Beginner, shares or rental house?

hi
i'm a beginner and still learning about how things work. i know that shares are generally better in returns than real estate, but i'm unclear.

generally speaking, if my sister and i purchase a unit and rent it out to help pay it off (250k purchase price, 130k deposit, 120k loan), won't i get a much better return than i would with shares. say i had 30k and she had 100k (total 130k deposit), and it gets paid off by us and the renters (we have average wages), and in 5 years time it also increases in value. we then sell it off for more than the purchase price. i get my (smaller) percentage (we use a lawyer to make it happen this way). surely my return would be much better than if i put 30k into shares. but aren't shares supposed to be better for returns? and even if it was just me buying the unit and i had eg 100k to start out with, the renters would help pay it off and the house might go up in value, so won't i still get a better return here than if i had 100k put into shares. just seeking to understand how it works and why shares are supposed to be better than real estate for investments (generally speaking of course).
does real estate in both these examples provide a better return (assuming normal results are obtained)? The fact that real estate may go up in value, AND renters help pay it off, seems to make it seem better than shares for returns. But shares are supposed to be better right for returns? I'm not getting it fully ...



joe

grah33 said:

hi
i'm a beginner and still learning about how things work. i know that shares are generally better in returns than real estate, but i'm unclear.

generally speaking, if my sister and i purchase a unit and rent it out to help pay it off (250k purchase price, 130k deposit, 120k loan), won't i get a much better return than i would with shares. say i had 30k and she had 100k (total 130k deposit), and it gets paid off by us and the renters (we have average wages), and in 5 years time it also increases in value. we then sell it off for more than the purchase price. i get my (smaller) percentage (we use a lawyer to make it happen this way). surely my return would be much better than if i put 30k into shares. but aren't shares supposed to be better for returns? and even if it was just me buying the unit and i had eg 100k to start out with, the renters would help pay it off and the house might go up in value, so won't i still get a better return here than if i had 100k put into shares. just seeking to understand how it works and why shares are supposed to be better than real estate for investments (generally speaking of course).
does real estate in both these examples provide a better return (assuming normal results are obtained)? The fact that real estate may go up in value, AND renters help pay it off, seems to make it seem better than shares for returns. But shares are supposed to be better right for returns? I'm not getting it fully ...



joe

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Hey bud,

I think where you are confusing yourself is how you are looking at things.
Best way to simplify, you are considering passive income and capital gains with the house (ie rent = passive income and rise in value = capital gain).

You can get that with stocks too. A dividend is your passive income (not as regular as rent) and capital gain would be your share price going up.

The one key difference is how liquid the investments are. Real estate takes time to get in and out. It literally takes seconds to buy stocks and sell them.

I prefer stocks as there is more flexibility and I'm not having to look long term for capital gains.

It all comes down to what works for you. But don't believe if someone says real estate doubles every seven years.... Maybe in the past but not now.

An example of the power of stocks, I bought at the market open on Friday and was up on the stock by 22% by the end of the day. Will that happen with a house? Unlikely unless you find oil under it! In saying that, my position size was small so I can move out when I choose and not locked in trying to exit a large position.

Perhaps read rich dad poor dad by Robert t kiyosaki

Hello grah33

I don't think it's really possible to generalise with saying property will always do better than shares or vice versa.
Asset classes tend to be cyclical, ie there will be times when property will show strong capital appreciation and times when it will fall in value. Same with shares.

Example would be Sydney and Melbourne over the last couple of years having shown good gains, at least close to the CBD (not sure whether it applies in the outer suburbs?). At the same time, many regional areas which fell around 30% during the GFC, are still languishing at that level.

Then, if you're planning to rent a unit out, you'll need to do the calculations to see what yield you get after expenses, viz if you get $300 p.w. in rent, then deduct rates, insurances, water, maintenance, tax etc as well as your mortgage repayments, then with what is left consider that as a percentage of your investment price. (I'm not taking any consideration here of negative gearing because it's so long since I've done it I can't make any informed comment on that.)

I don't know what rents are like where you live, but I do the calculation every now and again here (regional coastal Qld.) and the net yield would be as little as 3%. Combined with no capital gains for some years now and no reason to think that will change, I'd prefer the money in the bank where there is no hassle of difficult tenants, having to arrange plumbers in the middle of the night etc.

The time when property is a great investment is when there is high inflation such as occurred in the late 70s and 80s. It was possible then to double your investment plus bring in high rents in a pretty short time.
Much more difficult now imo.

With shares, again you can't absolutely generalise. Even when the XAO (All Ordinaries) is down, maybe just because of some event globally, there will be a few shares that won't follow that trend. Ditto on an up move.
But there are plenty of sound companies with a solid track record of increasing profits, increasing dividends, low debt etc, that over the long term are fairly stable. That said, they all went down with the overall around 50% fall during the GFC.

Above I mentioned 'yield' on property investment. With shares this comes in the form of a dividend, plus franking credits. For the latter, the company has already paid tax on that proportion of their profit which comes to you as a dividend so you can claim that back from the Tax Office.
Currently, if we take most of the banks as an example, their dividend yield would be around 5% or a bit more, and you could add very approx about 2.5% for the franking credit = grossed up yield of over 7%.

