire economy.

Do they? So tell me luutzu.... Why did the RBA in 2008 (remember that the peak of the market was in Nov '07) raise interest rates? I mean what were they thinking? Raising interest rates was making it harder for businesses to do business. Why would you make things harder for business if it's a representation of the entire economy? Wouldn't you just keep interest rates low all the time and fuel a never-ending rise in the share market?

While you think about that...So um...what about Govt Bonds? Do they represent an economy?

So if you are able to know when or want to be expose to certain asset classes, like property... buy REITS or developers or infrastructure stocks. You'll probably do much better through owning Stockland or Australand stocks, at the right time, than buying a property to flip... and will also reduce your risks too. Those property companies has billions in real assets all over the country, your $1 million could maybe buy you 1 or 2 properties in 1 or 2 states... and if one of those property market is depressed, or one of your rental burnt down, that's half your investment damaged.

*facepalm*

1. Residential Property and Commercial property are different. They have different price cycles, different amplitude within those cycles, different risk reward profiles. REIT's, Stockland and Australand are either commercial property or residential property developers. They operate on a completely different cycle than direct investment into residential property.
2. The cycle for commercial property has a higher correlation to the share market and interest rate cycles. Residential property also has a correlation to the overall health of the economy, but the window of opportunity for residential property is much more strongly orientated (in a negative correlation) during mature and correction of the share market. IE Residential property looks good when the share market sky is falling and all the chicken littles' are running around screaming.
3. Trading properties is like trading shares...generally you require some specialist kind of knowledge. IE how much expenditure to enhance the property, what to enhance and what is a reasonable level of return for your time/expenditure. A buy-hold strategy in shares is equivalent to a positively geared investment into a residential property. Over time the cost-based level of return in the investment increases.
4. The generalisation that you'll probably do much better in the listed stocks "at the right time" ignores the situation that the timing is different, because they operate on different cycles. If you time the property investment well....you could do both, invest in property/ invest in commercial property via a listed entity...which is not the case if you only invest in the listed entity.

Let say you see a booming property market, low interest rate, more home and offices doing up... The best thing to do is probably not rush out there and buy yourself a property... better, and i have seen this work, to buy into stocks of companies that supply those demands. Concrete, building/construction suppliers like CSR or Boral...
I don't own these... I should actually take a look see though

---

If you're waiting till the property market is booming...you've waited too long...just like newbies who invest towards the end of a price trend.

Why would you want a smooth earnings/returns curve? Unless your pay and bonuses depends on it I think it's more important to look at the entry and exit point, everything in between only make you feel happy or sad, not richer or poorer. And this is why I don't borrow or leverage... i want to keep my mistakes private and not forced to recognised it and having to make another mistake

---

Financial risk is about expectation...and my expectation is a consistent level of return in my investments regardless of fluctuations in asset cycles. If I know I'm going to make 15% yoy, I can predict where I will be in the future, budget and forward plan for large expenditures/opportunities, with a high degree of certainty. Can you?

Over the long term... 10 years should do it... equities has been shown to outperform properties. You could easily find evidence of this... but that's a general statement you say...

i don't think many people could point to many example of properties that gained 5 or 10 times its price in 10 years. I could point to CSL, Monadelphous, Cochlear, CBA ? as examples... that's not to say that i could have seen or predicted these... it's just to show that if you know what you're doing, you could make good return... even in property.

Ok ready...

In 2002 I bought 3 properties in Northern Brisbane Suburbs of Sandgate and Brighton. I paid $461,000 for the three properties, $350,000 of that was borrowed money, $92,000 my own equity. Eighteen months later those three properties were worth...~~$830,000. (They are now worth....~~ about $1.4m). So your are 100% correct. The price of the dwellings did not increase 5 or 10 times. Nevertheless since I only provided a 20% deposit, my level of return on my own equity did increase 10 times.

I hope I've provided some clarity.

Cheers

Sir O

 

[Sir Osisofliver]

I agree with your post except about properties being negatively correlated to shares. They are lowly correlated but positively, if any..not negative.

The correlation is dependent on location. In some places in Australia, property prices only start their cycle when there is a mature and falling share market, (IE negative correlation) other locations move in tandem with the share market because of localised drivers (positive correlation).

My terminology about negative correlation is because the vasy majority of people in Australia live in a location that exhibits negative correlation not positive.

Cheers

Sir O

 

[luutzu]

I don't think a beginner, or a student, would have enough money to diversify across property and stock. I don't think they could afford one property to live in, let alone as an investment property.

But as a beginner, a student, wanting some guidance, or in my case, just my opinions... some ideas as what to set his time and efforts towards for the most potential gain from his time, current and future savings, it might be safer and wiser to advise the guy to spread it all across the field, but it is not productive or profitable for him in the long run.

