Property vs Shares

Last year, I wrote that Melbourne property prices were starting to move upwards again, that rent rises wasn’t keeping up, and in mid this year, property prices were through the roof. Luckily for me I snapped up a bargain way back in December when I first noticed the movements. I’ve just had it re-evaluated and in the 10 months or so, it’s gone up by more than 30%. How massive is that? I’ve always been hooked onto the sharemarket since I was 17 / 18 but I’m starting to lean more and more towards property now. Here’s why…

• They don’t say things are “as safe as houses” for nothing. You see companies collapse and fold every year but you never see houses completely lose their value. This means you don’t need to read the Australian Financial Review every other day and be on the edge of your seat just in case there’s some negative news on your shares.
• You can gear up 100% of the loan. With shares, it’s normally on 70-80% if it’s a bluechip, 40-50% if it’s mid-cap, and nothing at all if it is speculative. With a 100% gearing, you can write off more in tax and also profit more from price rises. Say you buy a house for $500,000, pay 8% interest a year, rent it out at $350 a week, and deduct your loss come tax time - it’s actually cost you about $15000 to own the place. Now all you need is for it go up by more than 3% per year and you’re making a profit. Historically, house prices have gone up between 7-10%. This means you stand to make $35,000 in one year. Now that’s very rough calculations but if you put the same $15,000 in shares, manage to gear it up to $100,000 and your shares go up in value by 20%, all you’ve made is $20,000. That’s peanuts compared to $35,000 at a substantially lower risk level! Now I’ve obviously left out heaps (eg. stamp duty, agent fees, dividends, etc.,) but you get the picture on the power of gearing on houses - It doesn’t take much of an increase before you start seeing profit and where you’d have sleepless nights gearing $500,000 in shares, you’d happily set and forget the same half a million dollars in mortgage.
• The banks love houses. The interest rates are usually 1 to 2 % lower for mortgages than for margain loans. And when your house appreciates, you can use the extra equity as security to borrow EVEN more :)
• You can bargain down the sale price - sometimes by 10% or more if its a motivated seller. If you buy a place for $450,000 when it is really worth $500,000 - that’s an instant $50,000 in your pocket. :)
• You can feel and see your property. It feels good!

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