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If you’re a property owner, investor or looking to get into the market The Rentvesting Podcast will help cut through the hype, look at the facts and draw on decades of experience to help you make smarter property decisions.

Each week Red & Co Director, and Award Winning Finance Broker Jayden Vecchio will unpack the facts behind the property market, explain what’s really going & where the market is heading.

Are you ready to make better property decisions and learn to live where you want, but invest where you can afford?

Jul 15, 2017

In this week's episode of the Rentvesting Podcast, we're going to talk about the battle of growth. There was an article in the AFR about the growing number of Millenials investing in the stock market. So we're looking at the pros and cons of property verse shares and which one is better, in both situations.

Louis is going to be fighting for shares and Jayden will fight for property, and we're going to battle it out.

 

Round 1:

Pros - Property, leveraged.

Being able to leverage property is a clear advantage for property. If you invest $100k in shares verse property, the return of property will be a lot higher. So the big pro with property is that it's leveraged because if you get 10% return on property you'll make more than 10% return on shares.

According to residential property returns, they sit at 9.9% compared to Australian shares at 8.7% - gross return.

 

Pros - Shares, higher yield, no outgoings.

With shares, you'll get higher income per yield, so after costs and outgoings, that $100k can still earn similar income to property overall.

With property, it depends on where you are buying your property, obviously, the higher the yield will affect it.

As with shares, it's the same. You can buy some mining stock that won't ever pay a dividend because they don't really have earnings but generally, there are mid-capped to large capped shares that pay fully franked dividends. Telstra at the moment is paying a yield of 7.5 excluding franking credits. That's from an income point of view, fairly sexy.

Shares have franking credits, this is where the company has paid tax and out of the profit they pay you a dividend when you receive that income you pay your marginal tax rate but you'll get some franking credits back and it works out as a tax effective income.

This is exclusive to Australian shares, on American and European you don't get franking credits. But you can invest in Malta.

So obviously pros and cons to both.

 

Pro - Property, no capital gains when living in it.

Another property pro is that if you're living in it, it's hugely lucrative tax-wise as there's no capital gains tax when you sell it.

 

Con - Shares, capital gains tax.

Whereas shares you the get the capital gains tax when you sell. You will be assessed as earning half of it, so if you're on the highest marginal tax rate you'll lose a big chunk of it to tax.

So if you make $100k off shares, you'll be assessed as earning $50k and so you'll pay about $25k, a big chunk.

While property, it's hugely beneficial to renovate and flip it, as long as it's your principal place of residence and it's not your primary income source, there's no capital gains tax which is a great instrument when selling your home.

 

Pro - Shares, diversification.

It's cost effective to get a lot of shares at a low price. You can buy 300 shares for $20 through an ETF. However also beware that shares can be expensive if you're buying small parcels due to paying brokerage.

But equally, property can be expensive to get into with stamp duty, conveyancing, real estate costs, maintenance etc. The rule of thumb on an investment property (it's not the same interstate) but generally I use 5% as entry cost for a property.

But then if you look at the long-term returns, property wins.

However, if you go 30 years, shares win hands down, while 10 - 20 years though property is better.

 

Pro - Property, historically good long-term returns.

The other pro is that people in Australia like having a physical asset, it's easier to understand and look at a property, as you can touch and feel it. Whereas shares you have to pull apart financial statements and look at their three-way reporting, which is more difficult.

 

Pro - Shares, there's no fuss involved.

They're set and forget and you have no tenants calling you trying to get things fixed.

 

What is market cap?

Market cap is the number of shares X shares price.

It's not a true idea of how big or successful a company is but it's how big overall it's market capitalisation is. In general, anything that has stable cash flow and is large with a stable business model doesn't go out of business.

Con - shares, it always feels like there are some people with an inside understanding and it can be a bit opaque you don't know what's going on all the time.

 

Pro and con - Shares, volatility.

Shares can be volatile, however being volatile as heck is your friend. When a property goes down in value, how will you take advantage of that? Instead, with shares, you can put money into the share market as this will compound your returns massively. While being volatile, that's the best thing about them.

 

Are there are more risks in shares compared to property?

No, there are just more perceived risks.

As some people might have invested in shares in 2007 or 2008 and now it's sitting at 38% less. It comes down to your individual behaviours. If you're watching the market every day, it can go up and down a lot and emotionally affects you.

But you can do a speculative approach with property too. If you wanted to buy a development in the middle of nowhere, and you're going in for a speculative commercial thing you can lose a tonne of money off development because there's leverage in development, so you could lose it.

Developments need a 20 - 30% return to factor in that and you can get pre-leases and pre-sales to assist that.

 

Pro - Shares, franking credits.

If you're in a tax-free environment, eventually you will be in an allocated pension, you get 100% of franking credits. Right now Telstra is paying a 10% income when you include franking credits.

 

 

Round 2:

Risks with shares?

This is part of the problem though. Shares are quick and easy you can take that franking credit and buy something. The risk with shares is the temptation is there because they're so liquid.

Pro - Shares, liquidity.

Property is a good measure of savings because you don't take the money out.

Con - Property, forced repayments.

You're forced to pay money each week.

Con - Shares, unforeseen drop.

Shares can go to zero quickly - my Anglo-American shares went from 11c to half on one cent.

You can't take anecdotal evidence though (Louis).

 

 

Final argument

Over a 20-year period, Australian residential property performed even better, posting an average annual return of 10.5 percent compared to the 8.7 percent gain in domestic shares.

Australian shares have had a really bad 10-year run because you look at 10 years ago was 2007, but if you look at 9 years ago, shares have returned close to around 16% per annum. One year's difference is a massive overall difference.

 

Pros in summary:

Property:

  • No capital gains tax.
  • Enforced savings to help you pay your mortgage.
  • Good long term returns.
  • Owning a physical asset is great.
  • The leverage and tax deductions can help.

 

Shares:

  • Great diversification at a low price.
  • The low price is a pro alone.
  • Volatility can be your friend.
  • There is no fuss involved, you can buy some blue chips and even the index and get those returns.
  • Franking credits, potentially higher incomes, historically returns might be similar but with property you can leverage it.
  • Shares you're just investing on your cash. If you look at the return on capital it's different.
  • Positive yields.

 

Cons in summary:

Property:

  • Is a lot of fuss to deal with.
  • High costs, transactions, lots of outgoings.
  • Initially expensive to get into but not necessarily ongoing.
  • The vacancy is difficult too.

 

Shares

  • Can be costly to get into if you're not buying big parcels.
  • Volatile.
  • Risky.

 

Shares and property can co-exist but obviously, they each have different reasons to invest in them.