Private property issue #6 - property vs shares

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As interest rates rise, investors are faced with higher costs. And more properties are becoming negatively geared.

For many investors, the rent doesn’t cover all the property’s expenses.

That means the investor has to cover the shortfall – topping up their property by $150 a week, for example.

Savvy investors are asking themselves – “if I have to top-up a property by $150 a week, is that really the best use of my money? … Would I be better off investing in shares?”

To answer this, take a look at the below graph. It compares the return of topping up an investment property (per week) to if the same amount was invested in shares.

This is based on the actual numbers for a $625,000 property we are currently recommending to investors.

The modelling shows that property gets a far higher return per week than if the same amount was put into shares.

How could this be the case?

Because in this model, you’re buying a property with 100% of the bank’s money. You’re not using a cash deposit.

So when the property increases in value, you get a significant return compared to the money you put in.

But, let’s say you did have $625,000 in cash to buy this property. The returns look very different:

In this case – where no bank debt is used – shares beat property.

You see, many people think there’s something special about property.

There is … but there’s not.

It’s the ability to borrow against property (leverage), which allows investors to make outsized returns.

Now, if you could borrow against watermelons, rent them out, and they tended to go up in value ... I’d suggest you invest in tropical fruit instead.

Take a look at the same graph as above, but this time where bank debt has been used to purchase the property:

Looking at the graphs, you might think, “if it’s such a no-brainer to invest in property … why wouldn’t everyone do it?”

One reason is that investing in property is a commitment.

If you put $150 into shares each week, you can stop putting in that money at any time.

You can also sell your shares easily and walk away with the money.

Whereas with property, you’ve made a commitment once you've bought it. If you stop topping up the property, the mortgage or the insurance might not get paid. It’s a long term commitment.

For some, this is a benefit. For some, this is a drawback.

So what’s the message?

#1. Yes, you can get life-changing returns through property. But, you need to be prepared for that long term commitment.

You need to be ready for the ups and the downs.

#2. When looking at shares vs property. The returns primarily depend on how you set up the property.

Taking on more debt makes the capital gains more meaningful but will likely mean you need to top up the property.