[Redwing]

housing statistics are rubbish . - Finance News - Australian Finance Message Boards

An interesting read above about housing statistics but then gets down to Shares and property with some interesting thoughts from various posters

have a read and let me know what you think (link is for page 3 where it gets into shares and property)

here's an interesting post from another page located on the thread;

Almost all of us who invest in property are relying on capital gains to make up for the short-fall we have each month when the mortgage payment comes due, which the rent doesn't cover, let alone maintanence, rates, body corp, agents fees, renovations...

That said, if you buy a property for $200k, and get a weekly rent of $200, and assuming an interest rate of 7.25%, then you're looking at about $14,500 p.a. in interest, plus around $1400 in rates, $1000 in body corporate, $300 in landlords insurance and $200 in agents fees. Let's say you do a renovation once every 10 years for around about 10% (20k) every 10 years, I think more than that is foolish and doesn't really count as investment (the statistics of 20-25% are probably heavily biased by people renvoating their own residences).

Anyway, all of that makes a shortfall of about $9000 p.a. This means you'll need a capital gain of $9000/$200,000 = 4.5% in the first year to realize a profit. Long term growth in property is around 7%, which has a strong economic foundation given that inflation is 3%, population growth is 2% and real growth in GDP per capita is 2%. So supply and demand dictates an annual rise of 7% (demand increases by 7%, supply more or less fixed).

Let's say you only realize a growth of 4.5% in the first year. Property is then worth $209k. In the second year you now only need a growth of 4.3% to make a profit. Also, keep in mind that if the property went up by 4.5%, then the rent probably did aswell. Taking this into account, means that you really only need a growth of 4.1%

I agree, the next few years are going to be interesting for property, especially with the new tax laws. I think a 5% rental yield is fair, and dividing the annual rent by 5% is probably a good starting point for determining the fair price of a property. Where do I get this magic number?

Population growth = 2%
GDP per capita growth = 2%
Inflation = 3%

Leads to a property growth of 7% p.a. (capital gain)

Typical market returns for shares are around 11%. So a 5% rental yield, plus 7% capitals gains, minus 1% overhead gives an equivalent yield of 11% out of property.

Given that money should flow to the investments of maximum return you would expect that supply and demand across investments should equalize the market, leading to an equal return for property and shares. This is why I think it's fair to expect an equal return out of property and shares.

[Sim]

I think one of the key phenomenons that many people dismiss during a comparison of shares and property is that both are cyclical - and often these cycles are opposing (shares and up when property is down and vice versa).

There is always new money entering the investment world that needs to find a home - and as mentioned in the post above, it will tend to gravitate towards the market segment which is currently performing well.

When interest rates are low, people tend to upgrade their PPORs (renovating and/or trading up) and this starts prices rising - as prices rise, more people tend to start investing.

As more people buy property, they tend to pull money from other investments such as shares to fund it. This is, of course, a fairly small percentage of the overall sharemarket - so it doesn't have a huge impact, but there is a bit of a downward pressure.

The good thing about the sharemarket is that there is a very large pool of new money each year from compulsory superannuation which needs to be invested - and the main place that goes is into the sharemarket. This keeps the sharemarket pretty bouyant.

As interest rates start to rise and housing markets start to cool down a bit - people will turn their attention to other investments, and so the sharemarket will start to get a lot of other new money. If property has done really well - people may even sell out to realise a profit, and some of that money may well make its way to the sharemarket too, if it is doing well.

If you are observant and watch the interaction between the various markets, you can see where the money is going, and profit from it.

There are times where I think real estate is by far the best investment, and other times where I think shares are the best investment - so the solution is to invest in both and get the best of both worlds !!!!!

Indeed, the capital growth in my real estate portfolio is currently funding the acquisition of shares, which are generating cashflow which I will use to purchase more real estate, which produces capital growth for more shares and so on ...

As for the posts about costs and such - they are correct in that there are many costs in holding real estate that you don't have with shares, and this makes the potential returns look more attractive for shares ... but the fact is that you can buy property with a much smaller capital outlay than you generally can with shares - and that makes all the difference in a growth market ... leverage is the key.

[Mark Laszczuk]

Originally Posted by Sim

There are times where I think real estate is by far the best investment, and other times where I think shares are the best investment - so the solution is to invest in both and get the best of both worlds !!!!!

This statement sums up perfectly why I will never understand why so many investors are exclusively into property or exclusively into shares.

Mark

[Redwing]

I found this post interesting on that thread as well regarding Shares and Gearing..

Gerry,

There are one or two factors affecting this.

-By dumb luck I was holding CBA in the late 90s, the growth then was terrific,in the 30%s.
-I used equity built up by increasing share prices to secure further purchaases on margin.
-I have not always spent the excess dividend, in some cases I have used it to pay the margin interest. I have not done this in about 5 years but did earlier.

There's no guarantee the growth I got earlier would happen again, but even using current variables you could do it, would need to manage margin and price fluctuations carefully.

Assume 12% growth, 7% dividend (as I beleive available on CBA at the moment) , Interest expense of 8%. Start out buying 100K with 75K on margin (i do not recommend this, although it's about what I did)..I'm assuming here that dividends have been reinvested..See the following table. You can see how you could get to about 1M net and lowish gearing in just over 10 years.

