If you want to grow your wealth, investing is a crucial part of the equation. When it comes to investment options, two prominent choices that most people consider are investing in shares and property investing.
Both avenues offer the potential for significant returns and can be rewarding in their own right. However, they also differ in key aspects, including risk profiles, investment horizons, and overall market dynamics.
In this episode, we explore the fundamental differences between investing in shares and property, and shed light on the factors potential investors should consider before diving into either market.
Understanding the characteristics and nuances of shares and property is essential for individuals looking to make informed decisions about where to allocate their resources.
By examining the key differences and similarities between these two investment avenues, you can gain valuable insights into which approach aligns better with your financial objectives, personal preferences and how they can impact your financial goals.
IN THIS EPISODE, YOU’LL FIND OUT…
- Shares investing – what is it, and why is it beneficial? (01:07)
- The benefits of property investing (05:50)
- Returns of investing in shares vs. returns of property (09:23)
- The power of debt vs. the power of shares (10:39)
- The ultimate secret to building wealth (12:30)
QUOTES
“The wealthy use debt as a form of leverage.” -Carl Taylor
“Leverage increases the risks and also increases the return.” -Carl Taylor
RESOURCES
The Debt Millionaire By George Antone
WHERE YOU CAN FIND CARL TAYLOR
Automation Agency
CarlTaylor.com.au
LinkedIn
Facebook
Twitter
TRANSCRIPTION
Carl Taylor (00:00):
It’s all about leverage, without leverage shares, ultimately would be better than property.
Carl Taylor (00:18):
Hey, so you’re listening to another episode of Entrepreneurs Rising.
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Now, new listeners. Today’s episode is all about leverage. Now, if you’re a previous listener, you’ve heard me talk about debt in the past. So that’s what I’m talking about when I talk about leverage. And in this episode, we want to talk a little bit about shares versus property because it’s often debated, which is better our property investors better than share investors is share investing better than property investing in this this kind of common debate about which one is better. So let’s just list some of the key benefits of the different options.
Firstly, let’s explain what a share is, when you buy a share. You’re buying a shareholding of a publicly listed company. So you’re buying an actual business. When you buy a property? Well, you’re buying a physical building and some land like you’re buying property.
So some key benefits of shares. Firstly, is liquidity. What do I mean by liquidity? I mean, it’s not exactly the same. But similar to putting your money in a bank account. If you have a quarter of a million dollars in shares, and you want to go and buy something tomorrow that you need to dip into that quarter million dollars, that’s possible, because all you need to do is you just go to the share market, make sure it’s open and you do a sell order, if you’re willing to sell at today’s current price, you can turn those shares back into cash at a very rapid rate.
Whereas if you compare that to property, typically, if you own a property, you’ve got a list on the market, you gotta wait. And it could take a period of 30 days or longer just to sell. And then once you’ve got someone who’s purchased it, you’ve then got the settlement time, you might be looking at another 30 days before you actually get the money. So it’s not something that we typically call it liquid that we can easily turn back into cash. So the key benefits of shares is liquidity.
Absolutely. And if you remember in one of our previous episodes, we talked about the levels of rich, one of the aspects of our wealth when we’re measuring our wealth is how much we have in liquid assets, or cash shares, etc, versus the illiquid wealth. And so property typically can be one of those things, it has a strong net impact to your net worth.
But it has a limit on your liquidity. So shares a high liquidity well as property is far more illiquid. The other benefit of shares is truly passive income through dividends, if you buy a share, then it pays a dividend.
You didn’t have to do anything for that, once you purchased the share, there was no nothing you had to do ongoing, you didn’t have to talk to anyone, you didn’t have to review anything, you didn’t have to, you know, technically yes, you got my get these things you need to vote on for you the shares.
But most of the time, there’s a proxy that you don’t even have to do anything if you don’t want to. So the income you receive is truly the form of passive, you did the work once by buying the share. And then the income is paid ongoing or forever. So that’s really, truly passive income.
Third thing that’s a key benefit of shares is the low entry and exit costs. You know, if you’ve got 20 bucks, 50 bucks, 100 bucks, you can be buying shares, it’s made even more accessible with some of the fractional share ownership options that now exist as well.
But you can buy a whole share in a company for in some cases, cents on the dollar. Or you can get it as I said for 1020 3040 $50, you could be buying a share or multiples of shares. At that kind of price, you don’t have to pay your brokerage fee, which is very accessible in today’s online digital world. But other than that, you know, there’s no real estate agents getting their commission.
There’s no stamp duty costs in it for in Australia, though kind of taxes on the purchase are like property, where it’s got a lot more of these kind of purchase costs involved. And typically to even if you’re managing to get a very low deposit where maybe you only have to put five to 10% in, at least in Australia and I believe this isn’t the case of many places in the world.
