Borrowing for Property vs Shares

[graham]

I'm tossing and turning over whether to borrow money to buy a residential property for rental or borrow money to buy high yielding shares. With the property option I could service a 400K loan by myself without any incomings. With the share option I would only be prepared to borrow around 150k. My time horizon is about 10 years. To be fair rental properties just leave me cold but I like the idea of seeing something tangable even if prices did go down. I like the liquidity of shares and have done reasonably well over the last few years playing with my own money
but the borrowed stuff would make me way more conservative. I'm thinking the listed Property Trusts. The age old question Property Vs Shares Any thoughts ?

Discl: NZO / PRC / DGL / EQN / TGS

[fungus pudding]

I'm tossing and turning over whether to borrow money to buy a residential property for rental or borrow money to buy high yielding shares. With the property option I could service a 400K loan by myself without any incomings. With the share option I would only be prepared to borrow around 150k. My time horizon is about 10 years. To be fair rental properties just leave me cold but I like the idea of seeing something tangable even if prices did go down. I like the liquidity of shares and have done reasonably well over the last few years playing with my own money
but the borrowed stuff would make me way more conservative. I'm thinking the listed Property Trusts. The age old question Property Vs Shares Any thoughts ?

Discl: NZO / PRC / DGL / EQN / TGS

If that's your level of enthusiasm for residential property owning, then don't go near it. And I wouldn't blame you. It's damn hard work at the best of times. Commercial property leaves it for dead in every way.

[Stranger_Danger]

Don't borrow money to buy shares.

Shares offer a great way to gain leverage by using, in effect, non recourse leverage.

For example, buying a share in a highly leveraged company using equity only gives you (indirectly) the upside and downside of leverage, without you having any on your personal balance sheet.

Buying an option in a highly leveraged company gives you even further leverage, whilst reducing your initial cash outlay. This is another example of creating a situation where you can get the upside and downside of leverage, without any debt on your personal balance sheet.

Once you use debt to buy shares, the rules change. Almost by definition, you'll struggle to get a loan to buy into the highest leverage, highest risk situations.

Cutting a long story short, often what happens is people borrow lots of money (ie risking up their personal balance sheet, where debt has recourse) to buy "conservative" blue chip dividend paying shares.

To me, this makes no sense at all from a risk management perspective.

The so-called advantage of a blue chip investment is that the financial risks are limited due to their size and financial strength, but by borrowing money, you've ensured the main thing that determines the outcome is *your* size and financial strength.

In other words, an advantage of, say, a major minor or a major bank, is that they should be able to ride out tough times and survive. However, that doesn't stop them falling 50% and whilst they will survive, you won't!

To me, using all equity to take large, *diversified*, risks is logical. You're keeping your personal balance sheet strong, hoping to profit from a multitude of non recourse risks.

Using debt to make "safe" investments leveraged and risky isn't just greedy, it is stupid and illogical. You're making your personal balance sheet weak to juice up weak performance through debt and tax benefit, meaning that the 5 or so times a century that s*** really happens, you're probably a goner whilst the unleveraged investor pounces to take you out.

Of course, that doesn't begin to explain why the bulk of New Zealanders think utopia is getting rich by doing nothing other than living in a house paying interest......

[percy]

graham,
s tranger danger advice is correct.
if you can service 400k loan you must have a good income.
you are doing very well with your shares and i think if you keep adding to them you will enjoy yourself and have a very sizeable portfolio,just donot rush it.

[JBmurc]

I'm tossing and turning over whether to borrow money to buy a residential property for rental or borrow money to buy high yielding shares. With the property option I could service a 400K loan by myself without any incomings. With the share option I would only be prepared to borrow around 150k. My time horizon is about 10 years. To be fair rental properties just leave me cold but I like the idea of seeing something tangable even if prices did go down. I like the liquidity of shares and have done reasonably well over the last few years playing with my own money
but the borrowed stuff would make me way more conservative. I'm thinking the listed Property Trusts. The age old question Property Vs Shares Any thoughts ?

Discl: NZO / PRC / DGL / EQN / TGS

It all depends on how much risk i guess have done both borrow for both done well in both but also had some hard years with losses giving back my TAX from my other job
-Current the safest good investment IMHO is Silver bullion -current selling for $32-$35 this time last year I was paying $26-$29 can't get more safe than that,(Why you can't eat it?) because you can go anywhere in the world an exchange it for anything...try doing that with a paper contract
-more risk borrow an invest into the sharemarket I helped a mate out this year invested most of his 1.8mill AUD in JULY 09 it's now 2.47mill AUD Now if I'd borrowed that money I'd be up gross 670,000AUD for 6months (but it would have be a large risk)
-currently I loan 250,000 for the sharemarket I've more than doubled it so far this Fin year got to march so may even triple it by then .
-If you do borrow make sure your accountant sets up a LAQC an get that to borrow an buy the shares much safer esp if you have another income to off-set losses to in the bad years..

