Reply: 3.1.1.1.1.1.1.2.2.1.2
From: Gary Smith
Robert said:
>> But this is the difference with shares, you can only live off the money
if you sell your shares and as such you lose your equity (Note: I know there
are always dividends but most dividend payouts are only a small percentage
and you'd need to own millions of dollars of shares to retire on dividend
payouts <<
Well, a member of my family has lived solely off dividends since the early
80's. She spends her time playing with the kids, doing the gardening,
swimming, walking the dog, etc. You can buy shares mainly for their
dividend. Buy correctly and you will have an ever increasing (and may I say
increasing faster than rents do) income. Lets take an 'average' divident of
4% and an average rent of 8%. But you don't get twice as much much actual
money. Out of that 8% come the rates, insurance, maintenance, management
fees, etc. Then you get to pay tax on what is left over, minus whatever
depreciation allowances you have. The dividend however already has 30% tax
paid on it. The after tax money in your pocket is not much different. Of
course, you can buy property with higher yield/lower capital growth (or vice
versa) but you can do the same with shares. Just depends on what is more
important to you. I also write options against some of my shares which gives
me about another 10-15% of cash a year. The common picture that living off
shares involves continually buying and selling shares is a myth. Sure some
people do it, just as some people flip properties.
Paul said:
>> Imagine now having $1M in the market on 80% margin. Most people wouldn't
sleep and wouldn't be taking care of their day jobs either. <<
So we should aim to be 'most people'
What was RKs line about being an
average investor?
>> The only time I've been wiped out was over-gearing when 1st mortgage
rates hit 18% in 1991. <<
>> This level of gearing is conservative to normal. << (presumably talking
about 80% LVR real estate, but I'm not sure)
Don't you see a contradiction here? You were wiped out because you were over
geared, but like property because you can have a large LVR. Now I will admit
to being a conservative borrower and don't like going much over 50% on
anything, but I would be happier with a larger LVR on shares that property.
Why? Because I know I can get out the shares quickly and cheaply if needed.
But heh, everyone's different.
David said:
<< a certain stock's value can plummet overnight by for reasons beyond
anyone's control, leaving shareholders gasping for breath. <<
That's true. However, shares can also go up overnight as well. One of my
stocks - Hardmans - went from 38c to about 88c in one day recently after a
oil discovery. Now I know I had nothing to do with it, and had no influence
on it, but so what? I took the money and ran. Many people seem too worried
about losing money to actually make money. That's not restricted to shares
of course, also applies to property and business. But if all you think about
are all the things that can go wrong then you you will never do anything.
Then again, doing nothing might be better than not thinking at all and going
into things you don't understand.
>> and within 48 hours the company was worth 35% less because the market
lost confidence in this CEO to positively run this organisation. If due
diligence and market research is done, this would never happen with
residential property. There are too many constants that are unchangeable,
ensuring it remains a secure investment. <<
Some people think that you can't lose money in property. Bet they weren't
around 10 years ago. (Sort of like those share traders who thought they
couldn't lose up until about a year ago). Also funny how others in the forum
boast about getting 10%, 20%, 30% off 'market' value. What is this if it
isn't a sudden drop in value? The reasons why property drops in value may be
different, but to pretend it doesn't happen is fooling yourself. The main
difference for the members of this forum is that if a property is available
for 30% off it's market value they are in there trying to buy it; but when
talking about shares they look on it as though there were already the owner
of the shares and therefore losing money, rather than a potential buyer
looking to make money. Again, worrying more about losing than winning.
Robert said:
>> My $1m of cash can buy $10m of property. And my cash return on this would
want to be $200-400k pa so that's a 20-40% ROI. It's a matter of leveraging
from my point of view. <<
Your return is from gearing, not the investment. And you can gear shares
just as you can property, unless you want to gear above 80% which I
personally would not go anywhere near. From my viewpoint, using that sort of
LVR is introducing an unacceptable amount of risk into a reasonably safe
investment. At a LVR of 90%, all it takes is for the interest % rate to be
about 1% more than the after-expenses yield and you won't have the cashflow
to pay the interest. And if you only own property what are you going to do?
Lose a lot of money when you have to sell in a hurry to lower the LVR. A
trip back to the late 80's shows how that happens. Now, if we could get 30
year fixed IO loans then that would make it a totally different proposition.
And a lot of other people talked about ROI on borrowed money. I've got to
say that implying a return of infinity because you borrowed all the money is
bogus. But even so, that has nothing to do with property. Last time I
checked my margin loan, I had a unused borrowing capacity of about 400k. So
if I wanted too, tomorrow I can buy 400k worth of shares using 'none of my
money'. Does this mean that if the company suddenly goes bankrupt - ala HIH
or One-Tel - I didn't lose anything because I didn't put any money in?
That's a crazy concept. Once you have enough net worth to borrow as much
money as you want to, the concept of differentiating between your own money
and the banks is nonsense. I prefer the concept of measuring the return
against the amount of money you could potentially lose if it all went wrong.
But I think that's another conversation.
I think that investing in shares and property are actually quite similar,
and in the long run it doesn't actually matter which one you choose - a
passive share investor will get about the same as a passive property
investor, and an active property investor will get about the same as an
active share investor. I'm quite happy to do both, though for me there is a
lot more 'unenjoyable work' in property. The real question is which one is
easier to accumulate enough net worth to 'retire' on. For most people, it
seems that would be property, particually if you don't have much to start
with. When you don't have much cash/equity, high LVRs sure are attractive.
Gary