But in Australia, you’re even on a 10% deposit, you’re still kind of looking at 100 grand or more is required to get you started in property. The other big benefit again, and this is this is very specific to Australia.
So Australian listeners This is for you. Those of you outside you might find this interesting. In Australia we have a thing called franking credits and basically what that means is if the company has paid some of the tax on the dividend already, then you as an individual don’t have to then pay that same tax again.
So, in essence if you have a fully franked dividend, it means the company has paid all of the company tax rate on that particular amount of dividend. And so I think right now I’m trying to remember the top of my head, what our current company tax rate is, I think it’s 26% or 25%.
So that said, let’s call it for easy math what’s called 25%. It means that you can then claim that is already tax that’s been paid in some cases. And the government recently did try to pull this back as a policy of the Labour government put it in as a policy. And there was a big outcry from most of the baby boomers who benefit from this. In some cases, people can get a refund on their tax return, because the company paid this tax, and then the individual gets the money back.
So if you remember any of that in the news, Aziz, that was talking about franking credits. And that’s something that’s unique to Australia and also with the the key benefit to shares were that dividend can also have some of the tax already paid on it. So there’s some of the benefits of shares, let’s talk about some of the benefits of property. So firstly, property is very tangible. It’s a tangible asset, once you buy it, you technically can go, you can touch it, you can see it, you can touch it.
And for many people, that brings a sense of safety and security, it definitely does to banks and lenders, but even to you as an investor looking to buy it. The other thing is, it’s it’s lower risk, use of debt.
So debt, sometimes called leveraged, sometimes called gearing, your debt is a really big power, in property investing in general. But property is one of those things where compared to shares, if you want to borrow money to invest in shares, typically you have to take out what’s known as a margin loan and a margin loan, you’re then at risk of what’s known as a margin call where the value of the property the shares dropped significantly, and, you know, shares do go up and down a lot more rollercoasters than typically buying a property does, then you could have a margin call whales, and they’re saying you need to put some more money up, or they’re going to sell some of your shares just to make the LVR work.
So you don’t have that risk of all sudden the bank’s going, Hey, give me some more money in property in the same way that you do if you were to borrow in shares. And then another one that is very unique, again, to Australia, I believe this is the case in too many other countries around the world.
But it’s capital gains tax free, if it’s your family home, this is does not apply if you’re buying investment properties. But if you’re buying a property that you live in, and it goes up 300 grand, and you go to sell, there’s no, there’s no capital gain tax on that 300 grand. And that’s again, that’s a unique benefit to property. Because if you had some shares that went up $300,000, when you go to sell that, you would have to pay tax on it.
Now, you’d have to do that if it was an investment property. And we are talking about investments here. So it’s only a very specific use case here. But it is one of the key benefits that property gives you that you don’t get in shares.
What’s the same though across the board, there’s a lot of things, but one of the things I’d like to point out is, at the end of the day, your tax on capital gain is only paid when you sell the asset. So if you own a property and it goes up, as we said, $300,000. That’s income effectively, you’ve earned what I would call phantom income. It’s not realized until you actually sell and turn it into cash.
But you don’t have to pay tax on that. Well, this is one of the benefits I should add to property, in fact, is that if your property has gone up in value, you can access that extra money tax free.
Carl Taylor (08:14):
And the way you do that, and I need to make sure I should have said this at the beginning of this episode. This is not financial advice. This is not personal advice. This is general advice, please make sure you see someone to get personal advice for your individual circumstances.
But one of the things you can do is, if your property has gone up in value, rather than to sell the asset, you can get another mortgage, you can get a line of credit over your property and access that equity, and don’t have to pay any tax to access that money. And so then you can usually use that to go and buy another property or you can use it to whatever you want. You just got to pay your interest on it.
But you can buy things you can live off thing. I know some investors who they that’s what they do, they’re their income that they live their life on is the basically accessing the equity in their properties that have gone up in value. So there’s no tax on that capital gain until the sale is made. Whereas with shares, it’s the same it there’s no capital gains tax until you sell the share. But you’re not going to go I’m gonna sell access some of these shares.
Now, I believe in the US, you can eat more easily borrow and access equity from your shares. But in Australia, that’s not something we can do. Alright, so we’ve talked a little bit about the pros and cons of both assets.
Let’s talk about how the returns compare now, I’m going to share with you some information from a steward over at the invest opoli podcast. This is something that he modeled out recently, and I thought it was really interesting.
He shared that if you bought a million dollar property now this we’re talking Australian markets here, but if you built a million dollar property and you borrowed to invest and you held that property for 25 years, so he modeled this out, you would have made an internal rate of return of 13.96% per year.
So buying a property borrowing to buy that property. He’s modeled here that if you held it for 25 years that over those 25 years you made 13.96% Every year On your money now that’s that’s a decent issue.
