Is the Great Australian Dream Worthless?

[nokiacasio]

A friend of mine told me that if I had some leftover cash, say $20,000, I should invest in property. I should put down a deposit of about $20,000 and take out a mortgage to buy property that is about $200,000 or so. He claims that property prices in the long run rises by about 10 per cent, so I would make more money in the long run.

But maybe not. Assume that in the long run you get 10 per cent, inflation will erode about 3 per cent of that, so the real return you get from property is 7 per cent. Most home loans require you to repay interest at 7 per cent, so any gains you make from property investment, it seems, are completely eroded by both inflation and interest replayments.

Is this right or have I made a serious error here?

 

[Chief]

You're talking like you're buying one property and keeping it forever. You buy it when it is a steal and sell it after a jump. In theory. Or, keep it after the jump and refinance, borrowing against increased value to buy your next property and so on...

 

[Falchoon]

A friend of mine told me that if I had some leftover cash, say $20,000, I should invest in property. I should put down a deposit of about $20,000 and take out a mortgage to buy property that is about $200,000 or so. He claims that property prices in the long run rises by about 10 per cent, so I would make more money in the long run.

But maybe not. Assume that in the long run you get 10 per cent, inflation will erode about 3 per cent of that, so the real return you get from property is 7 per cent. Most home loans require you to repay interest at 7 per cent, so any gains you make from property investment, it seems, are completely eroded by both inflation and interest replayments.

Is this right or have I made a serious error here?

you will either rent it out, or live in it and save rent, or possibly even both, factor that in too.

 

[Scratcher Gillespie]

Remember that you are getting a return on the $20,000 of your own money that you are putting in. Ie: property goes up by 10%, you have in effect made a 100% return less interest (after rent) costs, maintenence etc.

 

[bunsen burner]

Is this right or have I made a serious error here?

Serious error. With real estate (particularly long term investments, ie at least 1 cycle) - always do the maths.

It's like what Scratcher says. It's all about leveraging.

The Rule of 70 states that what ever your interest rate is, divide it into 70 and that's roughly how many years it takes your investment to double.

So at 10% we can expect a property to double in 7 years. So if we assume you hld it for 7 years:

base outlay = $20,000
interst outlay = 180k x 8% x 7 years = $88,200
rent recieved = $160pw x 52 weeks x 7 years = $58,240 = $58,240 - 35% expenes (maintenace, real estate fees, insurance, rates etc) = $37, 856

Net expense over 7 years = $20,000 + 88,200 - 37,856 = $70,344

So after 7 years you shell out $70k
Property is worth $400k
Loan is still 180K
Equity is 220K

So from $70K you make $220k. That's a profit of $150k in 7 years. Much higher than the inflation rate.

Leveraging + appreciating assets (property or shares) + compounding = growth

 

[i_hate_scams]

from a practically point of view, investment property not worth the stress,

shares more liquid, and i tell you, you have worries with tenants recking your place, bloody mortage holding you by the balls, it is not worth the stress unless you're living in it, you have no quick access to your money, and you feel real poor!

the difficulty in finding decent rentals also means that investors are not investing in properties as they are not worth the value, given the bullish share market.

 

[bunsen burner]

from a practically point of view, investment property not worth the stress,

Subjective. Much more trouble than shares but many can handle it quite easily.

shares more liquid,

This is the main difference between property and shares. Surprisingly you are one of the first here to mention it. Most just come flying in and say crap like "shares alway get better growth than property".

bloody mortage holding you by the balls,

This is where you have it wrong. If you think this then you don't have even a basic understanding of investment concepts. Read my previous post - the penny may drop.

it is not worth the stress unless you're living in it, you have no quick access to your money, and you feel real poor!

You sound like an investor who has failed.

the difficulty in finding decent rentals also means that investors are not investing in properties as they are not worth the value,

Talking out of your arse here.

I always wonder what possesses people to come on this board and spout their views when they know very little?

given the bullish share market.

News to me. Pretty sure I read there was a big drop in the last few days.

