Shares vs. property investment

[kerosam]

just attended a 2-nights property investment seminar that included presentations from a financial planner and a mortagage broker.

from that seminar, it seems that the success of property investment is only half way thru financial freedom. when the financial planner made her presentation, she gave a couple of options including living on rent of existing investment property and so forth. the first few options were anything but attractive. her last option did surprise me though. her recommendation was to use the equity in the property portolio to invest in blue-chips to generate income during retirement!

what i'm saying is why would anyone invest in property then when eventually end up in the stockmarket? wouldn't it be more prudent to start educating oneself and get aquainted with the ins and outs of the stockmarket?

and looks like everyone in australia will need a financial planner very soon. all that setting up of trust and taxation stuff is getting a bit too complicated for me.

any words from the forum?

 

[GreatPig]

Re: shares vs property investment

To use the equity in a property portfolio to invest in shares for income means the return from the shares has to be higher than the interest rate of the property loan. If all the money you're investing in shares comes from the loan (ie. 100% geared), then I think you're going to be limited to a fairly small selection of shares that will give high enough income returns.

I've heard this approach suggested as well, but specifically using commercial property trusts which have relatively high income returns. You'd need to look at the distribution returns of a range of blue-chips and investment or property trusts to see which ones give the best incomes.

looks like everyone in australia will need a financial planner very soon. all that setting up of trust and taxation stuff is getting a bit too complicated for me.

You don't need a financial planner for that, just a good accountant.

GP

 

[tech/a]

Re: shares vs property investment

Its what I do.

I wont go into figures as it will cause dramas---as it has in the past.

I will say its been fantastic for me.
I know of a few others doing it as well.

Shock horror I also leverage it on Margin.

Further shock horror I've been able to produce an above average wage from only a small % of total equity if every share fell to zero only 4% of liquidated net wealth would be lost.

If you can profit from the market over the interest rates and expenses---I'd agree.

If anyone is interested in how I approach this including figures---of how I have done it for 3.5 yrs just private mail me.

 

[mit]

Re: shares vs property investment

I'm doing something similar. I have drawn down some of the equity in my IPs for shares on Margin. I am on a three stage process.

1. While I am still at work I'm growing my share position to a point that the annual "average" dividend+cap-growth should be more than the income I want to survive on.

2. This stage I'll stop growing my position and just reduce leverage, so I have the equivalent of 12 months salary to draw on immediately. I already have a few years of salary if I sell my properties. My properties aren't doing much at the moment but none are in metro areas so they haven't gone backwards.

3. Leave work and ?

4. Continue to slowly grow the position and reduce leverage until I can live purely off yield not capital.

It sounds easy but I didn't use equity for shares until I was very comfortable with my trading and as they say don't confuse a bull market for brains.

MIT

 

[salsa]

Re: shares vs property investment

Hi Kero,
Fr what i understand, you would start on property first because you can leverage more (bank lend 100% to buy properties not shares) then once you have achieved a confortable equity on your property portfolio (mostly from capital gain over the years), you then can use the equity to borrow from banks a large enough amount to generate sufficient income from bluechips.

Regards,

 

[tech/a]

Re: shares vs property investment

I have had a quite a bit of interest in this concept.
I'll knock up a small paper on it and send it out---should take a week (Purely due to lack of time).

Anyway most have asked what I think of Property V Shares.
So thought I'd share my veiw here.

I dont see it as Property V Shares.

I think that they are synergistic.
Each has their place in any balanced financial plan.
Each will and do have their day.
I have kept property for 10 yrs only to get back what I payed for it!
That same property has had its day and is now worth (8 yrs after I sold it.) 10 X what I paid for it.

I really believe that the nuts and bolts of better planning for your financial future ---the basics---the way you can get there---the way that you can find the capital that you MUST have to increase your lot---isnt readily available.

I have a dim view of Financial Planners---simply because there are few GOOD ones around---most are trying to be as wealthy as their clients ---most are simply product salesmen.

Finding a map of "How to" is almost an impossibility and when its partially seen at a seminar on wealth creation through realestate---trading or business its seen as "Voodoo" yet its simple common sence.

I cant tell you what to do but I can tell you how Ive done it.

Its simple,not Voodoo and available to everyone.
Some are better at it than others and some are far far better at it than I am
They have bigger Kahunas---and take risks un acceptable to me.

Property V Shares?
Property AND Shares!

Your future financially should be treated as a Business even if you've never had a business in your life!
The sooner you know how to structure your business the sooner your business can grow.

