Latest / Money Grows on Trees / #357 - Property Vs Stocks In Australia (Which wins)

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#357 - Property Vs Stocks In Australia (Which wins) · Money Grows on Trees

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  Every finance brawl on the internet has an opinion on this one.
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  The property crowd says shares are a casino. The shares crowd
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  says property is a 30 year prison sentence. Most people pick
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  a side and never actually run the numbers. The reality is when you do a proper total
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  return comparison, same money, same decade with real data, you
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  get the truth. Rock solid indicators of where you should be
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  putting your money. I'm Lloyd J. Ross, seven figure investor
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  and entrepreneur, and I've helped thousands of everyday Australians, Americans, New Zealanders and Canadians get
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  out of debt and build real wealth. And in this video, I'm going to referee this
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  fight properly with total return numbers and show
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  you where each asset genuinely wins and give you the verdict
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  based on the type of person you actually are. Step
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  one, the raw returns. So let's do it
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  right. It's total return, not just price. Let me give you a
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  bit of a quick lesson here in total return. Total return is
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  both elements of the return equation of an asset. So we look at property. It's
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  two parts. One is the capital growth. That's how much the property has
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  grown in value over a course of 12 months as a percentage. Capital
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  growth might be, say, 5%. Then there's the rental yield, which
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  is the cash yield. It's what the property produces in cash flow. And
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  that might be 4%, as an example. So if we got 5% capital
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  growth and 4% growth rental yield, that
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  is a 9% total return. Does that make sense? Now
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  what's interesting about property, just to give you an idea too, there's this thing called the net rental yield.
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  Now net is when you net out the costs. So for example, most properties
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  operate at 1% of value of operating costs, particularly if it's an investment. And
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  so if it's got a 4% rental yield, it might end up with a 3% net
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  yield after the cost of running the property, okay? So the net
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  total return could be 5% and 3%, which
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  is 8%, okay, we're using net rental yield in that
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  equation. And if you're including tax on the capital gain,
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  if you sell it, then it's a net capital gain of
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  5% minus whatever CGT is paid, capital gains tax is paid. Then you're dealing with,
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  and even the same thing with the net yield after tax, you could do a net after
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  tax total return. So you can see that the numbers slightly
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  shift. But for this exercise, let's just go off the gross total
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  return performance of the asset. In shares, it's the value of the
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  shares that have grown, capital growth over 12 months, and it's the dividends, the
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  cash flow yield that it's producing. And we add those two
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  together, we get total return. You can't assess the
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  performance of an asset with another one without taking into consideration those
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  two components because both of them are a return on your money. So we
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  have to compare that to that total return. Cool? All
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  right. So let's do it. Not just the price, but the total return. It's
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  interesting actually, because in Australian shares, you also get these things called franking
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  credits that enable you to get dividends and not pay tax. So we
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  have to consider the total return, but then understand too,
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  hey, what is the tax legislation on both of these? So what ends up in my pocket? And
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  I think that's a very important consideration, right?
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  So if you look at shares, just by and large, and
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  we're just going to do for the sake of this exercise, we'll just do Australian shares. We'll
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  talk about international shares as well. But Australian shares, so the ASX,
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  for example, by and large has produced somewhere
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  in the vicinity of around 9-10% and
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  it's usually 4.5% dividend yield as an example, sometimes
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  even 5 depending on which index fund you own, but say 4 and
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  then you've got between 5-6% growth. Cool? So 9-10%. If
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  you've got Australian property, the total return, which is the growth in the rental income, is
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  about seven to nine, okay, total. So if you've got 4% in
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  yield, you're gonna get between four and 5% in capital growth, or
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  three to 5% in capital growth, which makes sense, okay? So you can see straight away that,
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  on average, even in a specific 20, and it
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  does depend on what period you take, but in a specific 20-year window,
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  ASX shares have returned 10.2%, and the property has been around 8%. So
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  that's the difference. If you look at US shares on the other hand, we've got a massive
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  outlier here, it's more like 12%. If you think about that,
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  2% over the course of 20 to 30 years is a lot of money. So it's
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  actually the highest of probably any asset class on the planet, which is why I
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  own American stocks, because that's why I don't own any Australian shares. necessarily.
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  Although I like the dividend imputation credits, I like the fully frank dividends,
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  that's cool. That adds a whole 30% more on top of your income
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  from those dividends. Okay, so it's nothing to sneeze at, it's worth considering. But
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  the honest verdict on returns alone is it's close, but
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  shares edge out more over a 30-year window, particularly US-based
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  shares, okay. So property has won in specific decades.