 

[HighettBomber]

There is a lot of garbage peddled by people with a vested interest in the share market, one of the biggest is the relative returns of each. As a start have a look at the make up of the top 100 companies in the ASX now as compared to 10 years ago, it is quite different. Share market returns are based on an index of companies eg the ASX top 100, but if a company does particulalry badly then it is just dropped off the index and replaced, they no longer track its returns. In contrast median prices of property include all properties, they don't leave off the stragglers. Relative returns also do not take into account the cheaper finance available for property or the higher leverage possible, not does it take into account taxation benefits and the fact that you can add value to property to increase returns.

I will admit my bias as I make my living from the property industry, but i will ask you all a question: How many millionaires do you know who have made their fortune out of property and how many who have made it through the share market? Personally I know a heap that have acheived financial freedom throughy property and 2 who have done it through the sharemarket. I think this is the best pointer as to which asset class is the more effective wealth creator.

 

[bunsen burner]

given the bullish share market.

Bullish?

http://www.smh.com.au/news/business/billions-lost-as-markets-tumble/2007/08/01/1185647978769.html

I say "fat hairy gay dude" market.

 

[Deej]

in all honesty, i have absolutely zero respect for wealth generated from owning investment properties.

 

[HighettBomber]

in all honesty, i have absolutely zero respect for wealth generated from owning investment properties.

Why?

 

[Falchoon]

Why?

because he works hard for the money and resents passive income?

the easiest way to make money is with money

wealth makes wealth

 

[HighettBomber]

wealth makes wealth

Every day people with money lose it and people without money become rich. It's a cop out to say that you need money to make money, it just makes it easier. If someone with money has attained it without breaking the law or taking advantage of other people, I can't see why anyone would begrudge them anything. Would you prefer to live in North Korea? Thats your alternative.

 

[bunsen burner]

in all honesty, i have absolutely zero respect for wealth generated from owning investment properties.

Who owns the places people rent? Oh I see, you want people to own them but not make money out of them?

Housing must be supplied to people who want to rent. There has to be ancentive for people to invest. That comes in the form of tax incentives and growth. On the downside this boosts housing unaffordability. But what can you do?

And let me guess - you respect people who invest in shares? Ever wondered why bank fees are so high and interest so low?

 

[footylover18]

Serious error. With real estate (particularly long term investments, ie at least 1 cycle) - always do the maths.

It's like what Scratcher says. It's all about leveraging.

The Rule of 70 states that what ever your interest rate is, divide it into 70 and that's roughly how many years it takes your investment to double.

So at 10% we can expect a property to double in 7 years. So if we assume you hld it for 7 years:

base outlay = $20,000
interst outlay = 180k x 8% x 7 years = $88,200
rent recieved = $160pw x 52 weeks x 7 years = $58,240 = $58,240 - 35% expenes (maintenace, real estate fees, insurance, rates etc) = $37, 856

Net expense over 7 years = $20,000 + 88,200 - 37,856 = $70,344

So after 7 years you shell out $70k
Property is worth $400k
Loan is still 180K
Equity is 220K

So from $70K you make $220k. That's a profit of $150k in 7 years. Much higher than the inflation rate.

Leveraging + appreciating assets (property or shares) + compounding = growth

You look like you know what you're talking about.

Few questions:

1. What do you mean by "leveraging", you mean the equity gained from your investment?

2. In your example, you have made an on paper profit of 150k....people then suggest to use that equity ganied to purchase another property and continue till you have a few. I dont understand this logic, all you are really doing is essentially increasing the amount of debt you are in. Isn't this a recipe for disaster? Sure if the property market continues to boom as it has been doing then you will make a killing if you choose the right properties and then eventually sell, however there is no gaurantee that this will happen and if you are wrong then you stuck with a massive massive amount of debt.

3. What is your opiion on the property market? It has been so strong for a number of yrs now. Given the business cycle when do you expect it to slow down? Isnt the threat of rising interest rates and post boom "recession" a possiblity, similar to what happened in the early 90s following the booming 80s?

 

[chooke]

Personally I know a heap that have acheived financial freedom throughy property and 2 who have done it through the sharemarket. I think this is the best pointer as to which asset class is the more effective wealth creator.

You obviously have no idea. Most people generate wealth from businesses or ideas. Shares as an investment class always outperforms property over a 7 to 10 year period, show me a period where this is not the case. True wealthy people tend to own a lot of property which increase in value, just like classic cars, paintings etc but generally that is not where the wealth has been primarily generated.