 

[skin]

Re: shares vs property investment

her last option did surprise me though. her recommendation was to use the equity in the property portolio to invest in blue-chips to generate income during retirement!

This seems very reckless advise - in retirement - using borrowed money to invest in the share market!!!

In a long term strategy I can go with this advice but hell no during retirement when the tide turns you may not live long enough to catch the next wave.

My opinion only,

 

[GreatPig]

Re: shares vs property investment

This seems very reckless advise - in retirement - using borrowed money to invest in the share market!!!

I think that depends a lot on the state of the market and which shares are being invested in.

To me, the primary criteria is that the return is greater than the loan interest (otherwise what's the point). If that can come from distributions alone, then the share price doesn't really matter. If it's incorporating capital gains, then the time frame needs to be considered as well, as you can't live off gains unless you sell.

If gains are an important part of the picture, then I think either the choice of stocks needs to be limited to those with low volatility in an up-trend, or a more active approach needs to be taken to monitor the price and buy and sell accordingly.

Basically, risk is just something that needs to be managed according to circumstances.

GP

 

[skin]

Re: shares vs property investment

Great Pig,

Return (income) is of course paramount in retirement (hence dividend paying blue chips) - which I agree - however I cannot agree with borrowing to get into the share market when retired, of course that's my personal "risk averse" opinion. A loss can be recouped when young.

However - if the income/capital gain is not absolutely necessary to live out your retirment and only a vehicle to pass your assets to your children than - "go for it".
My opinion only

 

[kerosam]

Re: shares vs property investment

thanks for your input folks. i appreciate everyone's opinion here.

with the issue of returns more than interest, since i still have a mortgage of 6.72%, there are not many shares i can purchase to give me that return. if i'm not wrong, the only sector to give me that return is in the property trusts and property syndicates.

correct me if i'm wrong.

 

[tech/a]

Re: shares vs property investment

Just about to go into a meeting.
I have a few comments and will write up tonight.

Think there needs to be clarification on GOOD debt BAD debt.
Income producing debt can be your biggest ali in future wealth creation.

Just quickly consider this.

You have equity locked in your home----preferably in a few Investment properties as well.
Its increasing in value at say 5% and has averaged 20% over the last 3 yrs.
You are positively geared or have a low Mortgage.
You dont want to sell to release funds.
To release them you have a line of credit.

More later---dont care wether your retired or employed.

 

[mit]

Re: shares vs property investment

thanks for your input folks. i appreciate everyone's opinion here.

with the issue of returns more than interest, since i still have a mortgage of 6.72%, there are not many shares i can purchase to give me that return. if i'm not wrong, the only sector to give me that return is in the property trusts and property syndicates.

correct me if i'm wrong.

Your thinking purely about buying and holding and living off the dividends. My thoughts are more of an active investment style. You would in fact live of the capital gains as well as the dividends. Check Steve Navra out. Search on the http://www.somersoft.com/forums/ where he goes into some detail about this strategy.

MIT

 

[tech/a]

Re: shares vs property investment

Ok back to Mr & Mrs Example.

House Value $350,000 have $250,000 equity but cant get to it due to needing somewhere to live.

They gain a line of credit to be able to access it.They want a good return on their $$$s
Their equity is locked in the Mortgage and as such isnt WORKING.
Interest Rate say 7.25%

They have a PROVEN method of trading that returns 15% P/A.
They know that the largest Drawdown they have ever had using their method is 20%.
They have calculated that a Margin Loan will leverage their holdings 2.5x
They then decide that Drawing on $50k will mean that if they have a Maximum Drawdown they will lose 100% of that or $50k adding $300 a month to their Mortgage---a risk they are prepared to take.
It can also be claimed as a capital loss on Tax.As can a host of other things like computers,software,data providers,education,books--They have a great accountant.

On the Flip side They have the potential to return on their initial investment 37.5% on a 15% return on Margined investment.

$50k X 2.5 = $125000 to invest
Return at 15% = $143750 less the $75000 loaned = $68750 less the initial
$50K and you have a $18750 profit or 37.5% gain
As for Interest costs for the margin loan---This is only applicable on moneys over the $50K they put up---Dividends I have found take care of that.

Pretty Average you say.
With these figures YES.

For the Last 3 yrs I had an average of 150% returns on initial capital and so did 16 I know of.
Trade longterm and after 12 mths your capital gains tax on shares halves.

This is not for everyone.
Nor is Business
Nor is buying many Investment properties
Nor is trading.

