Over the years I've seen many articles and had a lot of discussions regarding which is the better investment, shares or property.
There are a number of lessons I've learned personally which I'd like to outline here;
1. Banks love property – Banks do not tend to like shares.
This is a really important fact as it limits your ability to leverage your equity and grow your asset base.
When I was in my late 20's my wife and I finally decided it was time to buy our own house. At the time we had a share portfolio of approximately $ 25,000 but little cash savings. We continued to purchase shares from the time we were first married in 1993and would purchase shares with our savings in $ 2500 lots – this was due to advice from our peers that shares was a good investment and better than property.
When we applied for our housing loan we were told that it would be best for us to sell our shares and use that as our deposit for our home, but that did not suit us as the market had dropped and it was not the best time to sell. The other issue we had was having to pay capital gains tax on our profits when we sold, which would mean a tax debt that year. The banks really looked at my shares as 'cash on hand' and not really as equity. They also valued the shares under the going share price because the market price could fluctuate and no one could guarantee what the share price would be when we decided to sell.
This really made it difficult to get the savings required for a home, and while it was not too important at the time, the same scenario became a lot more important when you consider growing an asset portfolio as a long-term investment strategy.
2. Equity Mate …
After buying our first home we were fortunate enough to make a large capital gain through the boom period. Essentially it mean we ended up with 50% of our property value as equity. A portion of this equity could be used towards a deposit on a new home, so, being in building, we decided to build an investment property. The banks simply used the equity in our existing home and cross-collateralized our loans, meaning each home loan was linked. If we were to sell one of the homes the banks could basically move a portion of the sale amount into the remaining home loan so our equity position was at least 20%.
This example is a basic outline showing how the 'rich get richer' using property as their vehicle of choice. The rule is quite simple; purchase a property using the equity from your current home then once the new home increases in value and has 20% equity, do the same thing again adding another home to your property portfolio. Rinse and Repeat as they say until you build a portfolio large enough to support you financially after retirement.
To help with the cash flow you can request a tax variation from your accountant that will reduce your PAYG tax each pay day in accordance with your tax offset from your investment property.
For what it's worth, in my opinion, Shares simply do not have the same power as property.
Avoid common property investment mistakes by;
- Doing a proper feasibility before purchasing
- Stick to your figures – do not get emotional about the home and overspend.