From a practical point of view, if a person has $100 000 to invest, would your advise be to spread it into property and stock? With that money, the guy might have $10 000 left for stock after a deposit for a flat somewhere, and have to continually pay the short fall from the rent, the additional capital repayment.

I think a well considered advised should depends on what he want, how he want to go about it, how serious or how much time and effort does he have to look after his eggs. That and the fact that a person seriously seeking to to start and learn, and does not have a big enough pot to bet on every table... what should he do to start off? Spread and diversify to reduce risk or to specialise and study a particular class first?

---

Property vs Stocks:

While we could all point to specific instances of people making amazing profit from this or that... and even though studies have shown that over the long term, stock investment always beat property investment generally... about 2 to 3 percent per year, on average... I don't like that as an argument because it's not practical to the average investor who does not or could not buy the entire market to match his to the averages.

So let's considered the merits of either class based on its productive capacity... because value will ultimately come from how productive the asset is or considered to be.

How productive could an average suburban block of land be? Assuming there's no gold or oil under it, and assuming that like most properties, its uses will remain relatively the same over decades (say could be rezoned after 20 years)... Over the years, a property is just something you build a house or a factory or an office over.. knock down and rebuild.

What about stocks?

If you see stock as merely the market prices ticking up and down, then it won't be much. But if you see it for what it really is - an organic organisation that comes about for the sole purpose of growing and be more profitable for its investors - then the productive capacity of businesses, whose ownership are transferred by many means, one of which is the secondary stock market through brokers... its productive capacity is practically infinite, and its returns to investor are only constrained by the company's effective use of capital, what that capital could employed and produce.

So putting property and businesses into that perspective, i think you will agree that ownership of business enterprise would generally be more productive and profitable than property.

We could all make mistakes in property investments as well as stock investments... the thing to do is probably to reduce the chances of us making mistakes, not to say there's no use trying and should spread things evenly.

Say a person does not understand much about stock valuation, does not have a clue either about property investment... would risk be minimised by diversification into both?

As i think i've said before... invest in what you know. And if you don't know either one or either is fine for you as long as it reaps the most rewards... then it probably is more profitable to spend time to study and get to know the field that are generally, and has proven to be, more fertile.

 

[luutzu]

If i go skydiving and jump out of the plane... i don't expect the to fall flat and die as much as I don't expect to fall and die sitting on a stable bench in the yard.

Both have the same expectation, which is riskier?

No investor expect to lose money, that does not mean they always play it safe or that no financial lost ever befall them.


I don't read the economy or try to predict business cycles or any cycles... I could barely read the financial statements. So if the cycle isn't already there for any idiot to see, I wouldn't have seen it or try to predict it, and if i do sometime try to make a guess, i haven't put money on it.


And I don't expect lost or take risk in my investments. I expect to gain, and sometime expect to gain handsomely... doesn't happen but it has nothing to do with risk.

The risk i do take and do expect as risks are from me being wrong, being unlucky, being duped.. that's enough risks i think.

---

I don't understand your reasoning for a higher return relative to base being a good thing. Following that logic and when my kids inherit my property, it costs them zero and they will get... i don't think you can divide by zero.


Anyway, congrats on your property investments. I hope you've already sold it and realised the profit.

Thre's just too many people with too much money scaring young people with some money and no experience.

 

[Sir Osisofliver]

I don't think a beginner, or a student, would have enough money to diversify across property and stock. I don't think they could afford one property to live in, let alone as an investment property.

But as a beginner, a student, wanting some guidance, or in my case, just my opinions... some ideas as what to set his time and efforts towards for the most potential gain from his time, current and future savings, it might be safer and wiser to advise the guy to spread it all across the field, but it is not productive or profitable for him in the long run.

From a practical point of view, if a person has $100 000 to invest, would your advise be to spread it into property and stock? With that money, the guy might have $10 000 left for stock after a deposit for a flat somewhere, and have to continually pay the short fall from the rent, the additional capital repayment.

I think a well considered advised should depends on what he want, how he want to go about it, how serious or how much time and effort does he have to look after his eggs. That and the fact that a person seriously seeking to to start and learn, and does not have a big enough pot to bet on every table... what should he do to start off? Spread and diversify to reduce risk or to specialise and study a particular class first?

---

Property vs Stocks:

While we could all point to specific instances of people making amazing profit from this or that... and even though studies have shown that over the long term, stock investment always beat property investment generally... about 2 to 3 percent per year, on average... I don't like that as an argument because it's not practical to the average investor who does not or could not buy the entire market to match his to the averages.