[Stylerz]

I have done a similar thing myself only a 50k loan though.

Have bought into three of the main listed property trusts and now just sitting back letting the dividends pay the loan,

Definitely has its risk, but so much less hassle than residential property.

Takes enough of my time just looking after my own house, its nice just having a passive investment.

[troyvdh]

Treasury have just annoucent that removing tax incentives will result in rents going up....now this is groundmaking stuff....totally out off the blue...I am still shivering with nothingness....

[percy]

jb murc and stylerz posts are excellent.think i could use some of jb's advice myself.
the advice getting your accountant to set it up is most important.
i try to act as an investor and carry any losses so as i do not have to pay tax on profits.
i think the listed property trust you mentioned would also give you safety rather than a single property.
i know retail rents are falling so this will affect the capital value,however good research will pay dividends.
i have noticed good posts by the likes of dr.who so am sure you can rely on good advice

[Doyle]

It all depends on how much risk i guess have done both borrow for both done well in both but also had some hard years with losses giving back my TAX from my other job
-Current the safest good investment IMHO is Silver bullion -current selling for $32-$35 this time last year I was paying $26-$29 can't get more safe than that,(Why you can't eat it?) because you can go anywhere in the world an exchange it for anything...try doing that with a paper contract
-more risk borrow an invest into the sharemarket I helped a mate out this year invested most of his 1.8mill AUD in JULY 09 it's now 2.47mill AUD Now if I'd borrowed that money I'd be up gross 670,000AUD for 6months (but it would have be a large risk)
-currently I loan 250,000 for the sharemarket I've more than doubled it so far this Fin year got to march so may even triple it by then .
-If you do borrow make sure your accountant sets up a LAQC an get that to borrow an buy the shares much safer esp if you have another income to off-set losses to in the bad years..

Can' Imagine any trading banks giving a LOAN to an LAQC secured against shares without a personal guarantee. Unless that LAQC had some sort of other assets or income. So doubtful that it would be any safer in an LAQC. Also while you can claim the interest and accountants fees I wouldn't be in a hurry to claim in any trading losses, will only result in having to pay tax on cpaital gains.

[voltage]

graham
I do leverage into shares and use self funding warrants, choosing blue chip aussie shares.
http://www.rbs.com.au/warrants/ a good read
Remember a lot more volatile, must have at least a 10 year horizon. The dividends pay off the outstanding loan. Telstra pays 25% dividend on their 10 year warrants.
Listed property trusts are at least geared 30%.
I think it is better to gear into quality shares for increased gain than to buy high risk shares.

[Steve]

What are the requirements for NZer's to use this product?

[voltage]

Only requirements is that you have to buy on sharemarket, you cannot convert shares for warrants. These products are very popular in aussie and the newer issues start off with 50% gearing. They also have a stop loss mechanism, if the head share falls below a certain value the issue is terminated and you get your funds back.

[winner69]

Only requirements is that you have to buy on sharemarket, you cannot convert shares for warrants. These products are very popular in aussie and the newer issues start off with 50% gearing. They also have a stop loss mechanism, if the head share falls below a certain value the issue is terminated and you get your funds back.


I don't think the RBS are that generous .... for those instruments with a stop loss mechanism you lose your initial investment if acted upon (ie 100% loss) .... its just the 'loan' / instalment payment that doesn't become payable.

There were a few of these Rolling Warrants on NZX stocks a year or so ago and when it all turned to custard ABN just turned them off much to punters disgust as most had to crystalise their losses ... they weren't given the opportunity for the head share price to recover

[voltage]

They say you can never lose more than your initial capital

summary below
negative we cannot access franking credits

Self-Funding Instalment Warrants

RBS Group (Australia) Pty Limited (“RBS Australia”), formerly known as ABN AMRO Australia Pty Limited, is the Issuer of our warrant products. ABN AMRO Bank N.V. remains as the Guarantor in relation to warrant products issued by RBS Australia.

The new Self Funding Instalments are a simple and effective way to obtain geared exposure to ASX listed shares, while still receiving the FULL benefits of any share price movements, dividends and franking credits for partial capital outlay. The key feature of this innovative product is the removal of traditionally high capital protection costs through a new Stop Loss feature. The dividends paid by the underlying company continue to be used to reduce the loan amount that is offset against daily interest payments added onto the loan amount. Often referred to as the 'set and forget' instalment tool, these low administration products are ideal for investors wishing to lock in leveraged exposure, with NO ongoing payments. Available as a Cash, Shareholder or Conversion Applicant but is also listed and traded on the ASX just like an ordinary share. Self-Funding Instalments are one of the few products allowing geared exposure within Self Managed Super Funds (SMSF'S).

