I've been reading another thread that was linked somewhere here on this forum and was surprised to read the following-
"I'm starting to see the advantages of shares, the turning point was when you mentioned no tenants, no agents, no repairs, no maintanence....
The other big plus is that with shares it's alot easier to run the numbers, analyze different ratios, etc. which is excellent for an excel junky like me. Property is alot more touchy feely.
Plus I'm starting to realize how thin the margins in property are. Like I mentioned, if operating costs rise from 1% to 2.5% of the principle, the APR suddently drops from 17% to 5%, not good at all.
This makes me see that with a mild level of gearing shares could outperform property, plus as you mention with gearing at only 50% you stand to lose alot less than gearing property at 95%.
At the same time I'm still trying to come to grips with the underlying driving force in shares. With property it's clearly population growth, and growth of the economy as a whole, so you can, at least roughly, approximate the growth of property based on large scale trends.
With stocks on the other hand it's less clear, for example the EPS on the S&P 500 has grown 20% over the last year. What's driving this? Growing consumption in India and China? Who are all these new customers of US companies?
Another side comment, I've gone through a bit of a transformation over the past few weeks and I have to say I'm now almost completely over property.
It's the scaling of operating costs with the growth of the property price that did it, plus the fact that operating costs are so high (2.5% of property price). Rates/body corp is currently 1% of principle, I probably could reduce this by buying a more expensive appartment, but then the rental yields tend to go down as appartments get more expensive, so you don't really gain in the end.
It's true that most people don't accurately estimate the true cost of holding property. In my case FHG covered alot of the buying costs, so I bought for 217k all up. I've poured 16k into the renovations, so it's easy to think that I've spent only 233k so far, but that neglects 15k of interest and 2k of body corp/rates that I've spent this year. This means I'd have to sell for 260k just to make my money back (assuming no selling costs!!!), which represents a 20% increase in the property value in one year, hardly realistic, even in the best of times.
On top of this, there's the opportunity cost of the 16k I've spent on renovations, and on the interest/body corp/rates payments.
I've thought about why popular culture is so pro-property, because on the surface of it things seem to grow at an amazing rate (or at least amazing for people who don't understand compound interest). For example, my dad is still amazed that beach-side properties which cost 180k when he first came to the Gold Coast (some 30 years ago) are now worth a million plus. On the surface it seems like you could be a millionare if you had bought back then.
But realistically, it's only a 6% growth p.a., and 30 years ago 180k was a fair bit of money (the equivalent of 440k in today's dollars). But things like APR, holding costs, etc. are beyond the comprehension of most people
Personally I didn't follow this thinking. The mistake in my analysis in the past was basically that I underestimate the holding costs of property, and also that I forgot to scale them with the growth of the property over time.
Vacancies, agent's fees, body corporate, renovations all grow at the same rate as the property value. Even rates can be viewed as keeping pace with property growth."
"I'm starting to see the advantages of shares, the turning point was when you mentioned no tenants, no agents, no repairs, no maintanence....
The other big plus is that with shares it's alot easier to run the numbers, analyze different ratios, etc. which is excellent for an excel junky like me. Property is alot more touchy feely.
Plus I'm starting to realize how thin the margins in property are. Like I mentioned, if operating costs rise from 1% to 2.5% of the principle, the APR suddently drops from 17% to 5%, not good at all.
This makes me see that with a mild level of gearing shares could outperform property, plus as you mention with gearing at only 50% you stand to lose alot less than gearing property at 95%.
At the same time I'm still trying to come to grips with the underlying driving force in shares. With property it's clearly population growth, and growth of the economy as a whole, so you can, at least roughly, approximate the growth of property based on large scale trends.
With stocks on the other hand it's less clear, for example the EPS on the S&P 500 has grown 20% over the last year. What's driving this? Growing consumption in India and China? Who are all these new customers of US companies?
Another side comment, I've gone through a bit of a transformation over the past few weeks and I have to say I'm now almost completely over property.
It's the scaling of operating costs with the growth of the property price that did it, plus the fact that operating costs are so high (2.5% of property price). Rates/body corp is currently 1% of principle, I probably could reduce this by buying a more expensive appartment, but then the rental yields tend to go down as appartments get more expensive, so you don't really gain in the end.
It's true that most people don't accurately estimate the true cost of holding property. In my case FHG covered alot of the buying costs, so I bought for 217k all up. I've poured 16k into the renovations, so it's easy to think that I've spent only 233k so far, but that neglects 15k of interest and 2k of body corp/rates that I've spent this year. This means I'd have to sell for 260k just to make my money back (assuming no selling costs!!!), which represents a 20% increase in the property value in one year, hardly realistic, even in the best of times.
On top of this, there's the opportunity cost of the 16k I've spent on renovations, and on the interest/body corp/rates payments.
I've thought about why popular culture is so pro-property, because on the surface of it things seem to grow at an amazing rate (or at least amazing for people who don't understand compound interest). For example, my dad is still amazed that beach-side properties which cost 180k when he first came to the Gold Coast (some 30 years ago) are now worth a million plus. On the surface it seems like you could be a millionare if you had bought back then.
But realistically, it's only a 6% growth p.a., and 30 years ago 180k was a fair bit of money (the equivalent of 440k in today's dollars). But things like APR, holding costs, etc. are beyond the comprehension of most people
Personally I didn't follow this thinking. The mistake in my analysis in the past was basically that I underestimate the holding costs of property, and also that I forgot to scale them with the growth of the property over time.
Vacancies, agent's fees, body corporate, renovations all grow at the same rate as the property value. Even rates can be viewed as keeping pace with property growth."