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  So like the last five years, property's crushed it, but it's
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  not, it's an abnormal period, okay? I would say the
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  same thing with shares. In the last five years, like the S&P 500, I
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  believe in the last five years is 14% price, massive. It's
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  completely killed property. It has, right? So
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  like shares is crushed as well. But just on like
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  debt-free, no leverage, pound for pound, total
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  return, shares wins, okay? Shares
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  wins. Even if you look at listed property trusts at 9% in the
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  States, it still gets killed by shares at an average of 12%. So
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  it's not even up for debate anymore. If you look at all the data, you
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  would see that shares wins. Now, here's
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  where property actually wins. So I've got to give it this due,
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  give credit where credit's due, literally credit, because it's all
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  about leverage, financial leverage, borrowing. This
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  is a real structural advantage. So leverage. that most people
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  can access. A $600k property with a 20% deposit and a 10% rise
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  creates a 50% return on your cash. Nothing to
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  sneeze at. So the cash equity
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  returns are massive. And that compounds over
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  time with more leverage, especially if you're buying multiple properties with leverage.
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  And you've seen that happen in the last 10 to 20 years. People have made a fortune in property on
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  leveraged real estate. And let's not forget about the capital
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  gains tax-free of a family home, it's real, right? And you can't
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  get that with shares, it's different. And then there's forced discipline. So
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  when you buy a property, you're forced to hold it because it's hard to
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  get rid of, okay? So it's also tangible,
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  which means you can renovate it, you can subdivide it, you can add value with
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  your own hands. And so there's that unlockable value
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  in real estate you don't get with shares either. So if you strip away the mythology, property's
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  edge is it doesn't grow faster. The edge is
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  the bank will help you bet bigger with less money. So
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  it's actually, it's a leverage play. which is fine, right? And that's why people lean
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  into it. But again, just as a caveat, that only
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  works when real estate grows. So if we go, like for example,
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  if you look at Japan, where real estate has fallen pretty much
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  since 1980, if you leveraged up on
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  Japanese real estate, you got killed for like 30 years,
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  you die, you're gone. You're a cash equity position,
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  negative equity for decades. You look at China, same
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  thing. You look at some parts of Canada right now, New Zealand, America, There's
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  periods of time in America where real estate has fallen drastically for long periods of time. If
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  you have leverage on that, you're getting killed. There are a lot of
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  people that have lost so much money in real estate but they don't talk about it because the
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  only people that write books or talking about property are the ones that
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  made it. But there's a huge number of people that lost a ton of money. So
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  then we have to look at where shares win over property. And
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  if we look at structurally where it makes a difference is the
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  costs of shares are a fraction of what properties are. So stamp duty with
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  property is tremendous. You've got rates, insurance, strata, operating costs,
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  transaction costs of moving it. Whereas an ETF is like 0.15%. It's
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  nothing. So the cost of property,
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  even leveraged property, the gains do get eaten by the costs. They do. Whereas
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  shares, there are none. So that's where shares edge out and win too, right?
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  And they're liquid. There's a value to having liquid assets.
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  Like to be able to click a button and put your hands on millions of dollars because
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  you've got a portfolio is optionality. That's valuable. You
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  can't do that with real estate, right? You can't. It's hard enough
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  to do it with cars, let alone real estate. God, sometimes it can take six
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  months to sell, longer. And then you get real diversification, because
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  one ETF. See, with real estate, if you own one piece of real estate, which if it's your
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  home, whatever, you don't have any diversification. It's one asset. If there's
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  a sinkhole under your house, or there's something, a flood, and you have no insurance, gone.
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  So you have no diversification. Whereas with shares, if you have an ETF, you
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  have maximum diversification. You've got hundreds of companies, sectors, and
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  even countries. Whereas one property is one asset, one street, one
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  city, one single point of failure. And most Australians have their whole
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  wealth in one asset class. which is their home. Then,
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  of course, we look at franking credits, as I mentioned, which is where you get up
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  to 30% marginal rate. So if you own shares in a company or you
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  own shares in your personal income up to 30%, you get paid dividends and they're fully
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  franked, you don't pay tax. That's cool. That gives you an
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  extra 30% rate on money in your
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  pocket. So if you've got Australian shares and you get paid a dividend and your tax
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  rate's 30% and you're getting that dividend in your pocket and it's
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  100% franked, you're literally getting all of the income in your pocket.
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  Whereas with property, the rent of even 4%, rental yield,
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  1% for operating costs, you're at three, then minus tax, you're at probably one
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  and a half to two, you're two. So you can actually
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  earn a lot more cash flow in your pocket from shares than
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  you will from property because of those costs and those tax implications.