BENEFITS:

Full exposure to all dividends.
Benefit from enhanced franking credits.
Leveraged exposure to ASX listed shares - with NO margin calls
Approved to be used in Self Managed Super Funds(SMSF's)
A Stop Loss feature that ensures you will never lose more than your initial capital.
Final instalment payment is Optional
Very low administration - With no ongoing payments

[blackcap]

They say you can never lose more than your initial capital

summary below
negative we cannot access franking credits

Self-Funding Instalment Warrants

RBS Group (Australia) Pty Limited (“RBS Australia”), formerly known as ABN AMRO Australia Pty Limited, is the Issuer of our warrant products. ABN AMRO Bank N.V. remains as the Guarantor in relation to warrant products issued by RBS Australia.

The new Self Funding Instalments are a simple and effective way to obtain geared exposure to ASX listed shares, while still receiving the FULL benefits of any share price movements, dividends and franking credits for partial capital outlay. The key feature of this innovative product is the removal of traditionally high capital protection costs through a new Stop Loss feature. The dividends paid by the underlying company continue to be used to reduce the loan amount that is offset against daily interest payments added onto the loan amount. Often referred to as the 'set and forget' instalment tool, these low administration products are ideal for investors wishing to lock in leveraged exposure, with NO ongoing payments. Available as a Cash, Shareholder or Conversion Applicant but is also listed and traded on the ASX just like an ordinary share. Self-Funding Instalments are one of the few products allowing geared exposure within Self Managed Super Funds (SMSF'S).

BENEFITS:

Full exposure to all dividends.
Benefit from enhanced franking credits.
Leveraged exposure to ASX listed shares - with NO margin calls
Approved to be used in Self Managed Super Funds(SMSF's)
A Stop Loss feature that ensures you will never lose more than your initial capital.
Final instalment payment is Optional
Very low administration - With no ongoing payments

You are right Voltage. You cannot lose more than your initial capital. We have these things in Holland too- called Sprinters and Turbos. You can buy them on all sorts of things like Indices, Stocks, Currency, Gold and Oil.

The beuty is there is an inbuilt stop loss and you get paid out the balance. So in fact you never lose your Capital because the balance is paid to you when the instrument is stopped.

I have done well in these riding the market up the last year.

I guess the caveat is the implied cost of capital they use. That is from what I can see the only real downside potential.

I havnt checked out the Australian ones but here you can go both LONG and SHORT the stock with these instruments.

(IN fact when they first issued the things here our brokerage had NO BRO on the instruments for 2 months to promote the things. That was a lot of fun :) )

[winner69]

......if the head share falls below a certain value the issue is terminated and you get your funds back.




So in fact you never lose your Capital because the balance is paid to you when the instrument is stopped.

Still think you are both wrong. You will lose all or most of your capital (Initial Payment) if stopped out.

When stopped out and they sell the share don't the proceeds go to pay off the outstanding loan and you get the leftovers. The size of the leftovers is probably driven by how much the loan has been reduced by which is dependent on how long you have held.

I only bring it up becuase you both give the impression that this is almost a fail safe investment and if it turns to custard you get all your money back.

[Steve]

Nothing is ever too good to be true...

[beacon]

You will lose all or most of your capital (Initial Payment) if stopped out.



That has been our experience too.

[blackcap]

Still think you are both wrong. You will lose all or most of your capital (Initial Payment) if stopped out.

When stopped out and they sell the share don't the proceeds go to pay off the outstanding loan and you get the leftovers. The size of the leftovers is probably driven by how much the loan has been reduced by which is dependent on how long you have held.

I only bring it up becuase you both give the impression that this is almost a fail safe investment and if it turns to custard you get all your money back.

Ah my time to apologise, I read the earlier threads too hastily. Yes indeed you do get stopped out and receive a residual.

However there is no nasty call on any more funds as could have been the case with the ABN things in NZ if they did not roll over. That was the point I was trying to illustrate.

In a sense these instruments are no more than leveraged equities but great in a bull market to keep ones exposure and keep adding to the bank balance....
(sell a lower stop loss for the more geared product and repeat as it keeps rising) but your are right that it is in no way failsafe.

The beauty for me is the possibility to go short as much as long and also the ability to purchase on commodities and currencies for what here in Holland amounts to a low brokerage (10 Euro per deal)