 

[bunsen burner]

You look like you know what you're talking about.

Few questions:

1. What do you mean by "leveraging", you mean the equity gained from your investment?

Leverage is the ratio of your debt over your gross worth.

So say you have 5 investment properties worth a total of $2m and your debt between all these is $1.2m then you're leveraged at 60%. The higher you're leveraged, the higher your risk.

Leveraging refers to how much you can leverage or borrow compared to your outlay/deposit.

Generally people put down 10% or 20% as a deposit. If you put down $50k on a $250k unit then you're everaged at 80%. Why this is important is because you can use the lender's money to create profit. That's why leveraging is so so important.

You've heard people say "you need money to make money"? Well that's where you get the money from - a lender such as one of the banks or Wizard or RAMS. $250k is going to make you more money than $50k.

2. In your example, you have made an on paper profit of 150k

Also a real profit. Sell the property for $400k, pay 10k to the real estate who sells it, pay back the loan and you are left with $210k. You then have to pay CGT (400k-10k(selling fees)-200k(buy 0utlay)=190k). You've had it over 1 year so you get 50% discount so you only pay tax on 95k. Let's say that is 35k, you're now down to $175k. In your pocket.

Of course 70 of this was shelled out in intial outlay and expenses over those 7 years.

....people then suggest to use that equity ganied to purchase another property and continue till you have a few. I dont understand this logic, all you are really doing is essentially increasing the amount of debt you are in. Isn't this a recipe for disaster?

All you're doing is repeating the process - catch is you have to make sure you can afford to pay the mortgages. In that example in costed about $7 pa to keep it. By the end of the 7 years with rent increases it's likely to only cort 3 or 4k. But by another one and all up you may need 12k to service 2 properties.

Al depends on your income and how much you can afford. The higher your income the more you can leverage and the more you can make.

Sure if the property market continues to boom as it has been doing then you will make a killing if you choose the right properties and then eventually sell, however there is no gaurantee that this will happen and if you are wrong then you stuck with a massive massive amount of debt.

Real estate always rises long term in big cities. You just have to hold you nerve and not sell at least until you get to one boom. If you budget right and can afford to service the property and loan then you don't worry when the market drops. You just wait for the cycle.

3. What is your opiion on the property market? It has been so strong for a number of yrs now. Given the business cycle when do you expect it to slow down? Isnt the threat of rising interest rates and post boom "recession" a possiblity, similar to what happened in the early 90s following the booming 80s?

Perth has peaked. Don't buy there as an investment.
Brisbane is moving. Probably will move some more.
Sydney (and I believe Melbourne) are starting to move again.

I don't know enough about Melbourne and if I were in a psoition to buy and investigate it.

Despite interest rates and high housing affordability I'm reasonably confident Sydney will rise. Could be a slow climb for a few years then a boom, or could just be the slow climb. There's not enough housing in Sydney. There's not enough land in Sydney.

I think Sydney and Mebourne are the go but there won't be any fairytale booms in the near future. Just good solid growth.

And I trhink this housing affordability crisis will never go away. We are pretty much locked in. This is normal in most of the world's largest cities. If you're young, bust your arse to get a deposit and grab a unit or move out to the sticks or whatever. It will just get harder.

 

[bunsen burner]

You obviously have no idea. Shares as an investment class always outperforms property over a 7 to 10 year period, .

Trust me champ, you have no idea.

This is nothing but a myth created by financial advisors. Of course they're going to say that. Just like the real estate books claim the opposite.

 

[HighettBomber]

You obviously have no idea. Most people generate wealth from businesses or ideas. Shares as an investment class always outperforms property over a 7 to 10 year period, show me a period where this is not the case. True wealthy people tend to own a lot of property which increase in value, just like classic cars, paintings etc but generally that is not where the wealth has been primarily generated.

Mate, I have a very good idea of what I'm talking about. I make a very good living assisting property investors and developers, and have seen first hand a very large number of people become wealthy, some on pretty low wages, through property investing.

I like shares, and dabble in them myself. However, they are nowhere near as effective a wealth generator as property. Please share your stories about all the people you know who have created wealth through the sharemarket, who were on low PAYG wages.