Portfolio Purchase Loan Net Gearing
1 100,000 100,000 75,000 25,000 75%
2 119,000 81,000 38,000 68%
3 141,610 87,480 54,130 62%
4 168,516 94,478 74,038 56%
5 400,534 200,000 302,037 98,497 75%
6 476,635 326,200 150,436 68%
7 567,196 352,296 214,901 62%
8 1,154,963 480,000 860,479 294,484 75%
9 1,374,406 929,318 445,089 68%
10 1,635,544 1,003,663 631,881 61%
11 1,946,297 1,083,956 862,341 56%
12 2,316,093 1,170,672 1,145,421 51%
13 2,756,151 1,264,326 1,491,825 46%

Good luck

whipped out my calculator and fired up my brain. It appears the 'Loan' column is reversed for some years. Ahhh, now I understand it better!

First buy 100K worth, $75 on margin;

Portfolio Purchase Loan Net Gearing
1 100,000 100,000 75,000 25,000 75%
2 119,000 81,000 74,000 68%
3 141,610 87,480 54,130 62%
4 168,516 94,478 38,038 56%

On the fifth year, you're saying to purchase $280K more on margin;

5 400,534 200,000 302,037 98,497 75%
6 476,635 326,200 214,901 68%
7 567,196 352,296 150,436 62%

On the 8th year, purchase $800K more on margin!? (omg);

8 1,154,963 480,000 860,479 294,484 75%
9 1,374,406 929,318 445,089 68%
10 1,635,544 1,003,663 631,881 61%
11 1,946,297 1,083,956 862,341 56%
12 2,316,093 1,170,672 1,145,421 51%
13 2,756,151 1,264,326 1,491,825 46%

I'd be happy enough to stop on the 7th year and not have to put $800K on margin. Ouch!

Stopping at year 7, and allowing the margin loan to get paid out would also result in a $1m portfolio on or after 10 years :-)

Also, instead of doing this just on CBA, it could be safer to diversify among 5 stocks which offer the same div and growth prospects (although I'm not sure which stocks they'd be)...

I like it :-)

[Redwing]

Had to drop out there as guests dropped in

I found the above strategy interesting; with his strategy of regular gearing (every five years a Margin Loan top-up)to increase the total portfolio of CBA shares and net worth, starting with $20k in 1996 and achieving a net worth of over $1M by 2006 by selecting a quality share and regularly investing/gearing into it.....imagine how he would've gone if he purchased CBA when it first floated; from memory it was around $3.50 or so wasn't it?

he's now sitting on a dividend income of around $100k p/annum at an age of 38 (good on him for sticking with his strategy).

maybe something applicable to a quality managed fund or two ;o)

[Redwing]

Just did a search on Growth and Dividend, Top Shares over 5yrs showed:

PBD Port Bouvard Limited 27.5% 18.00%
CIY City Pacific Limited 92.2% 10.07%
RPG Raptis Group Limited 25.5% 9.80%
TLT Tourism & Leisure Trust 19.3% 8.53%
FLK Folkestone Limited 24.2% 8.33%
CMI CMI Limited 17.1% 7.89%
MPH Magna Pacific (Holdings) Limited 17.6% 7.83%
TMO Tomato Technologies Ltd 17.5% 7.69%
DVN Devine Limited 16.1% 7.69%
SFC Schaffer Corporation Limited 26.4% 7.16%

[Redwing]

This from the same thread and some interesting observations within; certainly had me thinking about the effect of Time/Rate/Return and the Power of Compounding

Of course this is applied to one share only in this example ..

See attached spreadsheet as well

On the First Year buy 100K worth, $75 on margin;
On the Fifth year, you're looking to purchase $280K more on margin;
On the Eighth year, purchase $800K more on margin!

The other thing to note is compounding and time, and not to underestimate it.
Assume you borrow $100 at 8% and invest it in something paying 7% dividend.

But assume the company paying the dividend is growing its profits by 10%pa.

In the first year, you would get $7 div, and pay 8% interest, you would be down $1
in cash terms, but would have growth in your share price of $10 for a net $9 return.

In the second year, assuming you paid your interest last year, your dividend would
be 7%x110%= $7.70.
Interest still -$8 share growth 10% x $110 = $11.. Net cash out $0.30, net return $10.70

In the 3rd year you are cash positive $0.47, net return $11.47
In the 5th year cash in $2.24, total return $15.55
10th year cash in $8.50, total return $29.94
15th year cash in $18.58, total return $53.10
20th year cash in $34.81, total return $90.40.

All this for zero outlay.

Now assume instead of $100 you borrowed $100K. After 5 years it's generating $15,550
a year for you.

I realise this assumes 100% lending, but add this to the $50K of your own money you
invested and *bang* , you're doing very well. If you’re lucky or smart enough to buy shares
cheaply the return is even higher.

This kind of growth is available. I realise this excludes inflation, but you will find these
numbers kick other investments in the butt.
You will do even better to buy more as you go along as your returns allow you.

Of course you know the risks involved, you have to understand and manage them

[tropic]

Few things I like to mention:
10 years ago margin lending would have been 11-13%? Defintely not 8%. Even now most are higher than that.
7% dividend maybe when you used to pay 10% IR not now, unless you count the franking.
Will you sleep well at night if you invest like that?

Fantastic result though!

[petros]

I would disagree with the calculation that the sum of population growth, GDP growth and inflation will give you a forecast of how much property values with grow. I struggled for years with systems of econometric equations forecasting growth in rents and values and I tell you getting a reliable forecast of how much values will be growing just in the the next three years is way more complicated than the simplistic approach described. Furthermore the assumption that supply is fixed is quite questionable unless the calculations refer to an area where development is prohibited by law or there is no land available for development. In fact studies have shown that within a 5-8 year horizon supply not only is not static but it overreacts to increases in rents and values.


Petros
Profitable Property Investing in Perspective