So let's considered the merits of either class based on its productive capacity... because value will ultimately come from how productive the asset is or considered to be.

How productive could an average suburban block of land be? Assuming there's no gold or oil under it, and assuming that like most properties, its uses will remain relatively the same over decades (say could be rezoned after 20 years)... Over the years, a property is just something you build a house or a factory or an office over.. knock down and rebuild.

What about stocks?

If you see stock as merely the market prices ticking up and down, then it won't be much. But if you see it for what it really is - an organic organisation that comes about for the sole purpose of growing and be more profitable for its investors - then the productive capacity of businesses, whose ownership are transferred by many means, one of which is the secondary stock market through brokers... its productive capacity is practically infinite, and its returns to investor are only constrained by the company's effective use of capital, what that capital could employed and produce.

So putting property and businesses into that perspective, i think you will agree that ownership of business enterprise would generally be more productive and profitable than property.

We could all make mistakes in property investments as well as stock investments... the thing to do is probably to reduce the chances of us making mistakes, not to say there's no use trying and should spread things evenly.

Say a person does not understand much about stock valuation, does not have a clue either about property investment... would risk be minimised by diversification into both?

As i think i've said before... invest in what you know. And if you don't know either one or either is fine for you as long as it reaps the most rewards... then it probably is more profitable to spend time to study and get to know the field that are generally, and has proven to be, more fertile.

OK Time poor here it is in dot points..

1) Luutzu I objected to this...

if you know about stocks and could see a few good opportunities, it make no sense to put some cash into property for safety or risk reduction.

I hope I've shown you an alternate viewpoint. Looking at only one asset class (and the most volatile asset class at that) to the exclusion of everything else as if they had no value...can you see a problem with that?

Whilst we usually all start out in the share market due to the lower spend of buying assets, if he's young and starting out, he's got the time to learn when to buy shares and when to buy property. I don't want him to make the mistake of thinking that the share market is the only method of investing, which your comment seems to encourage.

2) 100K to invest - not enough information. What's their borrowing capacity? What's their income? What's his stage of life etc etc etc. If he's a 35 yr old Surgeon with 100k to invest but a borrowing capacity in the millions because of his 600K income a year, that's a very different person to a 20 something student earning jack who just inherited 100k from his Great Aunt Dot. The point I'm making here luutzu, is that you appear to be trying to impart wisdom that would apply to you and your risk tolerance and expectations, where the OP is his/her own person with his/her own risk profile. You are encouraging him/her to wear blinkers.

3) "and even though studies have shown that over the long term, stock investment always beat property investment generally... about 2 to 3 percent per year, on average... I don't like that as an argument because it's not practical to the average investor who does not or could not buy the entire market to match his to the averages." a) Prove it. Most studies when I look at them are lies damn lies and statistics from people driven by self interest. b) Over the longer term 50+ years, the return profiles of Shares V RE are roughly equal because of the volatility that exists in Equities. c) There can be a lot of debate here...I'm not really interested in continuing which is "better", they are each different and they each have their place and time.

4) "So putting property and businesses into that perspective, i think you will agree that ownership of business enterprise would generally be more productive and profitable than property." Then you would be wrong....and I think Donald Trump might also disagree with your assessment of the importance of property. You seem to be labouring under the impression that you simply buy a property and that's it, rather than the reality that a RE investment can become a parent asset over a variety of child assets if we manage our equity within that investment over the longer term.

5) "then it probably is more profitable to spend time to study and get to know the field that are generally, and has proven to be, more fertile." - So then if our goal is merely profit to the exclusion of risk, surely we need to direct him to the nearest reputable futures course, right?



Cheers

Sir O

 

[Sir Osisofliver]

If i go skydiving and jump out of the plane... i don't expect the to fall flat and die as much as I don't expect to fall and die sitting on a stable bench in the yard.

Both have the same expectation, which is riskier?

*shakes head*

No both have the same extent or potential outcome. Each one has a different probability of that potential outcome.

No investor expect to lose money, that does not mean they always play it safe or that no financial lost ever befall them.

I don't read the economy or try to predict business cycles or any cycles... I could barely read the financial statements. So if the cycle isn't already there for any idiot to see, I wouldn't have seen it or try to predict it, and if i do sometime try to make a guess, i haven't put money on it.

And I don't expect lost or take risk in my investments. I expect to gain, and sometime expect to gain handsomely... doesn't happen but it has nothing to do with risk.

The risk i do take and do expect as risks are from me being wrong, being unlucky, being duped.. that's enough risks i think.

OK its obvious you need to learn more about risk. have fun.

