New Zealanders are obsessed with real estate. Apart from a few savings in the bank, that's about all they invest in, be it their own home or home plus other property as an investment. Residential rental makes up a large proportion of the latter.
With the just announced bank restrictions on financing available to investors, it's possible they may look to the share market. If they do, there are several advantages over direct personal investment in real estate:-
1. It's a relatively passive form of investment (this is not to say you turn your brain off and don't let the company know what you think). With real estate you need to be concerned about maintenance, paying rates, insurance, making mortgage payments, finding tenants - the list goes on.
2. Gains can be outstanding and so long as you don't buy with the intent to sell, then like real estate investment the capital gains are tax free. With real estate, over time, the gains are definitely there, but do those gains all occur within a year? You can do that in stocks. But like deciding which property to buy you need to do your research and be satisfied that the company you're investing in, and becoming part-owner of along with all those other shareholders, is well managed and has prospects.
3. You can adjust your portfolio and do it easily. By that I mean, if you own the shares, you can sell as many of them as you like if you choose to (any marketable parcel). Can you sell half of that house you rent out? Or sell doors and windows? And if you can you need to get your hands dirty, and if selling the building you need a lawyer and likely an agent. Then if subdividing the property there are tax implications.
4. Income from dividends, return of capital, bonus issues and dividend reinvestment schemes make the returns often better than real estate.
Think about it, but beware, I think the most important thing is to be disciplined. The share market is a roller coaster and you need to think for yourself and be prepared to go in the opposite direction to the herd. That is, buy when everyone is selling and sell when everyone is buying.
An example of what is possible:-
ASX Bradken (BRK)
Jan 21 - they were at Aus$0.38
Jun 9 - they closed at Aus$1.22
You'd find it hard to triple your money in months in real estate. Some bright spark will point out, no doubt, that the above company is losing money and having to restructure. And they'd be right. But think about this, the company is not going to disappear overnight and if it fails will be gobbled up by someone else. It's a pretty solid company, not fly-by-night stuff.
Our bright spark will rightly reply that with investment real estate, you get the advantage of mortgage gearing and the tenant pays off the mortgage. How does mortgage gearing work? Well, the lender is not participating in the asset, they're just lending the investor money and charging for it while keeping the real estate as security. If you buy a $450,000 house and put in the minimum amount of equity, say, $135,000 and the property rises 10% in value during the first year, you book a $45,000 profit (at least on paper). Rounded down that's a 33% return on that $135,000. All the capital gains are yours.
This all sounds good and it looks like real estate is by far the better bet. But think about this - while things are going great, real estate is a sure-fire winner, but as an investor it is you with everything on the line. If the market tanks, you still have that mortgage to pay back. If you can't find tenants, tough, you still have to pay the mortgage. Everyone thinks of the times when things are going great and they never think about what may happen if things go wrong.
I think this is where investing in the companies listed on the share market comes into its own. If things go bad, you have no ongoing obligation to anyone so long as you haven't borrowed to buy those shares. You may have to forgo a dividend, or wait for the company to recover, or even sell at a loss, but that's where your obligations end. The company may ask for a further contribution, a rights issue, but you're never compelled to invest in those (they're often a very good idea by the way).
If we go back to our $135,000 equity example above, it's hard to get that 33% return on the share market across the whole portfolio. But get this, you also have far less risk than with real estate. If you apply the time honoured principle of compounding your investment, by reinvesting capital gains when realised, participating in dividend reinvestment schemes, buying shares offered in a rights issues, and taking your dividend income and reinvesting part of that (I'm assuming at least some of the dividend income is used to pay expenses, such as brokerage when due), then I'm sure returns can be better than real estate investment.
Whatever you do, my own experience of using advisers is they're often useless. My advice is use your own research, like you would when buying a house, know the market and what you want. What company do you like and why?
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