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  And of course, we share there's no single point of failure, right? Whereas
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  if you got property, there's now new negative gearing laws. Just
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  quickly, if you're ready to take control of your finances, but feel stuck on
• 9:36
  where to start, I have a solution. My book, Money Bias Happiness,
• 9:41
  simplifies investing and wealth building with practical steps to help
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  you achieve financial peace. Get your copy via the
• 9:47
  link in the show notes and let's get your money working for you. Now back
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  to the episode. It's no clear winner because there's so many factors that
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  we have to consider. So here's the factor that nobody puts on the scoreboard. Tax
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  on the way out. So if you look at property investors from July 2027 next year,
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  we're going to have negative gearing. Gone, CGT 50% discounts
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  can be scratched for those that aren't grandfathered. And the same
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  CGT applies for share investors, outside
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  super, and that's gonna suck when
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  you exit them. Both of them suck when you exit, but invitation
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  credits force you to hold, which is cool. So you're actually getting more cashflow to
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  hold from shares in your orphan property. And if you're in leveraged property and
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  rates go up, you may have to be forced to be liquidated. So there
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  are some challenges that aren't on the scoreboard yet. But the
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  one place where you can get shares and get tax relief,
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  including imputation credits and rebates, is shares inside
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  superannuation. That's a real winner. The only challenge
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  with that is what will the government do with it? Because they've already
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  brought out legislation that says when you get $3 million in a super fund, you
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  will have to pay unrealized capital gains. And
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  they've made mention, even the last few weeks, that it's a state asset.
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  This current government treats it as their own money. So I don't know, they're even stopping
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  you from opening, they're making it harder to open self-managed super funds now. You
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  may have seen. So you're starting to see that
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  superannuation, whilst it's a clear winner here with the tax legislation and
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  shares, it's a good winner, it may not be for long. So all the things we
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  can't see in the scoreboard are, what will happen to interest rates
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  and property? Will it even grow? If you own shares in
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  a taxable account, that's fine. Imputation credits look like they're here to stay, so that kind of wins.
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  If you hold it for long term, don't sell it. But super can definitely win from a
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  tax standpoint and capital growth and imputation credits, so that wins totally. But
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  who knows what's gonna happen? We don't see on the score, but yet how they're gonna approach it. So
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  which one wins for you? Let me explain which one wins for me and why. The reason
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  why I love shares is because it's liquid, I'm
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  getting actual passive income. If I'm getting imputation credits, franking
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  credits, I'm getting actual full income in my pocket. The
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  liquidity gives me optionality. I get full diversification, full
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  scalability, no problems, no calls, no tenants,
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  nothing. So for my objectives of
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  life ease and simplicity and the objective
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  of living a fun life and being financially solid,
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  shares do it for me. But if you are someone who doesn't understand
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  shares or trust it or you don't really have the education, I can understand why you
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  go to property because it's tangible. And so you
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  choose what yours is. But I can tell you right now why mine is
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  that way. And superannuation is not something I'm
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  interested really in because I can't touch the money for another 20 years.
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  And that's a big liability, particularly if you're an entrepreneur.
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  So that's why I park myself in taxable investment accounts
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  and shares, and I don't have any debt. I like that too, right?
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  Whereas property, a lot of debt, exposure to interest rates, a
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  lot of moving parts, a lot of administration, dah, dah, dah, dah, just
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  doesn't support and align with my values of how to live life. It just doesn't, so
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  I'm out of that. And then over the other side of superannuation is I don't want to give my
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  money to the government, or even have it at risk of being
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  tinkered with by the government. So that's why I slot myself in
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  there. But that's my own prerogative. And if I
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  can get a 12% return in the American Index Fund, great. If I can get 10, 9, whatever
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  it might be long term, I'm going to do it. And so that's why I like to say
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  I like to scale my money without scaling my problems. So
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  that's the position of property versus shares. If
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  you are someone who doesn't understand shares and you just absolutely
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  wanna understand it so you can actually have a choice and you don't get railroaded
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  into property because you've done anything else, then I would encourage you and implore you.
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  I did this most epic masterclass on shares on
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  this channel for free for an hour and you'll just be blown
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  away by it. I actually, I never listen to my own episodes back, but this is
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  one of the few that I've actually listened to. I was like, holy shit, Go
• 13:52
  back and check it. It's called Shares Masterclass, Not Meant for the Public. That's
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  the title. Go back and check it and watch it because you'll be like, holy
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  God, I can't believe they made this public because it literally steps you through everything
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  you need to know about shares, which is gnarly. So once you have that, you're equipped
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  with that, you can at least choose. And whatever you
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  choose, based on your own objectives, go for it. So go
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  check out the episode on Shares Masterclass. And I'll see you on the next episode of