This document discusses some of the disadvantages of investing in residential property compared to investing in shares. It notes that buying and selling a $200,000 property would incur costs of around $17,000 or 8.5% of the price, while the same for shares would be only $1300 or 0.65%. It also outlines higher ongoing costs for properties in terms of rates, fees, maintenance, and other expenses. Properties also provide less diversification than a share portfolio of the same value. Selling part of a share portfolio is easier than partially selling a single property asset. The document additionally discusses land tax implications for property investment in New South Wales.
2. 2 Investment propertiesFee & tax problems Buying and then selling a $200,000 share portfolio would cost approx $1300 (0.65% of price) Buying and then selling a $200,000 house would cost approx $17,000 (8.50% of price) People don’t notice these costs during booming markets with 25% price growth. However, during stagnant markets (3% growth) … these costs are terrible!!! This is one reason why I prefer to invest in shares than residential property!
3. 3 Investment propertiesRunning costs problems The ongoing costs of shares is almost zero Small amount of account fees? Ongoing property costs Council and water rates, body corporate fees Insurance, property management fees Maintenance, legal fees, accounting fees Advertising costs for new tenants Another reason why I prefer shares!
4. 4 Investment propertiesDiversification problems It is easy diversify a portfolio of shares with $250,000 However, you can only invest in 1 property with $250,000 If you are not diversified then you have a lot of extra risk (uncertainty) WITHOUT being rewarded with a higher expected long-term return! Another reason why I prefer shares!
5. 5 Investment propertiesDivisibility problems 20% of a share portfolio worth $200,000 can be easily sold because it is made up of thousands of individual shares (each worth a small amount). A property investment has one asset which cannot usually be partly sold. This exposes you to risk if you cannot make the loan repayments … you can be forced to sell the entire property.
6. 6 Investment propertiesLand tax Levied on owners of properties in NSW Principal place of residence is generally exempt if you have dwelled in it for the whole year. Except if owned by trust or company Based on assessed value of “land” Which is usually less than the value of land + building. Land tax free threshold $368,000 (2009) 1.6% + $100 of combined land value above threshold Avoid or reduce by investing in one property in each state
7. Advantages of shares over property Shares have similar long-term past returns Share prices dividends 12% Property prices rent 12% (incl. size renovations) Shares have lower risk from diversification Single investment property has very high uncertainty Share portfolio has lower uncertainty than single property Shares have more reliable future returns Share prices driven by economic growth House prices driven by supply and tax factors* Shares are more flexible with lower fees * Nigel Stapledon (2007) “Long Term Housing Prices in Australia and Some Economic Perspectives” PhD with Australian School of Business 7
8. Stop and read Now read: Chapter 14 Investing in property 8
Notas del editor
See Nigel Stapledon (2007) “Long Term Housing Prices in Australia and SomeEconomic Perspectives”, ASB PhDStd dev of long-term median house prices approx 10% (1955 to 2005)