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In This Video:

1:15 Historical performance of shares and property
1:52 Effects of leverage
4:54 Shares and property profit potential: Which gives you better results?

Hi Daimien here from Integrity and today we’re going to talk about the eternal question, What’s better shares or property?

When people consider investing, it often comes down to a question of whether to put your hard-earned dollars into property or shares. So, what’s better?

In this article, you will read about three things: the effect of leverage on shares and property, the historical performance of investing in both, and then a comparison of both using examples, presenting an argument for which one is better.
Leverage

Most banks will only allow you to leverage into shares with about 60% of the portfolio’s value. This means that you will be allowed to borrow 60% of the money that you would like to invest in shares. An interesting point to note here is that the banks will not let you secure this loan against the shares, but that they will require you to secure against a property.

However if you are looking to invest in property, banks will lend you up to 95% (and occasionally 97%) of the value of property. The reason for this is because the banks consider property to be one of the safest possible investments.
History

In Australia, property values in capital cities have doubled on average every ten years since the 70’s. In fact, if you look at the table below, prices actually quadrupled in the 70s!

70s 4 X

80s 3 X

90s 2 X

2000’s 2 X

That said, evidence shows that shares have actually out-performed property, dollar for dollar. That is, if you paid cash for your property and cash for your shares, the shares would have outperformed the property by about 1%. This is founded on Australian historical data.

However, very few people purchase property without leverage and the people who sell shares (stock brokers, financial planners) are unlikely to tell you about to potentially massive result that you can get from leverage.
Examples

We have $100,000 to invest

Shares

Total Investment: $100,000

Return: 7% PA for 10 years, compounding yearly

Result: $196,000

Profit: $96,000

 

Property (Conservative)

Property Start Value: $400,000

Deposit: 20% ($80,000)

Costs: $20,000

Total Investment: $100,000

Mortgage: 80% ($320,000)

Return: Doubles over 10 years

Property End Value: $800,000

Profit: $480,000

 

Property (Aggressive)

Portfolio Start Value: $800,000

Deposit: 5% ($20,000)

Costs: $60,000

Total Investment: $100,000

Mortgage: 95% ($760,000)

Return: Doubles over 10 years

Portfolio End Value: $1,600,000

Profit: $840,000

 

If you look at the shares example, you can see that buying shares should double your investment. However, if you look at our aggressive investor example, you can see that highly leveraged property will result in investment growth of more than eight times the original figure.

Savvy property investors know that the more property you buy, the better off you are. The real art to property is ensuring that your portfolio pays for itself so that you can hold it for the 10 years needed to double in value.

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