And that is not bad. Now, if you took the borrowing out, or if you didn’t borrow any money, if you bought that million dollar property with cash, that same million dollar property, and you paid cash upfront for it, instead of borrowing any money, what would the whole return drops down to 7.41% per year.
So instead of 13.96% per year, you only made 7.41% per year, because you had to use all this cash up front. And so the return, you don’t have that leverage in there. So adding in the debt actually added 6.55% per year to the return on that acid.
That is the power of debt. Now, if we compare that, you know, if we go to that argument of should I do property, or should I do shares if you’re not using debt at all, shares beats the property, because if you compare it with the exact same model, we’re using shares, by putting a million dollars into the share market in one hit. Now, let’s be honest, very few people are going to do that in one hit.
But if you put a million dollars in one hit into the share market, the internal total rate of return would have been 10.29%, which is better than the property that we bought in cash, which was 7.41%.
Now I know this is a lot of numbers, we’ll make sure in the show notes that this is all documented, so you can have a look at it. But there’s a decent difference between if you’d bought property. Now, obviously, there’s heaps of different property markets, you know which properties you buy, which shares Did you buy? There’s a lot of variables in here.
But it’s a very interesting model to look at and go okay, without the power of the debt. Your property versus shares is really like a non argument. They’re kind of par for the course similar ish. And in this particular model, shares beat it.
So what are the lessons? What can we take away from this? Well, firstly is the biggest lesson is the wealthy use debt as a form of leverage, they use debt as a way to control an asset that they don’t have the all the cash for, or you might have the cash, but then instead of buying one asset, you can take that million dollars and spread it across if you’re doing 10% deposits.
I know there’s other purchase costs. But let’s just for simple math, so you bought 10 properties, that gives you a whole lot more leverage and multiplication, that if you just put that $1 million into one property, so this leverage, while it increases the risks, it also increases the return.
And when we talked about it, like if you’re borrowing for property, it is one of the lowest risk, at least in my experience, in what my understanding of my education is one of the lowest forms of risk when it comes to using debt.
Now, the real secret to building wealth isn’t about is a property or shares. It’s a finance game, right? It’s how do we get the best return on our money? That’s really the what the secret is, when you get to the investor level of your entrepreneurship journey. It’s all about just the numbers.
It’s a finance game, how do we make these numbers stack up. So it’s about using debt in a smart way. It’s a tool that you use when you’re trying to manipulate the numbers in the finance game. In Australia, as it is, in many parts of the world. You know, property is one of your lowest risk ways to utilize debt. It’s not no risk.
But it’s far lower risk than a typical margin loan, as we mentioned earlier in the share market. And it’s definitely lower risk for most people than borrowing to start or buy a business.
However, I would say that, in all cases, whether you’re borrowing on a margin loan or some other borrowing, for shares, or whether you’re borrowing to buy a business, borrowing to start a business, I would say that the risk of the debt goes down, when you get more educated and more experience.
So the more experience and more educated you become, then the risk because you’ve got that experience, the risk becomes lower, doesn’t become zero, especially in games like business, which has got so many variables, but it does become lower. So action steps for you. first action step is if you currently are not using any debt in your business, then go and get educated.
Go and get educated. One of the best books I ever read was called the debt millionaire by George and tone really makes it quite crystal clear. As I hopefully even this example is the power that debt can have on building wealth. He has another great book called The wealthy coat.
I mean, he’s got quite a few but if you get the debt millionaire and the wealthy code, those together will really make a really powerful impact on getting educated about how debt can be useful or he’s an American. It’s so awesome.
He’s just always keep in mind whenever you’re reading about certain things, especially in the property space, but even in debt. Be aware that a lot of the American books don’t always take everything into account of what we can do or they will talk about products that don’t exist for us here in Australia.
But it’s always worthwhile understanding the mechanics and the mathematics. And don’t freak out mathematics you don’t need to be an expert guru of Excel or calculus, you know, spreadsheets and calculators.
Obviously better at numbers you are the easier this will make sense, but you do not need it. The book makes it quite clear you can figure it out. The other thing I just need to make sure I say remember that this is not personal or financial advice. Please get educated seek your own external advice from financial advisors from accountants, lawyers, etc.
Basically anyone who can get See your personal circumstances and give you the qualified advice that you need. Hope this has been helpful and educated you, as we talked about, it’s not about shares or property, even though that’s the big debate. It’s about leverage without leverage, shares beat property. Leverage is the key.
Until next episode, keep up the journey.
Outro:
You’ve been listening to Entrepreneurs Rising. Thank you, dear listener for tuning in. I appreciate your time and look forward to connecting in future episodes if you would like show notes or any resources from today’s episode, you can find them at rising.show rising.show you can find the show notes for this episode and all other episodes as well as links to socials and or the ability to reach out and connect with me make your suggestions for future episodes. Until next time, keep up the journey.
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