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  • Writer's picturepeterward4

Why invest in property

Updated: Jul 20, 2023

Property Vs Shares investment


Let's say you have $65,000 cash (or equity in an existing home) to use for investment. The below is a general* outline of the outcomes over time.


Property

Cash/Equity for deposit

$65,000 ($50,000 deposit, $15,000 costs)

Loan available from a bank

$450,000 (90% of purchase price) @ 4%

Purchase price

$500,000

Using a general rule of thumb that property (in a good capital city market) will roughly double in value every 10 years or so, we get the following:


After 10 years of investment

​Property value

$1,000,000

Investment equity (after all costs and incomes**)

$764,000

Cash out on sale (after deducting initial deposit and sale costs)

$568,000

After 20 years of investment

​​Property value

$2,150,000

Investment equity (after all costs and incomes**)

$2,082,000

Cash out on sale (after deducting initial deposit and sale costs)

$1,987,000

Shares

Cash/Equity for deposit

$65,000 ($63,000 cash, $2000 costs)

Loan available from a bank

$117,000 (70% of total value cash + loan) @ 6%***

Total shares purchase

$167,000

Canstar reports 30 year average to be 9.8% on shares:


After 10 years of investment

Share value

$387,030

Investment equity

$323,314

Cash out on sale (after deducting initial deposit and sale costs)

$258,000

After 20 years of investment

Share value

$986,645

Investment equity

$1,017,000

Cash out on sale (after deducting initial deposit and sale costs)

$952,000


For the same $65,000 cash or equity investment, the outcomes are markedly different.


The reason that property produces more equity after 10 and 20 years is that it is possible to leverage more with property than shares i.e. you can borrow $450,000 and begin with a $500,000 asset with property, whereas you can only borrow $117,000 and begin with a $167,000 asset with shares.




* There are many variables including interest rates on loans, fees, rental yields, dividends, inflation, incomes etc. This information is for general application only to understand the principal of leveraging. It assumes joint income of $146,000, loan interest at 4%, rent yield at 4.7%.

** Allowing for incomes (rental income, tax advantages), property holding costs (maintenance/ loan interest/ property management fees etc).

***Margin loans (loans against shares) cost more because the risk is higher.


Note: Cost and yield estimates are very approximate. A full spread sheet analysis would be required for each individual to provide accuracy for each asset class.







image of building outlines depicting the growth in return on property investment
Property investment returns a significantly higher return on initial investment over a 20 year span.

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