A good accountant and advisor (If you can find one ) is essential.
They will know as you will if you are likely to be successful.
If youve had to pay tax on your trading earnings for a few years then chances are you can turn a regular profit.

Sound Risk management in ANY financial undertaking is a must.
Above is an example of how its done and how I do it.
I'll have wins and losses--if I get caught and find myself in a crash--then I like most others will take a hit.

Thats a cost of doing Business.
If I DONT plan and work at my investments I have NO HOPE of reaching my goals.(Many of which I've reached).

But without using Other peoples money(Banks) which I do everyday in Business!! It just wouldnt be possible.
There isnt a wealthy person on the planet who doesnt undersatnd the correct use of Other peoples money.

Seek advice and NEVER do anything your un comfortable with--NEVER!
Your decisions will be emotional based!

 

[tech/a]

Re: shares vs property investment

Lets go a little further.

Mr Example whilst investing in his longterm share holdings still retains his property.
Lets just say he manages to see the value of the property rise a megre 3% thats a further $10,500.
So we are looking at $29,250 in a single year increased wealth.

(My own area has risen 8% in the last 12 mths and rediculous amounts prior to that).

Now Imagine that MR Average has 3 Investment properties and does exactly the same with each.
We now have 3 x $29,250 = $87,750 in a single year.
OR $1687.50 a week.

Now imaging Mr Example takes advantage of the profits in his portfolio and now can trade 2.5 x $68,750 = $171,875.
Next year 15% return = $25,781 or 50% of initial capital!!!

These are working with very average probable returns.

Lets look at this case.

3 Properties $30,000 taken from each.
$90k margin 2.5x return 130% = $117,000
3 Houses rise Average 8% on $750,000 = $60,000

Total $177,000.

Then consider the compounding effect of over 3 yrs and the rise in housing on average 35% each year---It did happen and not likely to happen again for a good while.
Even so the compounding effect EVEN NOW is nothing to sneeze at!

This is simply YOUR equity WORKING FOR YOU!! Rather than sitting there locked up making you feel warm and fuzzy.

So you can see why these guys investigate this method.
You can see why some of us use it.

Sure there are risks any business venture has risk.
Understand the risk.
Implement risk mitigation.
Treat any investment in your financial future as a Business.
Seek and gain Sound advice from a Good accountant,and a Great Financial Adviser.--Interveiw them---find out how good they are---your financial future can be influenced by these people.
Stay in your COMFORT ZONE.


I hope this is helpful to those who had trouble seeing how this can be implemented.
Happy investing all!

 

[tech/a]

Re: shares vs property investment

Of course Mr Example uses his trading profits to increase the equity in his property/s.
this has the effect of increasing passive income decreasing his overall gearing abd exposure to risk.
While increasing his Ability to apply for further funds as opportunities arise in both ares of Equity and Servicability.

 

[tech/a]

Re: shares vs property investment

For those interested particularly on the Shares side of gearing for long term investment and or passive income,this thread is of interest.

http://lightning.he.net/cgi-bin/suid/~reefcap/ultimatebb.cgi?ubb=get_topic;f=13;t=000175;p=1

In particular comments by Thomas N40K

Thomas worked out of Tokyo for many years as the head of Risk for the Currency trading side of ABN AMRO if I remember correctly.
Smart guy.

 

[money tree]

Re: shares vs property investment

Your thinking purely about buying and holding and living off the dividends. My thoughts are more of an active investment style. You would in fact live of the capital gains as well as the dividends.

It's not too hard to return over 10%, and forget capital gains, thats gambling. Smart investors look for certain immediate and ongoing returns, not possible future ones.

Covered calls will add 5% to the existing div yield of say 5%, giving 10%.

or

buy instalment warrants yielding over 10%

or

buy instalment warrants yielding over 10% and write covered calls adding another 5% = 15%

or

use a bonus dividend strategy (holding for 3 divs in a 366 day period) will yield around 7.5%

or

instead of buying stock, just write puts. It's LOWER risk and higher return.

I have 50 of such strategies........

 

[tech/a]

Re: shares vs property investment

Tree.

If I'm going to invest an amount equal to freeholding of a house I,m not going to do it with options.
Sure its a way to invest/trade but not for me.
I'm comfortable with risking a known amount with the prospect of gaining an unknown amount.
After taking care of due diligence by way of testing and ofcourse proven trading results---just as I do when buying property.

Certaintly your ideas can be used effectively.
Id rather the opportunity of 12 x risk (In some proven cases 30 X risk)than the certainly of 1.15 times risk.

I'm more than happy being a DUMB investor!