Not all companies pay a dividend and not all dividends are 100% franked.

Liquidity has also been mentioned above. If you might need the money out for any reason, or if you just decide to sell some shares in order to buy something different, then you can do it immediately. Far more complicated to sell property with leases, agents etc to deal with.

For background on how the sharemarket works, the Australian Stock Exchange has an Education section in the form of modules which you can work through, then self test at the end of each one.
www.asx.com.au

Hope this helps a bit.

This is something that I have thought about a lot recently. I've currently saved almost 50k at age 23, dont really have a lot of overheads and could probably look at buying a small 300k unit to try and rent at the 1:1 rule (i.e 300pw rent). I could easily afford the repayments and even if property where to only increase at inflation @ 2-3% I would be returning higher than shares because of the leverage. Add in rent and I'm close to being positively geared in a few years. Been looking at NSW areas outside of Sydney, Newcastle, Wollongong even Tamworth. All ok yields with possibility of capital gain.

The downside is the work and costs involved in going through the entire journey - getting the loan, choosing the property, settling, getting a tenant/property manager, keeping an eye on it, being tied down to work at a young age because of repayments etc vs just conservatively leveraging high yield stocks.

PinguPingu said:

This is something that I have thought about a lot recently. I've currently saved almost 50k at age 23, dont really have a lot of overheads and could probably look at buying a small 300k unit to try and rent at the 1:1 rule (i.e 300pw rent). I could easily afford the repayments and even if property where to only increase at inflation @ 2-3% I would be returning higher than shares because of the leverage. Add in rent and I'm close to being positively geared in a few years. Been looking at NSW areas outside of Sydney, Newcastle, Wollongong even Tamworth. All ok yields with possibility of capital gain.

The downside is the work and costs involved in going through the entire journey - getting the loan, choosing the property, settling, getting a tenant/property manager, keeping an eye on it, being tied down to work at a young age because of repayments etc vs just conservatively leveraging high yield stocks.

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If you can positively gear it you won't be tied down to work...

PinguPingu said:

I would be returning higher than shares because of the leverage. Add in rent and I'm close to being positively geared in a few years.... vs just conservatively leveraging high yield stocks.

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i take it ( not sure) that this person could either invest 50k into a 300k rental and get little rental returns (say 3%), or they could invest all the 50k (same amount for true comparison) into shares and get a higher return than from the rental (not guranteed of course). am i getting it? above quote suggests otherwise.

also, if at best dividends on 50k are 7%,means 3.5k/year=67$/week (much less than 300$/week). but it's the process of wisely trading (there is risk of course) and the growth in share value that should make the 50 k of shares grow faster and it will be better than the rental option. am i getting it? this is assuming things go ordinarily of course.

what of house doubling in value. that's what my brother said (after 10 years). his house went up a lot some time ago and he profited much. we are about 20 km from melbourne (part of melbourne). i take it that we can't at all assume this will keep happening in melbourne. that property has starting rising again since 2012 but we can't assume it will follow the trend of some time ago.

thanks again everyone. there's lots of terms to learn but it's going in

Hi Beginner. There are a few points to consider before you take the step to invest. Whatever the investment type first do the maths forget the emotion.
Q.1. What is your effective tax rate [etr] A. Expenses are not tax deductible $ for $. you only get back based on your tax rate. ie if you are on [say] 15% etr then a $100 expense will only give you a $15 tax deduction. Talk to an accountant on how tax works. Negative gearing into property is a bit of a fools dreams. I have seen many gain nothing after 10 years.
Q2. Personal liquidity. A. If the water system blows up do you have cash to pay for a new one?
Q 2a What are the holding costs other than loan/mortgage. A. Rates, insurance, agents fees, tax and property maintenance.
Q3. What is average rate of net return? A <4% net. Some TD's earn better.
Q4. How long can you pay the loan repayment if the tenant leaves? A. you need to hold at least 1 months rent in the bank.
Do the maths first.The only winners when you gear into property are banks, local council, insurance company and agents. As the market rises you can sell part of your shares and take a profit...you can't sell the bathroom.
Good luck.

thank you all for your posts. i've read them several times, churned over it, and benefited. I'm not completely certain yet, but i don't think i'll be going for a rental house - it's not for me.

grah33 said:

thank you all for your posts. i've read them several times, churned over it, and benefited. I'm not completely certain yet, but i don't think i'll be going for a rental house - it's not for me.

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Just one thing to think about first , shares are very liquid assets . As we have seen before and it will happen again , something startles the market sets of panic and you end up with a lot less worth. A house on a block of land will always be there , unless some unforseen unlikely event occurs. I believe there is nothing like bricks and mortar.
Some world crisis or new war somewhere in the share market will bring you unstuck if you are a beginner . It's the age of information , and therefore bad news travels fast. So just beware shares are only bits of data and paper and can disappear overnight. Also please stay away from any one advising you to use your monies to gear up or borrow more to invest in the share market. See the Storm Financial thread on this site and you will see what can happen when it all goes wrong when borrowing for shares. It's only my opinion and I hold property investments and shares , but mainly put most of my monies into property. At least I can drive past and see it .