shares vs property (again)

Hi all,

With some shares returning a grossed up yield of around 8 to 9% at the moment (like the major banks), I'm just wondering if they're just as good an investment to make right now as say buying a positive cash flow property.

If you take out a LOC to purchase shares at around a 6% interest rate (for the loan), then really you've got extra cash in hand at the end of each year, just like having purchsed a positive cash flow property (except minus the hassles that can go along with property investment). Can anyone see any flaws in this?

Cheers

John
 
If we're ignoring any growth on the shares, and only looking at the yield, there will be a difference between the shares and property because of the leverage involved. You could probably borrow a max of 50% to buy the shares (perhaps a bit more), but 80% to buy a house.

So if, for example, you had $100,000 you could buy a property worth $500,000. If the yield was 9% and the interest rate was 6.5% (of $400K), other expenses 1%, you would be earning about $14K pa.

You could buy shares worth $200,000. With 9% yield, 6.5% interest, you would earn about $11.5K pa.

Now there's growth, but that's another story.
 
Dear John (sheesh I'm writing a "dear John" letter)

The problem with your scenario is that interest is calculated on the $ you borrow under the line of credit from day one. You pay the monthly interest at 6% and wait for 6 or 12 months for the dividend payment.

Of course you could decide not to pay the interest and let it compound until the dividend is paid. The effective interest rate then becomes significantly more than 6% on the monies borrowed.

Finally dividend payments are not, usually, caste in stone. The company could reduce its dividend in future years if profits fall.

Ajax
 
Just adding to geoff's comments about cap gain.

If cap growth of property was 7%, then the shares would have to grow at 13% for the 10 year cap gain in dollars to be the same. If you had purchased the shares in a margin account then there is always the possibility of margin calls if the price retreats. The chances of your property loans being called in because the property went down in value is very limited (for good quality metro property). If loans were to be called in then I wouldn't wont to own the bank anyway.;)

Banks have had a fantastic run in the last 10-12 years and while I wont say that they can't go a lot higher, history shows us that the high fliers of one decade are rarely the performers of the next.

bye
 
Hi everyone,

Thank you all for your replies. Just wondering...

1. Bill... I don't really understand why shares would have to grow 13% to be equivalent to the cap growth of property of 7%. Could you please elaborate??? THanks.

John
 
John,
I could be wrong, but I think what Bill is getting at is that it is the amount of value you control, not how much you put in that matters.
In the example, you could control 200K of shares, but also 500K of property. So, while your property is growing at 7%, that is 7% of 500K, whereas with the shares, it is 13% of 200K. Pretty big difference. But hey, I could be way off the mark. Bill?

Mark
'no hat, some cattle'
 
Mark

You got it in one.

If you are good at selecting shares you can average better than 13%, but your not likely to find that over the next 10 years in todays bluechips. Smaller growth companies perhaps.

You can also get better than 7% on propery, with carefull selection.

bye
 
With deal for Free you could control $4mill worth of CFDs with that 200k. Not only that but you can short as easily as going long, with the same leverage. Similar leverage to property, no tenants, low interest rates without loan applications, no maintenance, greater liquidity and the ability to make money when the market goes down!
The expected return for blue chip stocks maybe small, but they are talking about buy and hold only on the long side. Of course you have greater control over property and how you add value to it, property also may make it easier for you to sleep at night. I will always hold more value in property than shares/ share products, but shares/CFDs might get you to your next deposit faster.
In fact im not sure I would feel comfortable holding CFDs leveraged that much. What im looking into at the moment is: Example only: Sell my $200k share portfolio, use $10k of that with D4F to give me $200k purchasing power. Put the other $190k into LOCs to positive gear or neutrally gear my property portfolio. The interest saved here offsets the interest D4F charges, which is below 6%. Also you only pay interest on the positions you have open, and they’ll pay you interest if you have short positions open (I think you still pay interest, however they still pay you so the rate might be something like 1.5% to go short).
The other interesting point is, as it stands at the moment there is no CGT payable on CFDs. As long as you are not considered a professional trader by the ATO. I have no affiliation with deal for free, and im not a customer….yet. Just want to point other alternatives.
 
GameBoy,

You have got to be kidding. If it looks like a bucketshop, smells like a bucketshop, and acts like a bucketshop, then it's probably a ......

bye
 
Sounds like you made your mind up Bill. Ill continue investigating to make mine up if thats ok with you? As I stated I am not yet a client, but im looking it to it.
The CMC group have been around since 1989 and dealing in CFDs from 2000. If I have $10k of my money with them and make 10% of $200k in a year then I can have my starting capital removed around the 6 month mark. If they go belly up for what ever reason, how much of my original capital am I risking? Im not 100% sure and this is one of the questions ill have for them. Fair enough I may have missed opportunity, but could have I missed one by not using them? You obviously think not.
In the case of a market melt down (87) I could be holding an equal number of shorts as longs hedging potential losses. What are the risks in holding just long positions during a melt down? I have read many posts by traders who seem happy with it (D4F). If you have anything constructive to add, that might help me and others to evaluate D4F then ill be happy to listen. I don’t consider ‘You have got to be kidding’ or bucketshop helpful at all…..or wasn’t it your point to be helpful?
At the very least D4F ‘might’ be an excellent platform for beginners to use as a step up from paper trading. Then again a bucketshop is a bucketshop isnt it?
 
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