The main reasons property is more effective are No. 1 Leverage, you can borrow more at a lower rate against property than any other asset, bar cash. It is also important to note that you can directly effect the value of a property eg renovating or developing, you can't do this with shares. The taxation benefits are also pretty good.

It is also a fact that overall median growth rates are a useless way to measure the performance of the property market, each State is driven by different factors and so are individual areas. Share market indexes do not include every listed company, and companies that perform poorly have their weighting reduced or are removed from indicies, not so with median growth rates for property.

 

[Aquamarinejewel]

Righto ppl's can we stick to discussing the topic at hand and not attack each other. Otherwise this thread will be closed.

 

[A Zannatta]

Mate, I have a very good idea of what I'm talking about. I make a very good living assisting property investors and developers, and have seen first hand a very large number of people become wealthy, some on pretty low wages, through property investing.

I like shares, and dabble in them myself. However, they are nowhere near as effective a wealth generator as property. Please share your stories about all the people you know who have created wealth through the sharemarket, who were on low PAYG wages.

The main reasons property is more effective are No. 1 Leverage, you can borrow more at a lower rate against property than any other asset, bar cash. It is also important to note that you can directly effect the value of a property eg renovating or developing, you can't do this with shares. The taxation benefits are also pretty good.

It is also a fact that overall median growth rates are a useless way to measure the performance of the property market, each State is driven by different factors and so are individual areas. Share market indexes do not include every listed company, and companies that perform poorly have their weighting reduced or are removed from indicies, not so with median growth rates for property.

Jeez guys, why would you argue over which assets class is better? They are both effective and suit different people. You say property is more effective because of leverage. I agree leverage is great. But you seem to think the same can't be done with shares.... I have exposure to 100k in funds where i borrowed 100% @ around 8%. So a small difference in you being able to get a slighly lower rate.... Tax benefits arent too bad either as the franking system gives us almost tax free dividends on fully franked shares, and of course the deductible interest. Over history indexes give an accurate measure of a markets performance - to argue that they dont is a bit silly. Anyway enough of this it is a ridiculous argument. I just think it is naive to say that shares are no where near as effective a wealth generator as property. There are many ways to skin a cat.

 

[HighettBomber]

They are both effective and suit different people.

No argument here. There are a lot of different reasons for choosing different asset classes, not all related to possible return.

You say property is more effective because of leverage. I agree leverage is great. But you seem to think the same can't be done with shares.... I have exposure to 100k in funds where i borrowed 100% @ around 8%. So a small difference in you being able to get a slighly lower rate....

You can anly borrow 100% against managed funds if there is a capital guarrentee. The finance for this would cost a lot more than 8%, you can't generally lend more than about 70% on most individual shares.

Over history indexes give an accurate measure of a markets performance - to argue that they dont is a bit silly.

This is not correct for individual shares, unless you try and match a particular index, or use a fund that does. Most funds track pretty closely to one or another of the indexes, but you also lose quite a bit in management fees for such products. My point was more directed towards the index that is usually used for growth in property prices i.e. median prices. You're also missing the important point that you can value add to realestate, you can't with shares.

I just think it is naive to say that shares are no where near as effective a wealth generator as property. There are many ways to skin a cat.

I repeat my challenge, how many people do you know that have accumulated, lets say $2 million in net wealth, from investing in shares. I know 2, but I know a large number who have done it with property.

 

[Deej]

because he works hard for the money and resents passive income?

the easiest way to make money is with money

wealth makes wealth

Correct. It's a cheats way to make money i reckon, especially over the past few years with the boom. Mind you i have benefitted from this boom, in the past 18mths alone my place has gone up in value by about 200. But so has everyone else's in my area so really all it's done is make it harder for people to get into the neighbourhood. In some ways that's a good thing i suppose, keeps the dole bludging feral troublemakers out.

I'm not crying destitute, we work our arses off in our business and with skill and honesty and hard work we have built something that could grow to become something even bigger one day that we never imagined would happen when we started. But just because someone bought a house a few years ago they have made like 200-300k in the past 18months for doing sweet f all. And all the poor bastards who aren't in these booming areas are now absolutely zero chance of getting in because the prices have put everything way out of their reach. I'd love for a property collapse to happen quite frankly.

 

[Aquamarinejewel]

I have had to delete a number of posts from this thread as once again this thread went off the rails...so I am therefore closing it now.