---

I don't understand your reasoning for a higher return relative to base being a good thing. Following that logic and when my kids inherit my property, it costs them zero and they will get... i don't think you can divide by zero.


Anyway, congrats on your property investments. I hope you've already sold it and realised the profit.

Thre's just too many people with too much money scaring young people with some money and no experience.

Your kids inheriting the property would generate a CGT event. Far better to put that kind of asset inside a trust and merely change trustee as an inheritance mechanism or use a testamentary trust structure.

No I haven't sold yet...I have no reason to.

Cheers

Sir O

 

[Wysiwyg]

Your kids inheriting the property would generate a CGT event.

Example

Full exemption

Rodrigo was the sole occupant of a home he bought in April 1990. He did not live in or own another home.
He died in January 2012 and left the house to his son, Petro. Petro rented out the house and then disposed of it 15 months after his father died.
Petro is entitled to a full exemption from CGT as he acquired the house after 20 August 1996 and disposed of it within two years of his father's death.
If Petro did not sell the house within two years of his father's death, he may request the Commissioner to grant an extension of time, see Commissioner may extend the two-year period

.

 

[luutzu]

*shakes head*

No both have the same extent or potential outcome. Each one has a different probability of that potential outcome.


OK its obvious you need to learn more about risk. have fun.



Your kids inheriting the property would generate a CGT event. Far better to put that kind of asset inside a trust and merely change trustee as an inheritance mechanism or use a testamentary trust structure.

No I haven't sold yet...I have no reason to.

Cheers

Sir O

Seriously though, i think you have a million reason to sell those properties. I don't think it's wise to try and make the last buck on an investment... and if you think properties will just rise or remain as is, there's a lot of property investors in the US, and trillions of lost money that led to the Global Financial Crisis that would tell you otherwise.

Donald Trump?
The dude went bankrupt a couple of times if i remember correctly. I think he hasn't made any money from property since the 90s. He made money by lending his name to projects owned, build and operated by other people.

It's great you could borrow money and made very good return in properties, imagine how much more return you could've had if you dedicate your capital and time into equities.

But like I said, what you considered leveraged by borrowing power, using other people's money and buy low and sell high - that's not really leverage, it's just debt and a lot of luck.

Leverage is what the Westfields guys did when they started - they borrow at x%, build/buy shopping centres and managed to gained returns of x+2% p.a. That is, leverage is when you could use other people's money, paying a cost for it, but also gain above that costs to you.

If you leverage by borrowing at 6%, but the investment returns only 5%, you're going broke, you're taking on risks that when you realised the investment the return will more than compensate for the previous losses. And if it does, as in your cases it has, great... if it doesn't, if the property market, for reason beyond most people's control, collapse... not only will you have lost each year you borrowed, you'll need to fork out more capital to fix the property and either whether the storm or sell at the new market price.

 

[Sir Osisofliver]

Example
.

Thanks wysiwyg.... Should have added possibly - was in a rush.

 

[Wysiwyg]

Hi everyone i'm new here
I'm a university student studying nursing and have a dream of one day being a property developer. As I don't have much cash I am looking at stocks to be my initial investment vehicle (my silver investment is more a long term thing).
I want to educate myself about stocks (having read Robert kiyosakis books) and am wondering where to get started as I want the right education.

Apart from teaching yourself which could take a long time depending on your personality, there are educators and service providers to bypass what could be years upon years of trial and error. Nick Radge offers a service for stock trading/investment. The Chartist.com.au

 

[artist]

I want to educate myself about stocks (having read Robert kiyosakis books) and am wondering where to get started as I want the right education.

To get started in educating yourself about stocks (or anything else) begin by THROWING OUT any and every bit of information you read or heard from Robert Kiyosaki.

Here is a link to a comprehensive debunking of his tosh http://www.johntreed.com/Kiyosaki.html .

To give you the flavour of it, here is Reed's introduction.
"Summary

Rich Dad, Poor Dad is one of the dumbest financial advice books I have ever read. It contains many factual errors and numerous extremely unlikely accounts of events that supposedly occurred.

Kiyosaki is a salesman and a motivational speaker. He has no financial expertise and won’t disclose his supposed real estate or other investment success.

Rich Dad, Poor Dad contains much wrong advice, much bad advice, some dangerous advice, and virtually no good advice.

Wikipedia says, “On August 20, 2012, Kiyosaki's company, Rich Global LLC, filed for bankruptcy in Wyoming Bankruptcy Court.” "

I came across Reed's site many years ago (it has been updated as more information came to light).

Caveat emptor!

PS: for an interesting and informative comparison of Reed and Kiyosaki, Reed compiled a table. The link is in his main RK page, but I shall include it here as well: http://www.johntreed.com/envy.html