Diversifying with Property

[nokiacasio]

Suppose I had $200,000 lying around. With that money I could buy one reasonable sized house or I could buy shares with it. If I invest in shares, I could diversify easily, e.g. I could buy shares from five different companies. However, with that sort of money I could only buy one house. By buying one house, I am exposing myself to a lot more risk because of lack of diversification? Does this prove stocks are better than property?

 

[Falchoon]

Suppose I had $200,000 lying around. With that money I could buy one reasonable sized house or I could buy shares with it. If I invest in shares, I could diversify easily, e.g. I could buy shares from five different companies. However, with that sort of money I could only buy one house. By buying one house, I am exposing myself to a lot more risk because of lack of diversification? Does this prove stocks are better than property?

or another example*

$50000 deposit, 4 properties, for $200000 each,

$150000 loan on each costs roughly $1000 p.m

Rent them out for $1000 p.m

*not exact figures, but you get the idea

 

[nokiacasio]

So borrow to invest to diversify. Couldn't you do the same for shares? Most banks provide margin loans. My point is that unless you're investing in mutual funds that buy property, buying actual houses allows less diversification for a given amount of cash in your hand.

Have I got this right?

 

[HighettBomber]

My point is that unless you're investing in mutual funds that buy property, buying actual houses allows less diversification for a given amount of cash in your hand.

If diversification is your major aim, then of course buying mutual funds or shares is better. Which is the better asset class for you is largely a matter of personal circumstance. Have you heard the term deworsifacation by the way?

 

[DIG]

So borrow to invest to diversify. Couldn't you do the same for shares? Most banks provide margin loans. My point is that unless you're investing in mutual funds that buy property, buying actual houses allows less diversification for a given amount of cash in your hand.

Have I got this right?

I'm about to take out an equity loan against my house to invest in shares. This amount will be a separate loan to the mortgage which i'll pay interest only so deductable against income. Already have a small portfolio which i'll sell down.

House has obv gone up in value, and have made inroads into mortgage so can do this, valuer coming out today for bank.

Will buy a few mid-large stocks direct, plus via managed funds (maybe 25%) get into global property, emerging markets and small caps, the latter two more likely to either go nuts or fail completely. The Mrs gets some m.fund fee discounts too thru her bank.

Was originally gonna do via margin loan, but was much more sense for me this way given lower interest rate than m.loan rate. If interest rates rise substantially i'd have to exit and refocus on mortgage. Not overextending on this either btw.

Anyway, probly different to your situation but yeah i've gone for shares instead of property, time will tell which was better - but figured am already in property with the house at least.

 

[bunsen burner]

I am exposing myself to a lot more risk because of lack of diversification?

Risk of what? Losing your money? Making a loss?

Very slim. Property long term just doesn't go backwards. Given the high entry and exit costs, property is rarely a short term strategy and therefore before going in should be equipped to ride out a cycle and therefore make a profit. And hence low risk.

Diversification as a risk strategy is more suited to shares. Why? Because some companies do go bust.

 

[chooke]

Suppose I had $200,000 lying around. With that money I could buy one reasonable sized house or I could buy shares with it. If I invest in shares, I could diversify easily, e.g. I could buy shares from five different companies. However, with that sort of money I could only buy one house. By buying one house, I am exposing myself to a lot more risk because of lack of diversification? Does this prove stocks are better than property?

You could always diversify into property through unlisted unit trusts such as REITs. Because they are unitised they work like shares in that they you can bus and sell as many units as you like and diversify your portfolio properly - inclding within property by having units in commercial buildings.

I and many people I know have done a lot better in the property asset class through this approach rather than direct investment.

 

[nokiacasio]

Which is the better asset class for you is largely a matter of personal circumstance. Have you heard the term deworsifacation by the way?

No, but I have a feeling I know what it means. Too much diversification can dilute investment returns. By taking too little risk, you get lower returns. But statistics on Australia shows that shares and property give approximately the same rate of return, about 12 per cent. If two investment options give the same rate of return but one is less volatile than the other, then the less volatile one dominates. We can unambiguously say it's a better investment.

Risk of what? Losing your money? Making a loss?

Very slim. Property long term just doesn't go backwards. Given the high entry and exit costs, property is rarely a short term strategy and therefore before going in should be equipped to ride out a cycle and therefore make a profit. And hence low risk.

I'm no expert here, but when property prices are shown to increase in the long run, usually they take the average of many different properties thereby smoothing out random fluctuations. It's like how the ASX200 index is smoother than the share price of one particular company e.g. BHP. If I have $200,000 and buy one house, because I have not geographically diversified, I am guessing I will be exposed to more risk from price drops than if I someone purchased a fraction of many different houses in many areas.

You could always diversify into property through unlisted unit trusts such as REITs. Because they are unitised they work like shares in that they you can bus and sell as many units as you like and diversify your portfolio properly - inclding within property by having units in commercial buildings.

I and many people I know have done a lot better in the property asset class through this approach rather than direct investment.

Yes, I have heard of this and I did mention mutual funds that invest primarily in property. Can I ask whether you think there is any performance difference betwen an unlisted property trust and a listed property trust?

 

[HighettBomber]

But statistics on Australia shows that shares and property give approximately the same rate of return, about 12 per cent. If two investment options give the same rate of return but one is less volatile than the other, then the less volatile one dominates. We can unambiguously say it's a better investment.

This is true. However I don't think median prices, which are used to measure the performance of property gives a very accurate picture of the market. Property in certain areas has a long history of above average growth while others have a long history the other way. There are fundamental reasons for this which differ between suburbs and States, but they are easy to identify. These fundamentals eg close to the beach, city etc. which mean there is constantly more demand than supply of properties in those areas, remain the same. Consequently, these areas can be expected to continue to outperform. In contrast, there are a lot more things that effect share price so past performance is a less accurate predictor of future performance.

Even, if you don't aggree to me on this, and want to use average overall growth as your comparison, direct property still has advantages. You can borrow more at lower interest rates against property, there are no margin calls, and you can assist growth of directly owned property through renovation, development etc.

Having said this, I'm not against shares and managed funds. There are definate advantages to these investment classes also. I just like property more.